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

• Citation: S.I. 2023/1398
• Sections: 13

Section 1 Citation, commencement and extent

(1) These Regulations may be cited as the Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023.

(2) These Regulations come into force on 8th January 2024.

(3) These Regulations extend to England and Wales, Scotland and Northern Ireland.

Section 2 Interpretation

In these Regulations—

“ the Act ” means the Financial Services and Markets Act 2023;

“ ancillary FMI activities ” means the activities that are referred to in regulation 3(6);

“appropriate regulator” is to be interpreted in accordance with regulation 3(8);

“digital securities depository” or “ DSD ” means, a sandbox entrant permitted to engage in one or more DSS activities referred to in regulation 3(5)(b) as a result of the FMI sandbox arrangements;

“digital securities sandbox” or “ DSS ” has the meaning given in regulation 3(1);

“ DSS activities ” in relation to a sandbox entrant means the activities approved in the SAN issued to the sandbox entrant;

“ established in the UK ” means constituted under the law of any part of the United Kingdom and having, for the duration of the FMI sandbox arrangements, a registered office or a head office in the United Kingdom;

“ FMI sandbox instrument ” has the meaning given in regulation 3(7);

“ platform ” means a form of market infrastructure, including a type of venue or facility, where FMI activities are performed in the DSS to which a SAN relates;

“sandbox approval notice” or “ SAN ” means a notice issued under regulation 5(5);

“ sandbox entrant ” means a person that makes an application to participate in the FMI sandbox arrangements and has its application approved under regulation 5(2)(a) or (b); and

“ users ” means the persons referred to in regulation 3(4)(a).

Section 3 Creation and operation of an FMI sandbox

(1) These Regulations have effect as an FMI sandbox (the “digital securities sandbox” or “DSS”) for the purposes described in section 13(1)(a) and (b) of the Act, insofar as those purposes relate to the use of developing technology, such as distributed ledger technology, in the carrying on of FMI activities.

(2) The following types of FMI entity where they are established in the UK are eligible to apply to participate in the FMI sandbox arrangements to carry on one or more of the activities described in paragraph (5) as a sandbox entrant—

(a) a recognised investment exchange that is not an overseas investment exchange;

(b) a recognised CSD;

(c) a person who—

(i) has a Part 4A permission to carry on the regulated activity referred to in article 25D of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (operating a multilateral trading facility) ; and

(ii) is an investment firm;

(d) a person who—

(i) has a Part 4A permission to carry on the regulated activity referred to in article 25DA of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (operating an organised trading facility) ; and

(ii) is an investment firm,

and “ Part 4A permission ” has the meaning given in section 55A(5) of FSMA 2000 and “ investment firm ” has the meaning given in section 424A(1) of that Act .

(3) The appropriate regulator may determine that other persons where they are established in the UK are permitted to apply to participate in the FMI sandbox arrangements to carry on one or more of the activities described in paragraph (5) as a sandbox entrant.

(4) The following descriptions of person may participate in the FMI sandbox arrangements in connection with the DSS activities of a sandbox entrant, including by carrying on ancillary FMI activities—

(a) persons using the services provided by the sandbox entrant;

(b) persons providing services either directly or indirectly to the sandbox entrant or to the users mentioned in sub-paragraph (a);

(c) persons carrying on activities or providing services in connection with an FMI sandbox instrument used in connection with the DSS activities under the FMI sandbox arrangements.

(5) The FMI sandbox arrangements must relate to one or more of the following FMI activities to be carried on as part of the business of a person described in paragraph (2) or (3)—

(a) operating a trading venue;

(b) carrying on one or more of the following functions in connection with an FMI sandbox instrument—

(i) maintenance;

(ii) notary;

(iii) settlement.

(6) Any activities that are ancillary to the following activities may also be subject to the FMI sandbox arrangements—

(a) activities referred to in paragraph (5)(a) or (b); and

(b) activities carried out by a person referred to in paragraph (4) or a sandbox entrant.

(7) For these purposes an “FMI sandbox instrument” is an instrument specified in any of paragraphs 1 to 3 and 11 of Part 1 of Schedule 2 to the Financial Services and Markets Act 2000 (Regulated Activities Order) 2001 that is used in connection with any of the activities described in paragraph (5).

(8) In these Regulations “ the appropriate regulator ” means—

(a) in relation to activities falling within paragraph (5)(a), the FCA;

(b) in relation to activities falling within paragraph 5(b), the Bank of England; ...

(c) where a sandbox entrant is carrying on activities falling within paragraph (5)(a) and (b), the FCA and the Bank of England ; and

(d) in relation to ancillary FMI activities, the FCA and the Bank of England.

