Delivering on the UK Government’s vision to modernise post-trade services
The move to digitisation
In the on-going evolution of the UK’s capital markets, post-trade modernisation is a vital step forward in enhancing the capital raising process for publicly traded companies and ordinary investors who wish to participate in investment offerings. For many market participants, change is long overdue; close industry collaboration will be essential in delivering on the benefits of greater efficiency, transparency and economy.
The efforts to modernise gained pace with the publication of the UK Secondary Capital Raising Review (“Austin Review”) on 19 July 2022, which included a recommendation for the digitisation of paper share certificates. The Government accepted the Review’s recommendations in full and appointed Sir Douglas Flint, Chairman of Asset Manager at abrdn, to lead a Digitisation Taskforce.
Digitising paper share certificates to drive innovation and efficiency—while maintaining investors’ rights— is pivotal in the modernisation of post-trade and will enhance the UK’s position as a FinTech hub and premier centre for capital raising.
Led by Mark Austin, the Review commenced on 12 October 2021 to look into improving further capital raising processes for publicly traded companies in the UK. This included investigating the role of technology to transform how individual shareholders receive relevant information and participate in secondary raises.
While the vast majority of shares are held in electronic form, there are understood to be up to 10 million* investors who hold their shares in paper (certificated) form. Trading and settlement of shares held in paper form is generally more expensive and often takes longer, with the associated risk of the certificates going astray during the process. Digitisation allows companies to issue securities without a paper certificate to evidence them and for existing paper shares to be transformed into electronic holdings.
The general trend towards holding shares electronically was formalised by EU legislation in the form of the Central Securities Depositories Regulation (CSDR) which required digitisation (or ‘dematerialisation’) of shares to a fixed timeline. While the UK has exited the EU and declined to adopt these timescales, digitisation is acknowledged to be a positive and necessary step forward in the modernisation of the capital markets.
A digital register for shareholdings promises to deliver substantial benefits for both companies and investors, including greater efficiency, transparency and cost-savings. Digitisation is a vehicle to protect and extend shareholders rights and through the Austin Review recommendations, empower individual investors to participate in the shareholder economy.
Euroclear operates the Central Securities Depository, Euroclear UK & International (EUI), and plays a central role in supporting the financial markets in United Kingdom and internationally by enabling investors to hold international securities. As such, we will play a pivotal role in facilitating this change - as and when it is determined in law - and to help enable a smooth transition to full digitisation.
The CREST system, operated by EUI, is an important and trusted part of the financial market infrastructure, enabling participants to settle securities trades safely, efficiently and at low cost. We process over 1.7 million gross transactions every day with a daily settlement value in excess of £1 trillion. The CREST system also settles over 16,000 eligible securities and the overwhelming majority of UK equities by value are already held in electronic form.
As the UK’s CSD, we connect issuers and their agents with capital market participants, including local and international brokers, banks, custodians and investment houses. Retail and private individuals can also open an account in their name and have an indirect CREST connection via their retail bank or broker.
We remain committed to ensuring we have the right infrastructure to support issuers and investors in the move to digitisation of shareholdings. The details of the transition are a work in progress and we recognise that collaboration is vital to address the needs of both issuers and investors. This is why we are looking forward to working closely with all parties and stakeholders input will be vital in determining the best mechanism to capture and record shareholdings in a digital register.
We welcome Mark Austin’s digitisation recommendation and look forward to working with Sir Douglas, government, industry and investor communities to deliver on this ambitious vision. Digitisation is a win-win for issuers and investors.
Michael Carty became Chief Executive Officer of Euroclear UK & International in October 2020. With 15 years’ experience at Euroclear, he was previously Chief Executive Officer of Euroclear Sweden, the group’s Swedish national CSD. During his five-year tenure as CEO in Sweden, he helped Euroclear Sweden to successfully achieve its CSDR licence while strengthening its client proposition in a number of key business lines, such as its funds offering.