Gate 2: Who is eligible and how to apply

00:00:00:00 - 00:00:26:05
Unknown
Just before we begin. A few housekeeping points tonight. The presentation portion of this webinar is being recorded. And will be posted on the Bank of England's DSS web page. However, the Q&A afterwards will not be recorded. Attendance is anonymized and attendees should not be able to unmute. If you have a question, please do submit it via the Q&A box in MS Teams.

00:00:26:06 - 00:01:01:03
Unknown
We will select questions that cover areas of broadest interest to participants, and we will seek to address any other specific questions after the presentation. Lastly, we will also publish the slides used in today's session on the Banks DSS web page in due course. Before we get into the detail, I'd like to invite the Head of Innovation, Payment policy in FMID at the Bank, Emma Butterworth, from the head of trading venues at the FCA, Jamie Whitehorn, to say a few words.

00:01:01:04 - 00:01:33:03
Unknown
Hi everyone. My name is Emma Butterworth and I'm the head up the area of the Bank of England that's responsible for financial market infrastructure, innovation policy. The DSS is being created to encourage innovation in financial market infrastructure, most notably through using new technologies like DLT. To do this, we've created a modified and flexible regime that allows the Bank and the FCA to remove legal obstacles and barriers that prevent the use of developing technologies and adapt those in light of activities in the DSS.

00:01:33:05 - 00:02:05:12
Unknown
When the sandbox was set up, it was understood that there were regulatory barriers for firms intending to use DLT for settlement activities. Those same challenges didn't exist for trading activities. Nevertheless, we included trading venues in the DSS because of the potential for DLT to combine the two settlement and trading in innovative ways, so-called hybrid firms. As you'll see in this presentation, we've aimed to join up our processes with the FCA as much as possible to minimize the burden on hybrid firms when applying.

00:02:05:13 - 00:02:32:12
Unknown
This has involved identifying areas of overlap in application forms to the FCA and bank, and establishing principles for ways of working as we assess applications. This includes coordinating our issuance of decisions to firms to support their business going forward. We're really pleased with the level of interest in the DSS to date, including the number of gate one applications we've received so far and the range of innovative models firms are exploring.

00:02:32:13 - 00:02:57:11
Unknown
We also welcome the announcement from H.M. Treasury confirming its plans for the UK's first digital gilt, or digit. As H.M. Treasury has made clear, firms looking to provide the infrastructure to host the digital digit will need to do this through the DSS. This marks an important milestone for the wider UK digital securities agenda and complements the work being progressed through the DSS.

00:02:57:13 - 00:03:22:04
Unknown
I'll now hand over to Jamie. Thank you very much, Emma and hello everyone. I'm Jamie and I'm the head of trading venues at the Financial Conduct Authority. Let me just start by saying, this really is a great example of how we can support firms to innovate safely. And as Emma said, it's great to see such strong interest so far.

00:03:22:05 - 00:03:52:00
Unknown
We understand that supporting the introduction of new technologies and new business models helps to strengthen the UK's position in financial markets, as well as ensuring that our firms and consumers benefit from the opportunities and efficiencies innovation can bring. As Emma noted, the core aim of the DSS is to remove unnecessary obstacles to the adoption of DLT in different business models, including those that combine functions of a trading venue with that of a securities depository, because we didn't see such barriers on the trading side.

00:03:52:01 - 00:04:16:10
Unknown
We've been able to largely base our processes for trading venue authorization on our existing approach, which we hope should feel familiar to firms, while allowing us also to ensure the firms we authorise in the DSS enjoy the same status and treatment as other trading venues operating in traditional markets. We understand that this is important to create certainty and build confidence in the DSS.

00:04:16:11 - 00:04:36:15
Unknown
What make our process here a little bit special is the emphasis that we're placing both on early engagement with firms in close coordination with colleagues at the bank. We've also already met with many of the firms here today and stand ready to meet with other firms in early stage of the sandbox journey to make sure that you have the clarity that you need.

