Consultation paper re progressing fund tokenisation

Consultation Paper
CP25/28**
Progressing Fund Tokenisation
October 2025

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How to respond
We are asking for comments
on Chapters 2-4 of this
Consultation Paper (CP) by
21 November 2025, and
Chapter 5 by 12 December
2025.
You can send them to
us using the form on our
website.
Or in writing to:
David Burrows and
Joshua Castle
Funds and Asset
Management Policy;
Wholesale Buy Side
Financial Conduct Authority
12 Endeavour Square
London E20 1JN
Email:
cp25-28@fca.org.uk.
Disclaimer
When we make rules, we are required to publish:
• a list of the names of respondents who made
representations where those respondents consented to the
publication of their names,
• an account of the representations we receive, and
• an account of how we have responded to the
representations.
In your response, please indicate:
• if you consent to the publication of your name. If you are
replying from an organisation, we will assume that the
respondent is the organisation and will publish that name,
unless you indicate that you are responding in an individual
capacity (in which case, we will publish your name),
• if you wish your response to be treated as confidential. We
will have regard to this indication, but may not be able to
maintain confidentiality where we are subject to a legal duty
to publish or disclose the information in question.
We may be required to publish or disclose information, including
confidential information, such as your name and the contents
of your response if required to do so by law, for example under
the Freedom of Information Act 2000, or in the discharge or
our functions. Please note that we will not regard a standard
confidentiality statement in an email message as a request for
non-disclosure.
Irrespective of whether you indicate that your response should
be treated as confidential, we are obliged to publish an account
of all the representations we receive when we make the rules.
Further information on about the FCA’s use of personal data can
be found on the FCA website at: www.fca.org.uk/privacy.
All our publications are
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Contents
Chapter 1 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 4
Chapter 2 Accelerating tokenisation of authorised funds . . . . . . . . . . . . . . . Page 9
Chapter 3 Fund efficiency and direct dealing in authorised funds . . . . . . . . . Page 13
Chapter 4 Fund tokenisation roadmap . . . . . . . . . . . . . . . . . . . . . . . . . . Page 22
Chapter 5 Supporting future tokenisation models . . . . . . . . . . . . . . . . . . . Page 30
Annex 1 Potential amendments in respect of cryptoassets . . . . . . . . . . . . . Page 39
Annex 2 Questions in this paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 41
Annex 3 Cost-Benefit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 44
Annex 4 Compatibility statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 58
Annex 5 Abbreviations used in this paper . . . . . . . . . . . . . . . . . . . . . . . . . Page 63
Appendix 1 Draft Handbook text

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Chapter 1
Summary
Why we are consulting
1.1 The UK is a leading investment management centre with £14.3trn assets under
management. Asset managers play an important role in the economy, supporting the
financial wellbeing of millions of people.
1.2 Innovation is a core contributor to economic growth, and ensuring our financial services
remain fit for the future. Following our discussion paper, ‘Updating and Improving the
UK regime for Asset Management’ (DP23/2) we have continued to support industry
tokenisation initiatives in the UK. In our January letter to the Prime Minister, we
confirmed we would progress our roadmap for digital assets within asset management.
We want to enable innovation and embrace new technology while being predictable and
proportionate, in line with our Strategy to be a smarter regulator and support growth
of the UK economy. This consultation delivers on these commitments by setting out
proposals to help the adoption of tokenisation and tokenised funds in the UK.
1.3 Tokenisation is seen as a key component of future financial services. Tokenisation is a
way of representing an asset, or ownership of an asset, by recording it on distributed
ledger technology (DLT). DLT is a digital system that records details of transactions in
multiple locations at the same time, rather than on a centralised database.
1.4 As younger generations invest differently, it is important that regulation evolves to
serve changing consumer needs. Tokenisation can open new routes to distribute funds,
broaden access to private markets and infrastructure investment, and reduce the costs
of small transactions, while maintaining existing consumer protection. We want the UK
to be a centre of excellence for tokenisation within financial services, with firms at the
forefront of innovation.
1.5 Tokenisation can make fund management more efficient as it gives firms operating
or distributing the fund the same records of information. This reduces the costs of
reconciling and sharing data. A recent report from Calastone estimated the size of the
opportunity for aggregate savings to be $135 billion across the UK, EU and US fund
industry.
1.6 Funds provide a way for multiple investors to pool their money to be managed
collectively by a professional fund manager. Our regulatory regime distinguishes
between authorised funds, where we regulate the fund and its fund manager, and non-
authorised funds, where we only regulate the fund manager. The proposals in this paper
apply to authorised funds, but our discussion and roadmap sections may be of interest
to fund and asset managers more broadly, including managers of non-authorised funds.
Our proposals address fund tokenisation, and do not address unbacked assets such as
cryptocurrencies.

