Travers Smith LLP has assisted its long-standing client, Euroclear UK and Ireland (EUI), on the successful launch of a new service for US dollar securities transactions under a central bank payment model (the US Dollar Service).
EUI is the central securities depository (CSD) for the United Kingdom and Ireland. It provides state-of-the-art, post-trade services for UK, Irish and international securities on a delivery-versus-payment (DvP) basis in sterling, euro and US dollars.
Responding to recent international legal and regulatory initiatives, as well as strong client demand, the US Dollar Service further enhances the safety and efficiency of financial market transactions in dollars settling through EUI's settlement system, CREST.
While the CREST system has offered DvP settlement in "central bank money" for sterling and euro since 2001, US dollar settlement has until now only been available in commercial bank money. CREST dollar settlement values range between $2 billion and $5 billon each day. Central bank money eliminates settlement, credit and systemic risks that otherwise arise where intra-day exposures build under deferred net settlement commercial bank money models.
In devising, developing and implementing the legal framework for the US Dollar Service, the Travers Smith team has worked hand-in-hand with EUI's in-house legal team and in close collaboration with the legal advisers to the CREST settlement banks, their correspondent banks (as NSS settlement participants), the Bank of England and the US central bank, the Federal Reserve Bank of New York (the FRBNY). The project has comprised a string of legal and operational "firsts", including:
- the FRBNY has permitted EUI, a non-US financial institution, to link with the US National Settlement Service (NSS) to provide international DvP settlement in US dollars in central bank money
- EUI, as a central securities depository, maintains a settlement account at the Bank of England to hold sterling central bank money funds to underpin settlement through the US Dollar Service
- those funds are held subject to a novel "springing trust" arrangement, supported by settlement finality laws, so as to provide a robust legal basis for the completion of settlement in all operational circumstances
- a new participant category (NSS settlement participants) is introduced to the CREST client base
- the US Dollar Service is the only non-EU currency central bank money system currently seeking authorisation from the Bank of England under the new EU Central Securities Depositories Regulation.
The Travers Smith team was led by EUI's Client Relationship Partner Mark Evans, and comprised Senior Associate in the Financial Services and Markets Department Natalie Lewis, Commercial, IP and Technology Partner James Longster and Professional Support Lawyer in the Dispute Resolution Department Emily Tearle. The team, in conjunction with EUI's in-house legal advisers, advised on all of legal aspects of the project, including:
preparation and negotiation of the new contractual framework with the 12 CREST US dollar settlement banks and the seven NSS settlement participants
consultation on, and implementation of, changes to the CREST Terms and Conditions for the wider CREST membership base
close liaison with EUI's supervisory authorities on amendments to the CREST Manual and CREST Rules, ensuring continuing settlement finality protections for the US Dollar System
issuance of legal opinions in favour of FRBNY as conditions to EUI's admission as a settlement agent in the NSS.
The EUI in-house team consisted of Chris Twemlow, Chief Legal Officer and James Young, Legal Counsel.
John Trundle, CEO of EUI, commented: "We are extremely pleased to be able to offer this unique and path-breaking service through the Federal Reserve. The connection to the National Settlement Service strengthens the robustness of US dollar settlement for our clients, provides greater visibility and efficiency of the settlement process, and a reduction in systemic risk. It is a great step forward for our industry."
Mark Evans, EUI's Client Relationship Partner, commented: "I am absolutely delighted to see the successful launch of this paradigm-shifting project by our long-standing client, Euroclear UK & Ireland Limited. The new payment system will materially enhance the London market's offering for US dollar settlement in securities transactions. The project represents over 4 years' intensive work, in close collaboration with our good friends at EUI, from the conception of its original legal blue-print through to implementation. The Travers Smith and EUI teams were required to resolve a series of complex contractual, legal and regulatory issues to bring this cross-border project to fruition – all of which, in view of the systemic importance of the service, required resolution under close scrutiny from regulators, central banks and participants alike. The project evidences what incredible results can be achieved, in the wider interests of reducing risk to support the stability and efficiency of our financial markets, when a market-leading system such as CREST works with financial institutions – both in the UK and globally – to identify innovative legal and operational solutions to deliver a best-in-class, cross-border settlement model."