00:04:37:00 - 00:04:59:07
Unknown
While we and the bank teams will each be carrying out separate assessments, we are looking to do so in a way that's closely joined up, so that firms do not face unnecessary duplication. We want to make sure that the process as a whole is efficient, smooth and as consistent as possible. So the key message I leave with is that we're here to support you, to enable you to make the most of the opportunity that the sandbox offers.

00:04:59:09 - 00:05:22:15
Unknown
I'll now hand over to Chris to set out in great detail what you plan to cover today. Thank you Jamie. Thanks. Today's session, we're going to walk through the gate to application process for hybrid firms. In this. We'll start by covering the application journey for hybrid firms. This includes how to engage with us before applying and what to expect from pre-application meetings.

00:05:23:00 - 00:05:50:00
Unknown
This will include an update from the bank and our pre-application engagement that is relevant to standalone DSD, as well as hybrid firms, we will then move on to what needs to be submitted to both the bank and the FCA, and how we approach any potential areas of overlap. From there, we'll explain how we assess applications, what each regulator will be looking at, and how we coordinates and progress with your application.

00:05:50:01 - 00:06:23:11
Unknown
Finally, we will talk you through our approach for coordinating on decisions. We'll also spend some time on topics of relevance to both hybrid and standalone firms. This includes the banks expectations around testing for day to settlements, finality requirements, and how both the bank and the FCA approach what we refer to as ancillary services. We'll finish up with a Q&A session where you'll hear from colleagues across the bank and the FCA. We'll aim to cover as many of your questions as we can.

00:06:23:12 - 00:06:50:11
Unknown
Any questions we don't get to today, we'll look to include in the Q&A pack that will be posted on the bank's website as we've done in the past. And just a quick reminder that today's session builds on our earlier webinar in January, which focused on the going to application process for standalone DSDs. You can find the recording materials from that session on the bank's Gate 2 website.

00:06:50:12 - 00:06:59:13
Unknown
We will now talk you through the application journey for hybrid firms, starting with pre-application engagements.

00:06:59:14 - 00:07:24:15
Unknown
As you might expect, the bank's application engagement process for hybrid funds is substantively the same as that of the standalone DSD firms. On the bank side, we strongly encourage firms to make use of pre-application engagement. As we've mentioned in our previous webinar. Firms will have up to three hours of engagement with the DSS supervision team, which can take place through meetings or calls.

00:07:25:00 - 00:08:01:08
Unknown
The supervision team will be your first point of contact for your application. These calls are your opportunity to raise questions and walk through key areas of your proposal with us. The aim of these calls is to help firms to be clear on what the bank is looking for and to support good quality submissions. The key difference in the engagement for standalone DSD and hybrid firms is that for hybrid firms, we ask that you flag any areas where you think materials submitted through the FCA's authorization process could also help meet the bank's gate.

00:08:01:09 - 00:08:42:02
Unknown
Two application requirements. We'll be coming back to this point later on in the presentation when we discuss possible regulatory overlap for submission requirement. And further to the last webinar, I wanted to highlight an evolution in our approach to pre-application engagements. This is applicable to both hybrid and standalone DSD firms. The bank will be offering firms that pass Gate 1 the opportunity to submit draft responses to parts of their Gate two application, focussed on some of the key risk areas in advance of sending through a full application.

00:08:42:04 - 00:09:11:01
Unknown
It is important to flag that submitting this draft information will not trigger the start of a four month Gate 2 assessment timeline. That timeline will only begin once we've received a full, high quality and well considered application. This is entirely optional. Some firms may not want to take up this offer and instead proceed to submitting a full application. However, other firms may see benefits in engaging in this process before working through the full application.

00:09:11:02 - 00:09:22:00
Unknown
I will now hand over to Christine to talk through FCA aspects.