Section 4 FMI sandbox application procedure and requirements

(1) A person who is eligible to apply to participate in the FMI sandbox arrangements as a sandbox entrant under regulation 3(2) or who is permitted to apply under regulation 3(3) may apply to the appropriate regulator for approval to participate.

(2) An application under this regulation must be made in such manner as the appropriate regulator may determine and be accompanied by such information as the appropriate regulator may require which may include (among other things)—

(a) the activities described in regulation 3(5) and ancillary FMI activities to be carried on by the sandbox entrant to which the application relates;

(b) the FMI sandbox instruments to be used on the sandbox entrant’s platform when carrying on the activities described in regulation 3(5);

(c) the details of the existing legislative barriers or obstacles to using developing technology if carrying on the activities described in regulation 3(5) is outside the FMI sandbox arrangements;

(d) the extent to which the proposed activities described in regulation 3(5) are to be carried on by the sandbox entrant at any time; and

(e) such further information that the appropriate regulator may require to determine the eligibility of an applicant.

Section 5 Determination of application for approval of participation in the FMI sandbox

(1) An application made under regulation 4 for approval of participation in the DSS must be determined by the appropriate regulator.

(2) The appropriate regulator may—

(a) approve the application;

(b) approve the application but with variations or conditions to the approval sought; or

(c) reject the application.

(3) The appropriate regulator must give the applicant written notice that their application has been determined.

(4) A notice of determination under paragraph (3) must include the reasons for any determination under paragraph (2)(b) or (2)(c).

(5) If the appropriate regulator approves an application to participate in the DSS it must issue the sandbox entrant with a sandbox approval notice (“ SAN ”) which must specify—

(a) the FMI activities to which the approval relates;

(b) any ancillary FMI activities that the sandbox entrant is given approval to carry on under the FMI sandbox arrangements;

(c) any further approvals, modifications or variations of an approval (including cancellation or suspension) with reference to the FMI activities specified in regulation 3(5).

(6) The appropriate regulator may include in the SAN—

(a) a description of FMI activities or ancillary FMI activities narrower or wider than that specified by the sandbox entrant in its application;

(b) such other conditions, limitations, approvals or restrictions as the appropriate regulator considers appropriate for the carrying on of FMI activities or ancillary FMI activities;

(c) how the FMI sandbox instruments are to be recorded and settled.

(7) A sandbox entrant may apply to the appropriate regulator for modification, suspension or cancellation of its SAN and in which case paragraphs (1) to (6) apply with the necessary modifications to that application as they apply to an application for approval of participation in the FMI sandbox.

Section 6 Sandbox arrangements – requirements related to relevant enactments and overall limitation

(1) The relevant enactments as specified in the Schedule have effect subject to the modifications in the Schedule in their application to—

(a) the appropriate regulators in connection with implementing and operating the FMI sandbox arrangements;

(b) a sandbox entrant in connection with carrying on the DSS activities;

(c) a person described in regulation 3(4) when participating in the FMI sandbox arrangements in connection with the DSS activities.

(2) Where a person has ceased to be a sandbox entrant or a person described in regulation 3(4), the provisions of specified relevant enactments as modified in the Schedule will continue to apply to that person in connection with any DSS activities performed in their capacity as a sandbox entrant or in their capacity as a person described in regulation 3(4), insofar as the provisions relate to an appropriate regulator exercising any of its powers.

(3) Each sandbox entrant must make the extent to which it is approved to participate in the FMI sandbox arrangements publicly available.

(4) The Treasury may direct the appropriate regulator, having first consulted with them, to impose restrictions on the overall FMI activities or ancillary FMI activities in the FMI sandbox arrangements, whether by reference to a number, value or another metric.

Section 7 Making of regulator rules

(1) The appropriate regulator may make rules applying to a sandbox entrant that appear necessary or expedient for the purpose of implementing and operating the FMI sandbox arrangements.

(2) The power to make rules in paragraph (1) includes the power to—

(a) provide for rules that are made by the appropriate regulator under FSMA 2000 or for any other relevant enactments not to apply;

(b) provide for modifications in the application of such rules;

(c) provide for the application of such rules (with or without modifications).

(3) The power to make rules in paragraph (1) also includes the power to make rules on the subject matter of a provision of a relevant enactment that has been disapplied by these regulations.

(4) Paragraph (5) relates to—

(a) any rules made under paragraph (1); or

(b) any rule that an appropriate regulator has made that is a relevant enactment.

