HL Deb 13 June 2003 vol 649 cc507-10

1.5 p.m.

Lord McIntosh of Haringey

rose to move, That the draft regulations laid before the House on 6th May be approved [20th report from the Joint Committee].

The noble Lord said: My Lords, we are debating today changes to the legislative structure for computerised securities settlement systems that transfers 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 (USRs). To ensure that the UK securities settlement infrastructure continues to be able to take advantage of opportunities for market developments there has been a rolling programme of reform of the USRs. They were first introduced in 1995, extended in 2000 and then re-enacted with modifications in 2001. The statutory instrument before us today continues that reform by amending the regulations in order to permit the evidencing and transfer of title of electronic equivalents of money market instruments (MMIs).

The new regulations, by allowing for the creation of electronic equivalents of MMIs, are fulfilling the final recommendation of the Bank of England's Securities Settlement Priorities Review, published in 1998. There has been strong support from the City in favour of allowing these securities to be issued in electronic form, title to be evidenced by names on an electronic register and their integration into the CREST settlement system. Settlement is an important source of revenue and one determinant of the location of financial activity. Since 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 this background that the Government are seeking approval for the relevant statutory instrument.

As I have already said, the statutory instrument will permit the evidencing and transfer of title of dematerialised equivalents to MMIs. MMIs are short-term debt securities; they 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 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 the 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. This change in characteristic means that while performing the same economic functions, electronic equivalents of MMIs will be distinct securities. In the amended regulations 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 so increasing flexibility for the issuer of the securities and thus allowing better tailoring to the needs of both investors and issuers. The modified regulations 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 the Uncertificated Securities Regulations, which make provision for electronic transfer and evidencing of ownership of securities, does not cover EDSs. The regulations we are debating amend the Uncertificated Securities Regulations 2001, to enable 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 in nature 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 fairly broad terms. The breadth of the definition is intended to maintain sufficient flexibility and at the same time allow for the possible future development of new kinds of securities.

Why are we making the changes? Basically, there are three reasons. First, they will 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. Secondly, they will reduce the costs of raising capital by removing the need to print and store large quantities of certificates. Thirdly, they will help to maintain the UK's competitiveness as a location for financial services by providing a modern and efficient securities settlement environment for London's financial markets.

Our objective in the amended regulations is a simple one—the electronic legal transfer of title and settlement of eligible debt securities. We believe that the change will enhance the competitiveness of the infrastructure of UK financial markets, and will be warmly welcomed by the City. I commend the regulations to the House.

Moved, That the draft regulations laid before the House on 6th May be approved [20th report from the Joint Committee].—(Lord McIntosh of Haringey.)

Baroness Wilcox

My Lords, I thank the Minister for that description of the changes required. We broadly welcome the move to modernise the settlement arrangements for UK securities, but I have two questions. I understand that the regulations are part of a process initiated following a consultation document. Do the regulations implement all the changes recommended by the consultation process? Will there be further consultation following the regulations to ensure that all is working smoothly? With those questions answered, we will be happy to support the regulations.

Lord Newby

My Lords, this is another set of regulations dealing with the rapidly advancing death of paper. The legislative framework always seems to be struggling to catch up with very rapid changes in how we do business. As someone who has just moved office and found to my slight surprise that in two years we had accumulated very little paper, which made the move a lot easier, I think it very important that the legislative framework is changed as quickly as possible to catch up with rapidly-changing business practices. On that basis, we support the regulations.

Lord McIntosh of Haringey

My Lords, I am grateful for the favourable reception of the regulations. I have two answers for the noble Baroness, Lady Wilcox. The first is that, yes, this is the end of the implementation of the changes on which consultation took place. The second is that, if there are further changes, there will of course be further consultation in advance.

On Question, Motion agreed to.