00:09:22:01 - 00:09:55:00
Unknown
Thank you Chris. I am Christine Reed, team leader of the Securities Innovation and Venues team in authorizations at the FCA, which includes firms entering the day assess. Moving on to the FCA. It is important to note that the FCA has adapted its authorization approach to assess participants. We have increased the number of pre-application meetings that we offer. These meetings are designed to give firms more clarity earlier in the application process, covering aspects including expectations around application forms, documentation and permissions.

00:09:55:01 - 00:10:18:03
Unknown
We have focused on improving our process so that we can work smarter and determining these applications in a much shorter timeframe. In line with our growth agenda, each firm will also be assigned a case officer right from the outset. That person will act as your main point of contact and help coordinate input across the relevant FCA teams. By using these multiple meetings upfront.

00:10:18:05 - 00:10:44:14
Unknown
Our goal is to reduce the annual assessment time, especially for sandbox trading venues, by getting applications into near final form before formal submission. Throughout this process, which starts from pre-application, the bank and the FCA will coordinate with one another. Where both regulators are engaging with a hybrid firm, we will share agendas in advance and invite each other to attend meetings where there is a clear joint interest.

00:10:44:15 - 00:11:13:00
Unknown
This helps avoid duplication. Our aim is that firms should not need to repeat the same points to each regulator separately. These joint meetings will also allow us to clarify expectations and identify potential overlap early between the Bank and FCA submissions, so we can manage your regulatory engagement in a more efficient way. So let's move on to submitting your application.

00:11:13:01 - 00:11:36:07
Unknown
We have looked to make it as easy as possible for firms to submit applications to become hybrid entities. Recognizing that hybrid firms will be submitting separately to the FCA and the bank for different parts of their businesses. So just to clarify what that means in practice, if you are seeking trading venue permissions you will apply for these from the FCA and if you are seeking CSD permissions. 

00:11:36:07 - 00:11:55:08
Unknown
i.e. for settlement, notary and maintenance activity you will apply to the bank, but both regulators will consider your proposals to carry out ancillary activities in the DSS. The next slide we will walk through what we expect to receive as part of the application process.

00:11:55:10 - 00:12:21:09
Unknown
From the FCA side. Firms will submit applications via the connect system. Every business model is different, but we can walk you through the typical permissions that most trading venues will need. MTF and OTF permissions are core for firms intending to operate as a trading venue. Depending on your business model, other regulated permissions may also be relevant, for example permissions relating to arranging for dealing investments.

00:12:21:10 - 00:12:54:00
Unknown
Exact permissions will vary from firm to firm. These permissions should be justified clearly in your business plan. We'll want to talk through this with you during your pre-application meetings to make sure they match your proposed activities. You will also need to submit a full set of supporting materials. Here we've listed the information requested for an MTF. Mostly self-explanatory, but the key documents to concentrate on with the business plan MiFID annex, Financial Forecast, ICARA and senior Management function forms.

00:12:54:02 - 00:12:59:04
Unknown
And they are a form.

00:12:59:05 - 00:13:26:11
Unknown
On the bank side, hybrid firms still need to submit the same application form as the standalone DSD firms by default. As a reminder that these are the gate2 questionnaire,  the Cyber Resilience Questionnaire or CQUEST, self attestation spreadsheets and the CEO and chair letter confirming self Attestation. On potential areas of overlap between the FCA and bank applications.

00:13:26:12 - 00:14:02:03
Unknown
Some of the FCA forms might meet the banks needs for information at Gate 2, particularly if hybrid firms trading and settlement functions are operated under the same legal entity. Where this is the case, a hybrid firm would be able to cross reference to the relevant FCA forms when submitting the Gate 2 application. We have identified some areas of potential overlap, such as governance arrangements like boards and committee structures, sources of funding, ownership and organizational structure.