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1.7 Our technology positive approach offers a number of options for firms that look for
support as they seek to innovate. Regulated firms can approach us directly through our
fund authorisation gateway. Alternatively, firms may want to use our Innovation Services.
We've supported over 60 firms with DLT-based innovations in our Regulatory Sandbox,
and more than 80 through Innovation Pathways. Firms may also look to use the Bank
of England and FCA’s Digital Securities Sandbox (DSS), which offers a proportionate
regulatory regime to financial market infrastructure providers using new technology to
provide trading and settlement services.
1.8 In developing tokenised fund propositions, firms may wish to use tools and platforms
originally developed for unbacked cryptoassets to support tokenisation of conventional
financial instruments. So, we have developed our proposals for funds alongside our
digital assets agenda as set out in our Crypto Roadmap. In particular, our expectations
for use of platforms based on permissionless blockchain networks for recordkeeping in
fund management are consistent with CP25/25.
1.9 A report from the Technology Working Group (TWG) of the UK’s Asset Management
Taskforce (AMT) published in March 2024, proposed priority use-cases for tokenisation.
We heard from firms that many models for tokenised funds will require activity to take
place on chain, including through ‘atomic settlement’, where tokens representing fund
units are swapped for a token representing cash. To do this, a fund may need to hold
cryptoassets that act as the exchange token, or to facilitate payment of transaction
charges (known as gas fees) for transactions on chain. This consultation paper
addresses how funds could do so.
1.10 We know global regulatory and technical standards are key to enabling innovation.
In addition to work on this consultation, we have been collaborating with other
international regulators and industry through the Monetary Authority of Singapore’s
(MAS) Project Guardian to share knowledge and global best practices for fund
tokenisation, as well as through tokenisation working groups at the International
Organisation of Securities Commissions (IOSCO) and the Financial Stability Board (FSB).
1.11 Our proposals include:
• Guidance for operating a tokenised fund under the Blueprint model.
• Rules and guidance for an alternative, streamlined dealing model for conventional
and tokenised authorised funds, referred to as ‘direct to fund’ (D2F). D2F has wider
application than just to tokenised funds, but we think allowing this new dealing
model will enable tokenisation.
• A roadmap to advance fund tokenisation and address key barriers.
• A discussion on future tokenisation models that use DLT to provide tokenised
portfolio management at retail scale and how regulation may need to change to be
fit for the future.
1.12 Our proposals aim to give firms greater clarity and thus the confidence to adopt
tokenisation in fund management to improve operational efficiency. We also want to
gather insight and provide a roadmap on how our rules may need to evolve in future. Our
objective is to allow fund managers flexibility to operate funds in the most efficient way
and enhance the competitiveness of the UK as a global hub for asset management.

