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Delegated Legislation Committee Debates

Draft Uncertificated Securities (Amendment) (Eligible Debt Securities) Regulations 2003

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First Standing Committee on Delegated Legislation

Monday 16 June 2003

[Mr. Alan Hurst in the Chair]

Draft Uncertificated Securities (Amendment) (Eligible Debt Securities) Regulations 2003

4.30 pm

The Economic Secretary to the Treasury (John Healey): I beg to move,

    That the Committee has considered the draft Uncertificated Securities (Amendment) (Eligible Debt Securities) Regulations 2003.

I welcome you to the Chair, Mr. Hurst. It is a privilege and a pleasure to serve under your chairmanship for the first time. Today, we are scrutinising changes to the legislative structure for computerised securities settlement systems that transfer shares, gilts and corporate bonds electronically, without using certificates. CRESTCo operates the only such system in the United Kingdom. The legal framework under which CRESTCo operates its system is provided by the uncertificated securities regulations that were originally put in place in 1995.

To ensure that the United Kingdom securities settlement infrastructure continues to be able to take advantage of opportunities for market developments, there has been a rolling programme of reform of USRs. They were introduced in 1995, extended in 2000 and re-enacted with modifications in 2001. The statutory instrument continues that reform by amending the regulations to permit the evidencing and transfer of title of electronic equivalents of money market instruments—MMIs.

By allowing for the creation of electronic equivalents of MMIs, the new regulations are fulfilling the final recommendation of the Bank of England's securities settlement priorities review, which was published in 1998. There has been strong support in the City in favour of allowing the securities to be issued in electronic form, allowing title to be evidenced by names on an electronic register and allowing their integration into the CREST settlement system. Settlement is an important source of revenue and a determinant of the location of financial activity. As issuers and investors nowadays have an ever wider choice over where they do business, it is essential that the United Kingdom remains attractive to them. The introduction of electronic equivalents of MMIs is another step forward in keeping London the leading international financial centre in the world. It is against that backdrop that the Government are seeking approval for the statutory instrument.

As I have said, the statutory instrument will permit the evidencing and transfer of title of dematerialised equivalents to MMIs, which are short-term debt securities, and mostly have a maturity of less than one year. They are used to meet the short-term funding needs of the Government in the form of Treasury Bills, financial institutions and other companies. Holders of

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MMIs are almost exclusively companies rather than individuals. MMIs are issued in the form of certificates. They are negotiable bearer instruments meaning that ownership can be passed by physical delivery of a certificate. Each MMI is unique and cannot be used interchangeably with other units.

Dematerialisation, as its name implies, involves the removal of paper. In order for an MMI to be issued and transferred electronically, it will lose its uniqueness. At the same time, it will cease to be a negotiable bearer instrument. That change in characteristic means that, while performing the same economic functions, electronic equivalents of MMIs will be distinct securities. In the amended regulations, therefore, a new electronic equivalent to the MMI has been defined the eligible debt security, or EDS.

An EDS will be a so-called registered security. Legal title will be provided to the holder by entry of his name on the operator register of eligible debt securities, a computer-held record of ownership. A change in the register will represent a change in legal title. Furthermore, individual EDSs will be interchangeable thus increasing flexibility for the issuer of the securities and allowing better tailoring to the needs of both investors and issuers. The modified regulations therefore take account of the different legal characteristics of the EDS.

Legislative change is necessary to allow for the creation of EDSs. The current scope of uncertificated securities regulations, which make provision for electronic transfer and evidencing of ownership of securities, does not cover EDSs. The regulations under debate amend the Uncertificated Securities Regulations 2001 to allow eligible debt securities to be settled in CREST and for title to be provided by entry on the operator register operated by CREST—that is, electronic transfer of title representing a change in legal ownership. Most of the amendments are technical and designed to facilitate and give legal backing to the upkeep of the registers and the transfer of securities.

The definition of an eligible debt security in the regulations has been deliberately cast in broad terms. The breadth of the definition is intended to maintain sufficient flexibility, while allowing for the possible future development of new kinds of securities.

We are making changes for three reasons. The first reason is to underpin financial stability by allowing settlement of short-term debt securities to take place in CREST with full delivery versus payment in central bank money. The second reason is to reduce costs of raising capital by removing the need to print and store large quantities of certificates. The third reason is to help maintain the UK's competitiveness as a location for financial services by providing a modern and an efficient security settlement environment for London's financial markets.

Our objective is simple: the electronic legal transfer of title and settlement of eligible debt securities. We believe that that change will enhance the competitiveness of the infrastructure of the UK financial markets, and it will be warmly welcomed by the City.

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4.37 pm

Mr. Stephen O'Brien (Eddisbury): I, too, welcome you to the Chair, Mr. Hurst? This is the first time that I have had the privilege of serving under your chairmanship.