00:14:02:05 - 00:14:35:03
Unknown
Wind-down plan. For this, we have identified that the FCA ICARA forms would likely be able to serve as a financial part of the wind-down plan that the Bank asks for at Gate 2. And finally, if you're holding client assets or funds and this triggers client assets or cash requirements, there may be overlap between the bank and FCA's applications, as our Gate two assessment considers protection of clients assets. As mentioned earlier, to help us make most of this overlap.

00:14:35:04 - 00:14:53:04
Unknown
We ask that hybrid firms flag these areas during pre-application meetings. We will agree with each firm which if any parts of this submission to the FCA would meet the bank's requirements.

00:14:53:06 - 00:15:21:08
Unknown
Now let's turn to how the bank and the FCA will assess your application. Key message here is that even though the FCA and Bank have separately separate regulatory responsibilities and will be approving different activities, we are committed to working together as closely as possible through close collaboration during our respective assessment processes. As part of that, we have put in place main ways of working to support this coordinated coordination.

00:15:21:09 - 00:15:52:12
Unknown
As you can see on the slide, firstly we will hold regular catch ups between our teams to coordinate our work planning and to share updates on the status of firm applications. These touch points help us to meet our respective objectives of minimizing the burden on firms. Secondly, where either regulator needs further information on a firm, we will first check if the other already has it can be shared using our established information sharing gateways before requesting it from the firm itself.

00:15:52:13 - 00:16:19:06
Unknown
Thirdly, where either regulator is meeting a hybrid firm to discuss aspects of their application, they will ensure the other has the opportunity to attend where there are topics of joint interest being covered. More broadly, where there is a high degree of overlap between the trading settlement systems and processes within the firm, there will be likely greater opportunity for the regulators to leverage overlap, however, where there is less overlap.

00:16:19:08 - 00:16:59:13
Unknown
For example, if trading and settlement are handled in separate legal entities and share little common personnel, IT or controls, likely there will be less opportunities for regulators to minimize duplication. I will now hand over to my colleague Kevin. Thank you. Christine I'm Kevin. I work for Christine in wholesale authorizations, overseeing the processing of MTF and OTF applications. Looking at what each regulator will be looking for in their application, as mentioned already on the FCA side, each firm will be assigned an authorization case officer who will act as your main point of contact.

00:16:59:15 - 00:17:32:01
Unknown
The case officer will coordinate input from the relevant specialist teams involved in your trading venue application. This includes FCA supervision, market abuse surveillance, technology, and cyber resilience, and others like CASS or Market Data Processor or MDFP if needed. We'll also be considering the firm's prudential requirements. Just to give an example here, for a non interconnected firm, which is the baseline of many applicants, the minimum capital requirements is 150,000.

00:17:32:02 - 00:18:04:09
Unknown
But that's just a starting point. The actual own funds required will vary based on your business model and can be slightly or significantly higher. These expectations will be discussed in more detail during your pre-application meetings. The FCA's approach for reviewing a hybrid firm application follows the current procedure. The authorisation department, with the support by colleagues across other relevant teams, will assess the application with consideration to threshold conditions. 

00:18:04:10 - 00:18:34:02
Unknown
The minimum standards for authorizing the firm. The need for appropriate and proportionate arrangements, systems and procedures to identify, prevent, and report market abuse. An analysis of how a firm will meet the definition of an MTF under article four, and how it meets the systems and controls requirements for trading venues under article 48. A regulatory analysis should be provided to demonstrate how the firm will comply with MiFID.

00:18:34:04 - 00:19:07:13
Unknown
ITS 19, which sets out the requirements for the content and formatting of MTFs and OTF and  NTFS and the information the operator supplies to the regulator. A review of the firm's cyber infrastructure resilience, as well as the firm's readiness, which will be informed by responses to the questions in I.T form. Chris. Thank you. Kevin. From the bank side, we'll be reviewing hybrid firm applications in line with the same key risk areas we assess for standalone DSD firms.