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1.13 This consultation also delivers on our objectives to protect consumers, by illustrating
how firms can ensure good outcomes when using DLT in fund management, including
for vulnerable consumers.
1.14 We also expect tokenised products to drive competition, including against conventional
authorised funds. The proposals may increase consumer choice in investment products
and may result in cost savings being passed on to consumers.
1.15 Our proposals to enable a new dealing model for authorised funds are in line with the
same priorities and objectives. We intend to allow unit deals to take place directly with
the fund, through a more efficient process, aligned with international practices. This will
improve productivity in fund operations and fund managers will be able to adapt global
processes more readily to UK operations. Our proposals may also reduce costs for new
market entrants and support an easier transition to tokenised funds.
1.16 We also discuss the feedback from Chapter 7 (Developments in relation to use of money
market fund (MMF) units) of CP23/28, ‘Updating the regime for Money Market Funds’,
which explored how tokenisation can support the use of units as collateral. Firms see
the use of tokenised MMFs (tMMFs) for collateral as an accessible use case of DLT in
wholesale markets because it increases transparency and may reduce the need to
redeem MMF units during times of market stress. Our rules do not distinguish between
tokenised and conventional MMF units where used as collateral. On this basis, we clarify
the application of the UK European Market Infrastructure Regulation (UK EMIR) when
counterparties determine the eligibility of MMF units as collateral.
1.17 Our discussion chapters look at how we can ensure our rulebook is fit for the future. We
explore what regulatory changes may be needed to promote future fund tokenisation,
such as the use of digital cash settlement instruments, or money-like instruments (eg
stablecoins) for unit deals. We also discuss a future vision where firms may use DLT to
support retail-scale portfolio management services, including via model portfolios. We
already regulate portfolio management services. However, we will conduct a review to
future-proof these rules where tokenisation may lead to a far greater use of portfolio
management.

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Consumer Interest
1.18 Digitalisation is transforming consumer expectations. Consumers want a single,
complete and instant relationship with service providers, whether social media firms,
online shopping or financial services. Many consumers use tools such as generative
artificial intelligence (AI).
1.19 Asset managers are adopting various technologies to make their investment offerings
and services more efficient and competitive. Firms have told us they see using DLT as
a potential way to service tomorrow’s investors, making digital solutions part of their
strategy to support generational wealth transfer over the next few decades.
1.20 Tokenised funds and tokenised portfolio management may engage new investors into
trusted, traditional financial products. For example, by offering shorter settlement times
or real-time transparency of portfolio holdings. We want to support consumers to have
confidence in financial services to meet their future needs and ensuring regulation is fit
for the future is central to this.
1.21 We engaged with the FCA’s Financial Services Consumer Panel and consumer
representatives in developing our proposals on fund tokenisation.
1.22 Some chapters of this consultation are more relevant to consumers. We particularly
welcome views from consumer groups and consumers on Chapter 5, which explores
how tokenisation might change investment management in the future.
Scope
1.23 The proposals in this paper apply to:
• UCITS management companies.
• UK Alternative Investment Fund Managers (AIFM) managing authorised funds.
• Depositaries of authorised funds.
1.24 This paper might also be of interest to:
• AIFMs and depositaries of unauthorised funds.
• Portfolio managers providing services to both professional and retail investors.
• Investment platform providers.
• Financial advisers and investment consultants.
• Custodians and cryptoasset custodians.
• Fintech firms.
• Stablecoin issuers and stablecoin backing asset pool providers.

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Next steps
1.25 Please respond to the questionson Chapters 2-4 of this Consultation Paper by 21
November 2025, and to those in Chapter 5 by 12 December 2025, using our electronic
survey or one of the other methods in the ‘How to respond’ section.
1.26 We will review the feedback and develop final regulatory requirements for publication in
a Policy Statement (PS), expected in the first half of 2026.
Environmental, social & governance considerations
1.27 In developing the proposals in this Consultation Paper, we have considered the
environmental, social and governance (ESG) implications of our proposals and our duty
under ss. 1B(5) and 3B(c) of the Financial Services and Markets Act 2000 (FSMA) to
have regard to contributing towards the Secretary of State achieving compliance with
the net-zero emissions target under section 1 of the Climate Change Act 2008 and
environmental targets under s. 5 of the Environment Act 2021.
1.28 On balance, we do not think that there is any contribution the proposals outlined in this
consultation can make to these targets. We will keep this issue under review during
the consultation period and when considering whether to make the final rules. In the
meantime, we welcome your input to this consultation on this.
Equality and diversity considerations
1.29 Overall, we do not consider our proposals materially impact any of the groups with
protected characteristics under the Equality Act 2010 (in Northern Ireland, the Equality
Act is not enacted but other antidiscrimination legislation applies).
1.30 As evidenced in Chapter 1 of CP25/25, we have observed that certain demographic
segments are over-represented in cryptoasset ownership. Our tokenisation related
proposals in Chapter 2 are targeted at authorised funds, which are regulated investment
products and do not present the same risks as unbacked cryptoassets such as Bitcoin.
At the same time, similar technology and infrastructure is used for recording ownership
and trading. This may result in similar demographic trends, particularly in early adopters
of the technology.
1.31 Access to tokenised funds may require use of a digital wallet or the ability to understand
how encryption operates using public and private keys. This new type of account
information (akin to usernames and passwords, and typically lengthy) may be unsuitable
for consumers who face challenges adopting new technology, which may include
some with age characteristics under the Act. Our suggested guidance on operating a
tokenised fund register provides guidance on how fund managers can retain authority
for the register, in line with our existing requirements for conventional funds. This might
include alternative options to contact the manager, where some target investors are
uncomfortable initiating on-chain transactions.

