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On 23 June 2020, Rishi Sunak, Chancellor of the Exchequer, issued a Written Ministerial Statement on the UK’s approach to implementing financial services regulatory reforms before the end of the Brexit transition period.

As part of a package of measures contained within the written statement, it was announced that the UK will not be implementing the EU’s new Settlement Discipline Regime (SDR), as set out in the Central Securities Depositories Regulation (CSDR), which was due to be applied in February 2021.

Following extensive lobbying efforts by the QCA, in conjunction with its Secondary Markets Expert Group, we are hugely encouraged to see that the Government has decided not to implement the regime in the UK.

As part of our efforts, the QCA has been working with HM Treasury, the Financial Conduct Authority and the Bank of England on the potential impact of the SDR to small-cap liquidity. If implemented, its introduction would have had a significant impact on the ability of smaller quoted companies to raise capital, as well as on the functioning of capital markets for SMEs in the UK.

The issue has been on the QCA’s agenda for a number of years, however, with the regime due to be implemented in February 2021, we increased our efforts. This included holding several roundtables and workshops with the three regulators where we gave detailed briefings on the potential impact of the SDR on market liquidity and the consequential impact on less liquid companies; responding to various consultation papers; and submitting a paper to HMT, FCA and BoE. We are particularly grateful for the work done by Charles Russell Speechlys in formulating the paper to set out the issues in detail, as well as outlining potential legal and market-led solutions. 

In recent months, the Government has reiterated its position that there will be no extension to the Transition Period, which is due to end on 31 December 2021. This culminated with the second meeting of the Withdrawal Agreement Joint Committee, where the UK formally notified the EU that it will not accept or seek an extension, ruling out the possibility that the Transition Period will be extended, and thus meaning the regime will not be implemented.

Firms have been instructed that they should continue to apply the existing industry-led framework currently in operation. Under this model, market makers can continue to provide an essential function for smaller companies with less liquid securities as they provide liquidity where there is an imbalance between buyers and sellers. This model ensures the provision of continuous liquidity, investor confidence and access to capital markets for smaller companies. 

If the UK takes the decision to make any future legislative changes, such as implementing its own regime for settlement discipline, the Government has stated that sufficient time will be provided to prepare for implementation.

The QCA will continue to work alongside HM Government and the regulators if the decision is taken to make any future legislative changes to ensure that they are proportionate and take into consideration the impact on smaller quoted companies. 

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