00:19:07:14 - 00:19:42:12
Unknown
As a reminder, the key areas are adhering to limits, limiting cyber contagion, protecting assets and orderly wind down. More information on these risk areas can be found on the bank's gate two web page, along with previous webinars and supporting materials. We've recently uploaded our key judgments to the website. We talked through these at the last webinar. These judgments underpin our assessment of each key risk to, for example, concerning the risk of limit breaches.

00:19:42:14 - 00:20:14:04
Unknown
A key judgment will be whether a firm has a plausible approach to adhering to all limits, and this includes having the necessary controls and processes to monitor, limit utilization, rectify and report any breaches if they occur. Alongside these key judgments we have uploaded to the Gate two web page a non-exhaustive list of review questions. We will seek plausible answers to these questions during okay to review, as they will help inform.

00:20:14:06 - 00:20:48:04
Unknown
Help us form key judgments for each risk. Using the example of limit breaches, some of the review questions look at how systems provide early warnings before a limit is breached and how systems track and monitor breaches in real time. We have considered including these review questions in the Gate two application. However, we decided not to do so as we are concerned, this would provide too narrow perspective and that firms would be able to address these key risks within the existing application.

00:20:48:05 - 00:21:25:14
Unknown
Instead, we have published these questions separately to help guide firms as they prepare their applications and ensure they have clearly demonstrated how they are considering and mitigating these key risks. We recommend firms consider these questions when completing their gate two application. We will not require firms to submit answers to these questions alongside the gate two application documents. We publish these judgments and questions to be transparent about our assessment process and to support the submission of high quality guidance for applications.

00:21:25:15 - 00:21:53:11
Unknown
These are relevant to both hybrid and standalone DSD firms. Finally, when assessing hybrid firms, the scope of the bank's review will cover the whole firm, not just the settlement components. If a hybrid firm has central governance or operational controls that apply across both trading and settlement, we will take these into account as well.

00:21:53:12 - 00:22:20:10
Unknown
Let's now turn to what happens at the end of the application process. The decision stage. We want to be clear that the bank and the FCA will each make their own decisions under their respective statutory responsibilities. Where the Bank approves a gate two application, the resulting permissions for CSD activities will be subject to limits set out in the DSS, where the FCA approves a trading venue authorisation

00:22:20:11 - 00:22:52:00
Unknown
This will be a full authorization and the activities will be not subject to limits. Regulators will not make a joint decision over hybrid authorizations. That being said, we coordinate our decision making over these separate authorizations where it makes sense to do so. For example, we are open to issuing decisions either concurrently or sequentially depending on what works best for your firm structure and timeline.

00:22:52:01 - 00:23:22:07
Unknown
We encourage you to let us know your preference to in the pre-application engagement. This will help us with our work planning and may support more aligned outcomes. Generally, we expect that most efficient outcomes will happen with firms submitting applications to both regulators at similar times. This allows both to view the firm's full operating model holistically, increasing our shared learning and reducing duplication.

00:23:22:08 - 00:23:46:11
Unknown
Of course, we understand this might not always be feasible, but we do encourage where it's possible. We expect this is the best way for any synergies between the bank and the FCA applications to be realized. We also want to flag that in the event that it's looking like we may reach different decisions with about the same application, we will share our thinking with each other and the firm.

00:23:46:11 - 00:23:56:09
Unknown
As early as possible. That way, firms are given the opportunity to potentially pivot or adapt their business model if needed.

00:23:56:10 - 00:24:31:06
Unknown
Lastly, a quick points on fees. The bank will charge the application fee of 40,000 pounds only if the application is successful. The FCA currently charges an application fee of 54,380 that needs to be paid at the point of submission. Firms won't be able to submit unless the fee has been paid and to flag all operators of trading venues would need to onboard to submit instrument reference data and in some case, transparency reports to the FCA market data processor MDP.

00:24:31:08 - 00:25:03:07
Unknown
Trading venues will also be required to submit transaction reports if they have non UK MiFID members, but can choose to use an approved reporting mechanism. Costs will vary depending on your set up. These can be discussed during the pre-application meetings and are available to view on the FCA MDP page. Thank you. We had initially included a placeholder in the agenda to cover topics specifically for standalone DSDs.

