Policy paper: Wholesale Financial Markets Digital Strategy
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Policy Paper published by the Treasury Contents 1.Market
Optimisation 2.Market Transformation 3.Market Leadership Wholesale
financial markets are a fundamental driver of economic growth, both
directly by providing jobs and services, but also by financing
activity in the wider economy. To deliver these benefits, wholesale
financial markets rely on a complex financial ecosystem. This
includes the venues through which assets are issued and
traded,...Request free trial
Policy Paper published by the Treasury ContentsWholesale financial markets are a fundamental driver of economic growth, both directly by providing jobs and services, but also by financing activity in the wider economy. To deliver these benefits, wholesale financial markets rely on a complex financial ecosystem. This includes the venues through which assets are issued and traded, clearing houses that manage risk and net off transactions, settlement systems that process transactions and provide records of ownership, payment systems through which payments are made, and many other organisations and activities that support the operation of markets. Adopting new technology across these areas, and realising the benefits of innovation, will allow our wholesale financial markets to better serve the real economy. Conversely, if our wholesale financial markets fail to adapt to technological change, then they become costlier places to do business, less resilient, less competitive and less able to support growth. While the UK's wholesale financial markets are in many ways highly modernised and sophisticated, there are clear opportunities to improve efficiency and resilience through digitalisation. At present securities can still exist in paper form, many market processes still require human intervention, and data is often processed and reported inconsistently. Government, regulators and industry need to work together to tackle these remaining inefficiencies, so that the UK's wholesale financial markets are as effective as possible in performing their essential role. At the same time, we are on the precipice of a new technological era. The current processes for issuing, trading, clearing, and settling financial assets are still largely based around structures that existed prior to the electronification of markets. Distributed Ledger Technology (DLT) could change this by allowing financial assets to be represented as tokens on shared ledgers, allowing data to be better recorded, shared and synchronised. The ‘tokenisation' of assets could deliver a step change in market efficiency, for instance by enabling real-time data sharing which could improve transparency and lower operational costs. More broadly, it could enable a fundamental reimagining of the way financial markets operate, creating infrastructures that support both existing and new forms of asset issuance, transfer and ownership. Technologies such as AI and quantum could also radically change the way markets operate. The UK will grasp these opportunities to make our wholesale financial markets better, both by removing outdated processes and by taking decisive action to realise the potential benefits of new technologies like distributed ledger technology. The UK will drive forward the digitalisation of its wholesale financial markets across three broad areas: 1) Market optimisation: we will optimise our wholesale financial markets by making the necessary progressive improvements to drive efficiency and remove frictions. 2) Market transformation: we will apply technologies to fundamentally reimagine and transform wholesale financial markets, in particular by adopting DLT and other key technologies such as AI. 3) Market leadership: we will work with the sector to deliver digitalisation and with other jurisdictions and international bodies to develop a global approach. In many areas, work to digitalise UK wholesale financial markets is already underway. This document draws these areas together into a comprehensive strategy, setting out the actions the government intends to take across the areas above, as well as where it sees the wholesale financial services sector taking the lead. 1. Market Optimisation There are three key areas where the government intends to improve UK wholesale financial markets by modernising existing systems and removing outdated processes. Eradicating paper: the UK should remove paper processes from wholesale markets, given paper creates costs and frictions and is increasingly unnecessary in a digital world. Paper transactions are inherently slow and require manual handling. They can also result in more frequent errors which can be expensive and time-consuming to identify and correct. The most important remaining focus is removing paper share certificates, which the UK Digitisation Taskforce has been assessing. The Taskforce has today published its final report. The government will take forward the recommendations at pace and turn next to other cases where paper is utilised (such as for other assets like bonds), setting out the necessary action to dematerialise. The government commits to:
Automation: the UK should remove inefficient manual processes in our wholesale markets that rely on regular, sometimes daily, human intervention. Automation has the capacity to enhance operational speed and accuracy, significantly reduce costs and errors, and generally improve efficiency and build market resilience. This will be backed up by government action: the government committed to introducing a next day T+1 securities settlement cycle in October 2027, following the final report of the Accelerated Settlement Taskforce, and will focus next on where further action is necessary to directly promote automation. The government commits to:
Utilising Smart Data: data is the foundation of modern wholesale financial markets and new technologies like AI. Using data effectively is important both for enhancing the functioning of wholesale markets, and also for preparing for future developments. This can be aided by adopting smart data principles, where data is relevant, available in a timely manner, structured in the appropriate way, trusted/verified, and interoperable between systems. The UK should explore how the market could improve data standards, and how data could be better shared across wholesale markets. Initiatives like Digital Identity, where online passports containing firm level data could enable easier verification and greater efficiency across our wholesale markets. The government commits to:
The government, working in collaboration with the sector and the regulators, has identified these three broad areas to improve market functioning and intends to take and coordinate action across all three. The government will continue to work with the regulators and industry to identify other opportunities for optimising markets that fit within or beyond these categories. 2. Market Transformation The UK will take the lead in realising the benefits of technologies such as DLT, as well as AI and quantum. This includes working with industry to use transformative technology for live market activity, both experimentally and with the view to rapidly scaling up and rolling out solutions more broadly. Proactive innovation will be supported by government and regulators (particularly through a flexible regulatory approach). There should be a collective sector effort to achieve the benefits and an action-focused approach that delivers momentum in the short term, as we build towards the longer-term vision of a digitalised wholesale financial market. The government commits to:
The UK should be open to completely new models across the various wholesale market activities, including payments, trading, clearing, settlement and reporting. It should be open to different technological solutions, including solutions that decentralise functions currently performed by centralised entities. For instance, on digital wholesale payments the government and regulators are open to proposals that innovate on existing forms of payment, such as tokenised deposits, and also new innovations such as stablecoins. The regulators will explore how stablecoins can be utilised in the new Digital Securities Sandbox alongside other digital payment solutions. This will complement other initiatives to digitalise UK wholesale payments, such as the recently launched renewed Real-Time Gross Settlement service. The use of Financial Market Infrastructure Sandboxes, such as the Digital Securities Sandbox and the Private Intermittent Securities and Capital Exchange System (PISCES), will ensure legislation and regulation can evolve as innovation takes place, particularly in the trading and settlement of digital assets, but also across other areas. These sandboxes effectively allow for new regulatory frameworks to be created temporarily, and then quickly made permanent, enabling live activity to take place while the government and regulators learn from it. As new use cases are identified, these sandboxes can be further adapted enabling these use cases to proceed. This will complement wider work to put in place completely new regulatory regimes, in particular for cryptoassets, as well as ongoing work by the regulators to modify their rules and supervisory approaches, such as by clarifying how digital assets will be treated under prudential regulatory requirements. Other sandboxes, in particular the FCA's Supercharged Sandbox, will also enable the testing of new solutions for AI. The government is also taking forward other interventions, in particular the first issuance of the Digital Gilt Instrument (DIGIT). The intended designed features for DIGIT have been published today alongside this document, and include facilitating the settlement of DIGIT on DLT, supporting interoperability between different infrastructure and working with the sector to encourage the development of collateral mobility solutions and secondary markets in the future. It is important that the sector works to identify the best use cases for DLT, in particular for mobilising financial collateral and if necessary developing consortia to take forward. This will be supported by cross sector bodies such as the Investment Management Taskforce, whose Technology Working Group have published a blueprint for fund tokenisation The Digital Markets Champion, proposed below, will also provide a cross-cutting approach to digitalisation. The government will ensure that English and Welsh law backs the tokenisation of assets and can be used internationally as the governing law for tokenised assets. Existing use cases show that English and Welsh law, and UK financial services legislation, is flexible and broad enough to accommodate digital assets. A key feature of our common law system is that it can evolve in response to innovation. We will work with the sector and commit to providing further clarity in any specific cases where this is needed. The government commits to:
3. Market Leadership Government, regulators and the sector have to work together to make wholesale market digitalisation happen. Collective action and coordination across industry will be an essential factor in realising the successful deployment of new market structures. The government will appoint a Digital Markets Champion to lead, join up and coordinate the private sector's work on this. It is also essential that the UK works in global fora, and bilaterally with other jurisdictions, to develop a genuinely global approach to digitalisation. This will reduce fragmentation in order to enable digital assets activity to take place cross-border and will support the UK's status as a global financial hub. The government and regulators will work to join up our approach with other governments and regulators. The Digital Markets Champion will also join the UK sector up with digitalisation work happening in other global jurisdictions. The government commits to:
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