The Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023

On December 18, 2023, the Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023 were published on legislation.gov.uk, the official UK platform for the publication of legal texts. The regulations introduce a framework for testing the use of developing technology in the carrying on of financial market infrastructure (FMI) activities. The FMI sandbox, also known as the Digital Securities Sandbox (DSS), thereby aims to facilitate innovation and experimentation in the financial services sector while ensuring appropriate regulatory oversight. The key provisions of the FMI Sandbox are summarized below. It shall be noted in this context that the regulations are quite high level in that they primarily focus on the eligibility requirements, including eligible financial instruments, the process of applying for participation, the ongoing oversight of participants, and the powers of the regulators in relation to modifications of the sandbox or terminating sandbox participation.
1. Eligibility and application process: The regulations outline the eligibility criteria for entities seeking to participate, including financial market infrastructure entities based in the UK only. The application process involves submitting an application for approval to participate in the FMI Sandbox to the appropriate regulator (please see the comment box below on „who“ is the appropriate regulator) along with the required information, such as the type of activity to be conducted under the sandbox or any instruments that will be used (e.g. debt, equity, or money market instruments which can be either „digitally native“ issuances or „digital representations of existing securities).
2. Approval and sandbox approval notice (SAN): Upon receiving an application, the appropriate regulator is responsible for determining the approval of participation in the DSS. If approved, the sandbox entrant is issued a SAN specifying the approved FMI activities, ancillary FMI activities, and any further approvals, modifications, or variations related to the FMI activities.
3. FMI sandbox scope and ancillary activities: The regulations define the FMI sandbox scope which encompasses a range of FMI activities, including operating a trading venue, maintenance, notary, and settlement functions in connection with FMI sandbox instruments. Ancillary activities related to the FMI activities or carried out by sandbox participants may also be performed in relation to these activities.
4. Supervision and oversight: The appropriate regulator is tasked with maintaining arrangements to supervise the operation of the DSS, including ongoing oversight of sandbox participants and monitoring the progress of DSS activities as described in the SAN. The regulator may also direct sandbox participants to provide specified information or documents and engage or cease engaging in particular activities in connection with the FMI Sandbox arrangements. The Treasury may also impose restrictions on the overall FMI activities or ancillary FMI activities within the DSS altogether, if it finds this necessary to protect the UK financial market.
5. Cooperation between appropriate regulators: Pursuant to the regulations, the Bank of England and the Financial Conduct Authority (FCA) are required to cooperate with each other in connection with the operation and supervision of the DSS. This includes adopting and maintaining a memorandum of understanding describing how they intend to cooperate in various aspects related to the DSS.
6. Powers of the regulators: The regulations empower the appropriate regulator to make modifications to technical standards for the purpose of implementing and operating the FMI Sandbox arrangements, including providing for the non-application or modification of technical standards for those purposes. The regulators are also empowered to require participants to terminate their engagements, if – for instance – the participant no longer fulfills the eligibility criteria or violates and regulations stipulated herein.