00:25:03:08 - 00:25:32:00
Unknown
However, we finally identified topics that are relevant to both standalone DSDs and hybrid firms, which the next few slides will cover. These are topics that have arisen in our pre-application engagement with firms to date. Concerning expectations around testing before gate two. To reiterate, firms cannot perform live activity before guidance and that includes live testing. Well, by that I mean.

00:25:32:00 - 00:25:59:09
Unknown
Testing involving real clients, real assets or activity that takes place in a live environment. That being said, we do not require firms to conduct any particular form of non testing before submitting the guide to application. It is entirely up to the firm how they choose to prepare. What matters most for these applications is that firms explain plausible approaches to managing our key risks.

00:25:59:10 - 00:26:29:13
Unknown
However, if firms do choose to undertake non live tests, we will be looking for firms to include the results of those tests in the gate two application, particularly if that non live testing evidences how firms plan to manage the key risks we care about. I will now hand over to Clare who will talk about settlement finality.

00:26:29:15 - 00:26:53:11
Unknown
Hi everyone. Sorry for the camera glitch there. Thanks. I'm Clare Hammond, and I'm one of the managers on the DSS supervision team in the bank. A number of firms have asked us about settlement finality, requirements. So we thought it be helpful to just take a moment to walk through what's required under the DSS rules.

00:26:53:12 - 00:27:36:15
Unknown
So settlement finality designation ensures that, transfer orders are legally enforceable and binding on participants, regardless of the solvency of a participant. This finality helps to reduce risk in the ecosystem and provide legal certainty by guaranteeing the completion of transactions. Even if a participant defaults outside the DSS, CSDs operating under the UK CSDR regime would be required to obtain settlement finality designation under the Financial Markets and Insolvency Settlement Finality Regulations 1999, known as SFR designation.

00:27:37:01 - 00:28:11:05
Unknown
However, it's important to note that under the DSS rules, SFR designation is not mandatory at gate two, and that means that firms do not need to have formal SFR designation in place in order to begin live settlement activity once they cross gate two. That said, article 39 of the DSS rules does still require that the DSDs must meet three conditions before they can begin live activity at gate two, and these apply regardless or not, of whether a firm is seeking SFR designation.

00:28:11:07 - 00:28:47:10
Unknown
Firstly, the firm must ensure that its securities settlement system offers adequate protection to participants, including through contractual arrangements and rulebook provisions. Secondly, the system must clearly define the moments of entry and irreversibility of transfer of asset of transfer orders. Thirdly, firms must clearly disclose the rules governing finality of transfers in their system as set out in the bank's DSS rules instrument, so that participants are clear on when settlement becomes final.

00:28:47:11 - 00:29:17:12
Unknown
Even if a firm does not have formal SFR designation, it still needs to provide clarity to users on when settlement is final and therefore irrevocable. This level of transparency helps maintain user and investor confidence. So applying for designation under the SFR. Let's have a look at the actual process. To reiterate from the previous slide, SFR designation is not mandatory at gate two.

00:29:17:13 - 00:29:46:10
Unknown
However, if you do decide to apply for SFR designation, you should initially refer to the schedule that's appended to the Financial Markets and Insolvency Settlement Finality Regulations 1999 for what firms are required to demonstrate in their application. The bank's DSS supervision team to which I belong to with Chris and my colleague James here, will provide some additional guidance to you.

00:29:46:11 - 00:30:14:08
Unknown
As needed. But we will look to give you some details around the sorts of things that your application should include. And that's likely to cover areas such as the systems management and governance, including member and participant requirements, how the firm promotes and maintains its securities settlement system standards, and what arrangements are in place to ensure effective monitoring and enforcement of compliance with the system.

