Approach to the monitoring of third country systems designated under the Settlement Finality Regulations

In light of the UK’s withdrawal from the EU, the UK amended its legislation to enable third-country CCPs, CSDs and payment systems, which are not subject to UK law, to receive settlement finality designation within the UK. Any system previously covered by the EU’s Settlement Finality Directive, that submitted an application for permanent designation by 30 June 2021, continues to benefit from the UK’s settlement finality protection under the Temporary Designation Regime, which ends on 31 December 2023. Further details can be found on the Bank’s website.^{footnote [1]}

Once a system, not subject to UK law, has been designated under the UK Settlement Finality Regulations (SFR), the Bank will monitor that the system continues to meet the requirements for designation. The requirements are:

1. A system must:
   • have at least three institutions participating in the system, unless otherwise determined by the Bank in any case where there are two institutions participating in the system and the Bank considers that designation is required on the grounds of systemic risk; and
   • be a system through which transfer orders are effected.
2. A system must have adequate arrangements for the effective monitoring and enforcement of compliance with its rules.
3. A system operator must have financial resources sufficient for the proper performance of its functions.
4. A system operator must be able and willing to co-operate with the relevant UK supervisory and administrative authorities.
5. The rules of the non-UK law system must:
   • specify the point at which a transfer order takes effect as having been entered into the system;
   • specify the point after which a transfer order may not be revoked by a participant or any other party; and
   • prohibit the revocation by a participant or any other party of a transfer order from the point specified in accordance with paragraph (b).
6. The system must have default arrangements, which are appropriate for that system in all the circumstances.

Pursuant to Regulation 12 of the SFR, this note sets out the Bank’s approach to the ongoing monitoring of third-country designated systems. In line with the Bank’s approach to co-operation with overseas authorities,^{footnote [2]} we will have regard to Home State regulation where we are satisfied that there are equivalent requirements e.g. by implementation of the Settlement Finality Directive or relevant Principles within the CPMI-IOSCO Principles for Financial Market Infrastructure. If the Bank identifies any areas of concern, we will, in the first instance, engage with the relevant home state regulator (where one exists) to resolve any issues.

In the event that there were material changes planned in these equivalent requirements, we would review our approach to consider if it remained appropriate, and if we proposed to change our approach, we would give reasonable notice to allow for necessary preparations.

These requirements will be applied to each designated system when its application for permanent designation is approved.