(5) The appropriate regulator may waive or modify a rule so as—

(a) not to apply to a sandbox entrant or a description of sandbox entrant; or

(b) to apply to a sandbox entrant or a description of sandbox entrant with such modifications as the appropriate regulator may specify.

(6) The appropriate regulator may—

(a) exercise its power under paragraph (5) by direction and which may also be subject to conditions;

(b) revoke or vary a direction under paragraph (5).

(7) The reference to a rule being made under paragraph (1) or to a rule being applied or disapplied to a sandbox entrant or a description of a sandbox entrant in paragraphs (5) and (6) includes a reference to a person described in regulation 3(4).

Section 8 Modification of technical standards

(1) The appropriate regulator may make such modifications of any technical standards having effect for the purposes of a relevant enactment if it considers it to be necessary or expedient for the purpose of implementing and operating the FMI sandbox arrangements.

(2) The power to modify technical standards in paragraph (1) includes the power to—

(a) provide for the technical standards not to apply for the purposes of the FMI sandbox arrangements;

(b) provide for modifications in the application of the technical standards for those purposes;

(c) provide for the application of the technical standards (with or without modifications) for those purposes.

(3) This regulation ceases to have effect when the revocation of section 138P of FSMA 2000 by Part 4 of Schedule 1 to the Act is commenced.

Section 9 Supervision of the FMI sandbox

(1) The appropriate regulator must maintain arrangements to supervise the operation of the DSS.

(2) The appropriate regulator must provide—

(a) for the on-going oversight of each sandbox entrant under the appropriate regulator’s supervision; and

(b) for monitoring and where necessary modifying the DSS activities as described in the SAN of each sandbox entrant as it progresses through the FMI sandbox arrangements and to include provision for the winding-down of those DSS activities prior to the termination of the FMI sandbox arrangements under regulation 13.

(3) The appropriate regulator may direct a sandbox entrant to—

(a) provide specified information or documents;

(b) engage or cease engaging in a particular activity in connection with the FMI sandbox arrangements.

(4) The appropriate regulator must publish details (including on its website) of—

(a) the FMI sandbox arrangements, in a way that is best calculated to bring it to the attention of a sandbox entrant and persons referred to in regulation 3(4);

(b) the instrument by which rules and technical standards are made by an appropriate regulator;

(c) the waivers made under regulations 7(5) and (6) that are issued in conjunction with a SAN.

Section 10 Cooperation between appropriate regulators

(1) The Bank and the FCA must take such steps they consider appropriate to co-operate with each other in connection with the operation and supervision of the DSS.

(2) The Bank and the FCA must adopt and maintain a memorandum of understanding describing how they intend to co-operate and where they are required to engage in dual regulation of the operation of the DSS and particular sandbox entrants.

(3) The memorandum referred to in paragraph (2) must make provision in connection with the DSS for the—

(a) granting or varying of an approval of a sandbox entrant’s participation in the FMI sandbox arrangements.

(b) making of rules;

(c) exercise of enforcement powers;

(d) furtherance of the purposes of the DSS as described in regulation 3(1).

(4) The Bank and the FCA may satisfy the requirements in paragraphs (2) and (3) by modifying an existing memorandum of understanding between the appropriate regulators or creating a new one.

(5) The Bank and the FCA must ensure the memorandum that is in force is published in a way that is best calculated to bring it to the attention of interested persons.

Section 11 Date of the report on the FMI sandbox arrangements

The date specified for the purposes of section 14(3) of the Act is 10th January 2028.

Section 12 Modification, suspension and cancellation of the SAN

(1) Where a sandbox entrant breaches a requirement imposed on it by or under these Regulations or if it appears necessary or expedient for the purpose of implementing and operating the FMI sandbox arrangements, the appropriate regulator may—

(a) modify the SAN;

(b) suspend the SAN; or

(c) cancel the SAN.

of that sandbox entrant.

(2) Where the appropriate regulator exercises the power under paragraph (1) to modify the DSS activities permitted under a SAN, the appropriate regulator may impose such limitations, conditions or restrictions as it considers appropriate.

(3) Where the appropriate regulator exercises the powers under paragraph (1), it must notify the sandbox entrant in writing in a way that is best calculated to bring it to the attention of the sandbox entrant and—

(a) it must provide reasons for exercising the power and specify if the modification, suspension or cancellation of the SAN takes effect immediately or on a specified date; and

(b) may make reference to required periods for the sandbox entrant to either winddown its DSS activities or transition these activities outside of the FMI sandbox arrangements.

Section 13 Termination of FMI sandbox

These Regulations are to cease to have effect on 8th January 2029.