00:30:14:08 - 00:30:48:01
Unknown
Rules. It will also look at risk management and controls operational resilience, including cyber resilience and the rules and controls that governs settlement finality in the system, including the firm's arrangements to manage misalignments in nudges, if those were to occur. We know that parts of this information overlap with your gate two application. As a result, firms may be able to cross-reference to information provided in the gate two application in some of their SFR submission materials.

00:30:48:05 - 00:31:13:14
Unknown
To avoid duplication. We will discuss this with firms as part of your application process. If you are thinking about applying for formal SFR designation, you might be wondering what the timeline looks like. There is no statutory timeline, but in practice, the application process can take around 4 to 6 months, depending heavily on the quality of the applications submitted.

00:31:13:15 - 00:31:41:15
Unknown
If firms are considering seeking designation in time for live activity at gate two, for example, because participants want to benefit from the protections offered under the SFR, we strongly encourage firms to raise this with the bank as early as possible. Ideally, during pre-application meetings, there will be additional discussion time allowed separate to the three hours allotted for pre gate to application meetings.

00:31:42:01 - 00:32:09:04
Unknown
Firms should then aim to prepare and submit the necessary information for SFR designation at the same time as, or as close as possible to, the gate two application submission. I'll now hand over to Phil to talk through ancillary activities. Thanks, Clire. I'm, Phil Bronk, the FCA policy lead on the DSS. So turning to ancillary activities I need to cover, a couple of.

00:32:09:05 - 00:32:38:13
Unknown
I should have gone on. It's on my mind. Apologies if you can't see me on the screen. Hopefully it'll come on in a second. Turning to ancillary activities, these are an important feature of the DSS regime, and will play a key role in how firms are able to operate under that. DSS permissions. The DSS regs build on the existing concept of ancillary activities and sets out how these should be treated within the DSS.

00:32:38:14 - 00:33:09:10
Unknown
In order to achieve two things. First is where DSD is conducting what would be defined as regulated activities under the RAO, certain exemptions may apply within the DSS so that there's no need to obtain a separate FCA authorization for those activities where they're being conducted in support of the DSS provided that they are being conducted to support the DSD's core functions. And second is to ensure that where a sandbox entrant has a wider regulated business that interacts with their DSS activity, that business can benefit from the DSS framework by necessary.

00:33:09:11 - 00:33:41:11
Unknown
For example, this might include situations where a firm would otherwise need to register as a crypto wallet or exchange provider under the MLRs. To make this work in practice, we've divided ancillary activities that may be carried on by sandbox entrance into two categories. First is category one activities, which are those carried on for the purposes of enabling the core functions of the DSD, those of maintenance, notary or settlement which could include activities like sending dematerialized instructions.

00:33:41:12 - 00:34:09:12
Unknown
And then there's category two ancillary activities which go beyond this and may be carried on for other purposes. Under the Digital Security Sandbox Instrument 2025, the FCA has clarified that where category one activities are carried on by an authorized person, those activities won't be treated as regulated activities from an FCA handbook perspective. That avoids duplication and gives clarity that DSD functions are already being regulated under the bank's DSD rulebook.

00:34:09:13 - 00:34:38:14
Unknown
However, we do want to be clear in a firm's SAN that these category one activities are only permitted insofar as they're being carried on, in support of the core DSD functions. They are not a license for broader activity. Where a firm wants to carry out category two ancillary activities as part of its SAN, we will only include these where it holds the necessary part four a permissions under FSMA and that's to ensure that firms don't use their SAN to avoid appropriate regulatory oversight for wider activities.

00:34:38:15 - 00:35:04:13
Unknown
The only exception to this is for banking type ancillary activities. These are activities which the bank's DSD rulebook says must be carried on by a firm with permission to accept deposits. That applies regardless of whether the deposit taking activity is directly enabling the DSD core functions or not. With that, I'll hand back to James.

00:35:04:14 - 00:35:12:02
Unknown
Thanks very much, Phil. That concludes our presentation, which will be posted on the slides on the bank's website.