Regulators’ response to industry sentiment
The Policy Statement includes positive news on a number of points which had been raised by the industry. The key policy changes are:
- Extending the scope of the DSS to include non-GBP denominated assets.
- Flexing the Gate 2 capacity limits and allowing uplifts to limits while firms are in the go-live stage – which will allow smoother transitions to the scaling stage.
- Adding the option of a third Gate 3 progress review window – again, which will allow smoother transitions to the scaling stage.
- Reducing the minimum DSD capital requirement to 6 (instead of 9) months of operating expenses.
- Removing detailed provisions relating to the use of bank guarantees and letters of credit used to secure DSD links in favour of relying on article 48 of Chapter 2 of the Gate 2 Bank rules.
- Confirming that where DSDs must ensure that any securities settlement system they operate offers “adequate protection” (article 39 of Chapter 2 of the Gate 2 Bank rules), such can include protection by contractual means.
For global firms, it will be disappointing that these changes did not include any flexibility around UK branches of non-UK entities taking part.
The Policy Statement did, however, acknowledge that the consultation had prompted requests for clarity on participant eligibility and how non-sandbox entrants would interact with DSS participants. In relation to third-party technology providers, the regulators confirmed that while such parties may apply to the DSS, they are not necessarily expected to do so and may be able to help DSS participants delivery services as a third-party supplier. Furthermore, the Policy Statement confirms it is unlikely a DSD would be designated a critical third party (CTP) under the UK’s new CTP regime. Accordingly, such providers would not be subject to direct supervision, but the relevant resilience, recovery and outsourcing requirements would apply to the arrangement.
Notably, the regulators’ responses on extending scope of the DSS to non-GBP denominated assets and moving to a more flexible approach on Gate 2 capacity limits are good news.
- For non-GBP denominated assets, the Bank will publish limits as soon as possible for non-sterling assets “that hold an important position regarding the functioning and financial stability of the financial system”. These are expected to include corporate bonds in EUR and USD (and possibly others).
- For the Gate 2 capacity limits, the Policy Statement confirmed that the regulators have uplifted these limits for gilts and sterling corporate bonds, and uplifts will also be possible for other asset classes.
Further, on the Gate 2 capacity limits, the Bank confirmed that where uplifts have been applied, firms within the go-live stage may be subject to different firm-specific limits. This is different to the original consultation paper proposals, and the change in approach is hoped to facilitate firms needing extra capacity to grow their business meaningfully. Uplifted limits will be set out in the published SANs.
Gate 3 and beyond
The consultation paper included proposals in relation to the Gate 3 Bank rules (for DSS participants scaling up) and End-state Bank rules (for firms which have exited the DSS). These prompted significant industry feedback which centred on the disadvantages of having a rigid set of rules, which draw heavily from the existing regulatory regime, before the DSS has even started.
As a result, the Bank confirmed that it would be revisiting these proposals once the DSS has been running for at least 15 months, so that the regulators can take on board learnings and observations from DSS activities over that period. The Bank expects to publish updated drafts of Gate 3 and End-state Bank rules after this 15-month period, and has confirmed that there will be industry engagement about these revised draft rules.
More broadly on industry engagement, the regulators have confirmed that they have taken note of consultation feedback on the need for clear and open communication about the progress of the DSS. They will hold periodic and ad-hoc roundtables to discuss the DSS with participants, as well as enabling discussion with wider industry on significant legal or policy questions.
What happens next
The DSS is officially open. The Guidance sets out indicative timeframes for DSS entrants as follows:
- Approximately four to five weeks to assess the type of applicant
- Approximately four to five weeks to decide Gate 1 application;
- To progress from submitting a Gate 2 application to live activity:
- Four months for DSDs.
- Four to six months for authorised hybrids.
- Six to 12 months for unauthorised hybrids.
Over the coming months, firms will enter the DSS and start to move through the gates and stages. We await further information on the scheduling of roundtable meetings with entrants and wider industry to discuss how the DSS is operating in practice.
The updated Gate 3 and Gate 4 Bank rules are expected only after the DSS has been operational for 15 months – so this will be January 2026 at the earliest.
The Consultation Paper noted concerns as to how the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) should be applied. The Policy Statement confirms that HM Treasury intend to bring the MLRs in scope of the legislation that can be modified for the purposes of the DSS, and will provide a temporary exemption from those requirements for firms engaging in DSS activities.
The application window is expected to close in March 2027. As a reminder, the DSS will be operational until December 2028, but may be extended.
Helpful links
Footnotes
1. Note that the FCA fee regime was not subject to the consultation and the existing fee regime will apply. Entrants applying for MTF and OTF permissions would therefore need to pay the Category 8 charge or, if eligible to apply to vary their permissions, 50% of a Category 8 charge. The Category 8 charge is currently GBP54,380.
2. Adapted from Table B: Stages of the DSS in the Policy Statement.