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Chapter 2
Accelerating tokenisation of authorised
funds
Background
2.1 We have worked closely with industry groups on tokenisation initiatives. We were
observers on the industry-led Technology Working Group (TWG) of the previous
government’s Asset Management Taskforce (AMT). In November 2023, the TWG
published its interim report, setting out how firms can operate a tokenised unitholder
register within our existing legal and regulatory frameworks, known as the Blueprint
model. We authorised the first tokenised UK UCITS under the Blueprint in January 2025.
2.2 The Blueprint model is the first stage of enabling UK funds to use DLT for operational
efficiencies. It envisaged that dealing in fund units would be reflected on, or take place
through, blockchain-based records. Conventional processes would be used for cash
movements, pending wider adoption of on-chain cash instruments or money-like
instruments (eg stablecoins) and the development of a regulatory regime for them.
2.3 We received feedback and questions from firms on adopting the Blueprint. We want to
give firms the confidence to use tokenised fund registers whether through the Blueprint
or in more advanced models we explore in Chapters 4 and 5. So, we are consulting on
guidance to clarify how managers can meet their existing regulatory obligations to
ensure consumer protection and maintain market integrity.
2.4 When the Blueprint was first introduced, it was assumed that a private-permissioned
blockchain would be used. Firms may also use public networks, so long as they have
the appropriate controls in place to meet the outcomes in our rules and comply with
relevant regulations, such as data privacy. Our proposed guidance sets out how firms
may think about our rules in a DLT context, including when using public DLT networks.
2.5 We will continue to take a technology positive approach to interpreting the rules for
operating fund registers. Consumers do not need to understand the mechanics of
tokenisation or unit dealing processes in authorised funds to make informed investment
decisions. They should not be overwhelmed with disclosures linked to new technology
that go beyond comparable features and constraints of conventional products.
2.6 Our rules for operating authorised fund registers in the Collective Investment Schemes
sourcebook (COLL), and the corresponding content in the Open-ended Investment
Companies (OEIC) Regulations, are generally technology neutral and outcomes-based.
Ensuring unitholder records are accurate and up-to-date allows the fund to be managed
effectively so that the number of units in its valuation reflects recent investor deals, and
information on unitholder concentration is available for liquidity management purposes.

