EU Securities Settlement – Changes Make LSE Listing More Attractive to US Issuers

Dorsey & Whitney, LLP., a business law firm with a location in Denver, recently published an article relevant for companies considering a listing in the UK. It follows.


Since the Markets in Financial Instruments Directive (“MiFID”) came into force in 2007, European legislators and market participants have sought to harmonise the diverging European securities settlement framework, with a view to improving liquidity. The Regulation on Central Securities Depositories (“CSDR”), due to come into effect from January 2015, will create a common regulatory framework for securities settlement across the European Union. CSDR mandates the introduction of a shorter, harmonised, ‘T+2’ settlement cycle (with securities transactions to settle two business days after the trade date, rather than the current three business days in the United Kingdom and elsewhere). In addition, under Article 3(2) of CSDR, where a transaction in transferable securities takes place on a trading venue, the relevant securities must be recorded in book-entry form in a Central Securities Depository (“CSD”) on or before the intended settlement date. This means that all transferable securities, including those of issuers established in countries that are not an EU member state, are subject to this requirement, to the extent that the settlement of transactions in such securities is governed by the laws of an EU member state. Accordingly, all transactions executed on the London Stock Exchange (the “LSE”) will be subject to this requirement, irrespective of whether the relevant security is currently eligible for electronic settlement or not and regardless of the issuer’s jurisdiction of organisation.


It is hoped that Article 3(2) of CSDR will have a positive effect on the ease with which US issuers and other issuers that do not qualify as “foreign private issuers” under US securities laws (collectively, “US-Based Issuers”) are able to list on UK markets. Although the UK Listing Authority’s Listing Rules and the LSE’s AIM Rules for Companies currently require securities to be eligible for electronic settlement, as described in greater detail below, equity securities that are offered and sold in reliance on Regulation S (“Regulation S”) under the US Securities Act of 1933 (the “Securities Act”) of US-Based Issuers (“Regulation S, Category 3 securities”) are not currently eligible for electronic settlement in the principal CSD for transactions on the LSE (Euroclear UK & Ireland’s CREST system (“CREST”)) until at least the expiration of a Regulation S “distribution compliance period”. Accordingly, US-Based Issuers applying to have their Regulation S, Category 3 securities admitted to trading on UK markets must currently request a derogation from the rules, which is typically granted without much argument, to allow such securities to settle outside of a CSD in certificated form. Such settlement outside of a CSD results in longer settlement periods (typically ‘T+10’) and can have a negative impact on the liquidity and trading prices of the relevant securities, which ultimately can make a UK listing less attractive to US-Based Issuers than it would be if such physical settlement was not necessary.


Read the full article on Dorsey & Whitney’s website by clicking here.