The Bank of England (BoE) and the UK Financial Conduct Authority (FCA) are consulting on their proposed approach to operating the Digital Securities Sandbox (DSS). The DSS explores integrating technologies like distributed ledger technology (DLT) into the issuance, trading, and settlement of securities. According to a press release, this move could lead to faster and cheaper ways for securities to trade, settle, and be utilised among financial market participants.

To facilitate the exploration of new technology, the DSS will operate on a set of modified rules and regulations. Participating firms will be able “to provide securities depository and settlement services and operate a trading venue under those modified regulations”. The regulators state that firms can provide these services from a single legal entity for the first time. The DSS lasts for five years and could lead to a permanent technology friendly regime for the securities market in the future.

The DSS aims to stimulate innovation, maintain financial stability, and preserve market integrity, encompassing various financial instruments except derivatives and unbacked digital assets.

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Applications

To manage risks and maintain stability, the BoE plans to limit the value of securities issued within the sandbox, progressively expanding permitted activities. Expected benefits, according to the regulators, include enhanced post-trade efficiency, potentially reducing costs for market participants like pension funds and banks.

Following the consultation period, the BoE and FCA will finalise guidelines, aiming to accept applications from interested parties this summer.

Lacking framework

As previously covered by PostTrade360°, the establishment of the DSS was motivated by the Call for Evidence in 2021, which set out to examine “the application of DLT to financial market infrastructures (FMIs)”. A key issue identified was that the UK legislative framework lacked support for the use of DLT. In July 2023, a consultation was opened for participants, with its outcome published in November. Up to that point, 19 firms had expressed interest in participating in the DSS.