The regulations come before us having been postponed from 3 June. They were considered in the other place last Friday. I thoroughly welcome the measure. It is not controversial, and will be welcomed in the City, as were the original rules and regulations introduced in 1995, when I was working in a plc. There was considerable acclamation for the introduction of the uncertificated process. I had some hand in advising, and then chairing, conferences on CREST, so I am familiar with this subject.

I am glad that following the first introduction of regulations in 1995 there was an extension to include gilts in 2000, and that there were further regulations in 2001. Given the nature of the statutory instrument and the subject matter, I should like to congratulate the Minister and his officials on the explanatory memorandum. It is a model of clarity. In my view, it is the only thing that needs to be read to understand and approve of what is being proposed.

The Minister confirmed that the regulations represent a final variation as part of the rolling programme of what will be included following the 1998 Bank of England securities priorities review. In the House of Lords, my noble Friend Baroness Wilcox asked of the Minister, Lord McIntosh of Haringey, only two questions, which he answered satisfactorily on Friday. He said that the regulations were the final variation as part of the rolling review, and that if there were any other consideration or proposal that might want to add to, amend, or indeed adjust the regulations in this respect, there would be prior consultation. He answered both questions in the affirmative, which is satisfactory from our point of view. I am therefore happy to register the Official Opposition's approval for the measure.

4.36 pm

Mr. Andrew Stunell (Hazel Grove): I, too, congratulate you, Mr. Hurst. It is a privilege to serve under you.

I shall not detain the Committee for long. This is a specialist area. It is important that the regulations are brought into the 21st century and that the City of London retains its capacity to be a major financial world centre. From that point of view, the proposed regulations are welcome.

The explanatory note is much clearer than the proposed regulations, although I do not entirely share the view of the hon. Member for Eddisbury (Mr. O'Brien) on their clarity. Perhaps that is because I do not have his background on this technical matter. The explanatory memorandum explains that under regulation 12 there will be no requirement to disclose the operator register of eligible debt securities. In fact, reference to regulation 12 is somewhat opaque,

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because it simply refers to omitting regulations 7 and 8 in the primary regulations.

I want to couple that point with the fact that there is potential for a much more volatile situation to arise with an electronic system, compared with the current paper-based system. Is the Minister satisfied, both in respect of transparency and volatility, that the proposed regulations give no grounds for concern or complaint, especially bearing in mind that that could not be said for some other transactions—of currency, for example—in which significant problems are generated by the instant transfer system that is available?

Subject to the Minister responding appropriately, I am happy, on behalf of the Liberal Democrats, to give the regulations a fair wind.

4.42 pm

John Healey: I welcome the contributions of both hon. Members. I especially welcome the recognition by the hon. Member for Hazel Grove (Mr. Stunell) that there is an important modernising purpose behind the proposed regulations. I have to say to him that the explanatory note is obviously clearer than the proposed regulations. The very purpose of such notes is to try to clarify what it is not always possible to clarify in the regulations, which must be legally drafted.

Regulation 12 mirrors the current system. There is no appetite in the market for this requirement, based on the consultation we have undertaken. On volatility, I tried to explain in my opening remarks that there will be a single record in future, instead of both an electronic and a paper-based record. The fact that we are able to move to a delivery vs. payment system, in which the processes happen simultaneously under the new system, will reinforce the stability of and the confidence in the system. That will reduce the theoretical risk in the existing system; nevertheless, there may be a degree of risk. That meets the hon. Gentleman's concerns.

The hon. Member for Eddisbury brings expertise and experience to the discussion that I would not claim for myself. I welcome the fact that he thoroughly welcomes the measure. I shall ensure that officials, who have been involved with both the Treasury and the Bank of England, are aware that the hon. Gentleman described the explanatory memorandum as a model of clarity.

To avoid any doubt, I too confirm what my hon. Friend confirmed on Friday in the other place. There will be prior consultation on any future changes, just as there were consultations on any changes in the past. I welcome the comments that have been made and I hope that the Committee will agree the regulations.

Question put and agreed to.


    That the Committee has considered the draft Uncertificated Securities (Amendment) (Eligible Debt Securities) Regulations 2003.

Committee rose at sixteen minutes to Five o'clock.

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The following Members attended the Committee:
Hurst, Mr. Alan (Chairman)
Ainsworth, Mr. Peter
Anderson, Janet
Bayley, Hugh
Hamilton, Mr. Fabian
Healey, John

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McWalter, Mr.
Murphy, Mr. Jim
O'Brien, Mr. Stephen
Stunell, Mr.
Wilshire, Mr.
Wright, Mr. Anthony D.

The following also attended, pursuant to Standing Order No. 118(2):
Southworth, Helen (Warrington, South)


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