Internal links
MODERNISING SECURITIES SETTLEMENT
PART III: POLICY ISSUES
ETT: Definition of properly authenticated dematerialised instruction
32. The 1995 Regulations require the Operator to set the specifications for the networks which form part of the relevant system. It is only instructions which comply with these specifications which may be treated as properly authenticated dematerialised instructions. The Operator accredits networks which comply with its specifications, and requires participants to use such networks in order for the Operator to comply with its obligations.
33. Under the new Regulation the Operator remains responsible for satisfying itself that networks which convey instructions to and from the operator system meet a high standard of security. Nevertheless, whilst the Operator should remain responsible for specifying the requirements which must be met in relation to communication with participants, the Treasury considers that there are limited situations where the Operator should be allowed to act on and send instructions to bodies which meet certain criteria through networks specified by such bodies, providing that the operator is satisfied as to security.
34. The bodies concerned are (a) overseas central securities depositories, and (b) exchanges or clearing houses. The terms "clearing house" and "exchange" are defined by reference to the Financial Services Act 1986[17] and a "depository" is defined as a body or association carrying on business outside the UK with whom the Operator has made arrangements: (a) to enable system members to hold and transfer title to securities; or (b) to enable the depository to permit its customers to hold and transfer securities through the Operator's system.
35. The rationale for permitting this new type of instruction is that these bodies are themselves regulated central infrastructure providers. The Operator cannot realistically oblige such bodies to adopt networks which it itself has accredited, when those bodies have established and satisfactory network arrangements of their own; nor is it appropriate for participants in the relevant system to incur the significant costs involved in accrediting a number of such network arrangements, each of which is used only for a limited amount of business involving the Operator and another body. The Treasury recognises, in this approach, the need to ensure that the UK infrastructure remains competitive in the context of new developments, including the internationalisation of securities markets.
36. Such instructions are properly authenticated dematerialised instructions in that they are authenticated electronic instructions but they are not authenticated in accordance with specifications set or monitored by the Operator, which will not therefore be responsible for accrediting the relevant network.
ETT: Corporate Actions
37. One of the features of the ETT regime is that the Operator's rules will need to specify which system records constitute the operator register of securities in relation to a participating security. This is especially important in the context of corporate actions because, at present, there are a certain number of instances where the operator's system generates messages in circumstances where it is not intended that a transfer of title should occur, and where a transfer of title is not, in fact, registered.
38. CRESTCo have therefore drafted an amendment to their rules which is being published as Part VI to this consultation document. Comments on the revised amendment to the CREST rules are welcome.
ETT: Liability
39. Responses to the 1999 consultation document indicated dissatisfaction among some respondents with the fact that, under ETT, the civil liability of the operator would continue to be limited. It was suggested that (a) this was anomalous and unfair since it would mean that the liability attaching to the maintenance of the issuer register would be different from that of the operator register and that (b) either the civil liability of the operator ought to be brought into line with that of the issuer or the civil liability of the issuer under the Companies Act ought to be brought into line with that of the operator under the Uncertificated Securities Regulations.
40. The Treasury has considered these points very carefully but has reached the conclusion that there are no grounds for altering the liability structure in the new Regulations. The issue of the civil liability attaching to the maintenance of the issuer register is outside the scope of regulations made under section 207 of the Companies Act 1989. Whatever the substantive merits of the argument therefore, it is not something that can be dealt with as part of the current exercise.
41. As far as alterations to the civil liability of the Operator are concerned, it should be noted that the Operator is in a different position to a company. A company is liable for a single register covering a single company, whereas the Operator is liable for operator registers of securities relating to hundreds of companies. The risks it faces are therefore qualitatively and quantitatively greater than that of the single company. It is important, moreover, to note it is by no means unprecedented for the infrastructure of financial markets to receive special protection because of considerations of systemic risk[18] and that the Operator does not escape liability altogether under the new Regulations. In addition to the limited liability of Regulation 36, it retains unlimited civil liability for fraud and negligence and has the same criminal liability as the issuer does under the Companies Act 1985.[19]
Costs of ETT
42. The draft legislation has been designed with the express intention of minimising inconvenience to users of the CREST system and, in essence, gives a different legal effect to the computer messages which currently pass from CREST to issuers/registrars and vice versa. The Treasury does not therefore believe that the introduction of ETT will involve any additional costs for issuers and registrars.
ETT: OEICS
43. At present, OEICS are incapable of being settled under the Uncertificated Securities Regulations because of inconsistencies between its provisions and those of the relevant FSA Regulations. The new Regulations therefore remove all references to OEICS from the Uncertificated Securities Regulations, pending the coming into force of regulations made under section 262 of the Financial Services and Markets Act 2000 later this year. The position will then be reviewed and, if necessary, further amendments to the Uncertificated Securities Regulations will be made.
Delivery versus Payment
44. Since its introduction, CREST has operated on an assured payment system. Securities are only transferred if the requisite payment is guaranteed, and equally, payments are only made if the securities are transferred. The settlement banks play a key part in this process by undertaking on behalf of their customers to make assured payments for security transfers.
45. The assured payments system has worked well but, nevertheless, does not eliminate the settlement risk associated with payment for securities. Although a purchaser's settlement bank guarantees their customer's payments in the event of its subsequent default, the seller's settlement bank does not have to guarantee payment to their customer in the event of insolvency of the purchaser's settlement bank, before inter-bank settlement has occurred. At present, any such risk is only eliminated when settlement banks discharge their inter-bank obligations across accounts at the central bank, shortly after the close of settlement in CREST. It is true that the risk of an intra-day settlement bank default is extremely remote, but APACS, the Bank of England and CRESTCo believe that the time is right to eliminate the risks between settlement banks described above by the introduction of real time settlement in central bank money.
46. As part of the DVP arrangements which the Bank of England and CRESTCo are planning to introduce, there will be an automated ?repo? mechanism whereby stock being purchased by certain CREST members will automatically be included within a repo to their settlement bank and onwards to the Bank of England, generating additional liquidity for the settlement bank and credit for the CREST member. As currently drafted, however, the Uncertificated Securities Regulations require there to be a system member instruction from the transferor before a transfer can be effected through the CREST system. The new draft Regulations therefore provide that the requirement for a system member instruction will not prevent the registration of transfers by the Operator where this is in connection with the provision of liquidity to the transferor by a settlement bank or the Bank of England.