10
2.7 The effect of our existing rules is that the firm responsible for operating and maintaining
the register can make unilateral updates to it to, for example:
• Process decisions of courts, life events such as divorce and death.
• Resolve fraud and manage unitholder defaults.
• Undertake mandatory redemptions where required to support fund mergers /
closures, or where the residency / tax status of particular investors may prejudice
the interests of the broader pool of investors.
2.8 The firm must also ensure the fund has legal domicile and jurisdiction for service of
legal documents in the UK. The register needs to be portable, and records need to be
accessible to the depositary, regulator and unitholders in the fund.
2.9 In introducing the Blueprint, we recognised that the principles and outcomes set out
in the regulations remain valid and necessary in the context of DLT/blockchain based
register systems. This is still the case. Our proposed guidance aims to support firms
launching authorised funds to navigate these questions.
Authority of manager
2.10 The effect of the rules in COLL and the OEIC Regulations is that the firm responsible for
maintaining the register needs to be able to make unilateral updates to it. This may not
be the default operating model for some DLT networks.
2.11 Our proposed guidance confirms that records formed by reference to a series of
transactions can be compatible with our rules. This includes the use of DLT functionality
to ‘burn’ and ‘mint’ tokens or the creation of subsequent records which ‘unwind’
incorrect entries or create new ones. Equally, the firm responsible for the register could
update the register through direct control of private keys, through having a ‘master-
node’ functionality or through a contractual relationship with unitholders.
Question 1: Does the proposed guidance provide adequate clarity on
how firms can use DLT to support the operation of fund
registers?
Question 2: Are there any challenges in meeting the current
requirements where DLT platforms are used, or in respect
of emerging use-cases?
Smart contracts and eligibility verification
2.12 DLT may improve the accurate functioning of unitholder register processes. It may
allow entities other than the manager, such as distributors and investors, to instruct or
request amendments to the register. Transfers of units between investors, referred to
as ‘peer-to-peer’ transactions, may also become more widely used.

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2.13 This may require firms to consider additional technology controls to ensure transfers
meet our existing rules and terms in scheme documents. These controls could include
arrangements to transfer tokens only to known account numbers, verified by the
manager as belonging to a specific eligible investor, often referred to as ‘whitelisting’, or
an ‘allow list’, referencing a set of addresses.
2.14 Our proposed guidance confirms firms can use eligibility verification systems to decide
if investors meet broader criteria, for example compliance with minimum holding limits
or having a particular tax status. As an example, processes based on the ERC-3643
token standard.
2.15 COLL and the OEIC Regulations require the register of unitholders in an authorised
fund to be complete and accurate. The manager also needs systems to monitor the
amount and status of units in issue, including identification of aggregate positions. Our
proposed guidance clarifies that managers can comply with our rules where positions of
unitholders are held through different wallets as long as the overall platform can provide
reporting of units held at unitholder level.
2.16 Systems which operate on the basis of a ‘deny list’ (sometimes known as “blacklisted”)
for specified wallet addresses may require additional verification steps to ensure
adequate Know Your Customer (KYC) checks. This is particularly the case where an
individual or entity may be able to establish new addresses or identities readily on-chain
and where information on the controlling party, for example whether they are a target
investor for a particular fund, may be unknown.
2.17 Through our stakeholder engagement, we are exploring evolving industry standards,
including audit controls for smart contracts, and how we and other supervisory bodies
can support emerging standards and best practice. Firms should have regard to data
confidentiality and privacy legislation, particularly where public networks are used and
records are not secured through encryption. In this assessment, firms should recognise
that records may be permanent and immutable as DLT networks operate on the basis
of recording a chain of all previous transactions. Emerging technology such as quantum
computing may lead to historic data being compromised.
Question 3: Do our existing rules and proposed guidance provide
sufficient flexibility to allow for firms operating the register
to use smart contracts for the purposes above?
Question 4: What role can regulators play in supporting the
development of token standards that promote effective
governance and positive consumer outcomes?
Managing network risks
2.18 Where records on DLT networks are used to maintain a fund register, the manager
should have alternative processes and contingencies to allow for unitholder operations
in exceptional network outage events. This includes allowing for the fund to be

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wound-up and investor assets and cash returned. We proposed in Chapter 3 of
CP25/25 that using a permissionless network should not be treated as an outsourcing
arrangement. Chapter 4 of that consultation outlined how we expect cryptoasset firms
to comply and implement our existing operational resilience framework and we plan
to consult next year on non-Handbook guidance on the use of DLTs to provide further
clarity. Subject to the respective consultation processes, we expect firms to consider
any additional guidance when using public networks to support register processes.
2.19 COLL and the OEIC Regulations require the register to be reproduced in legible form, in
the UK and to be accessible to the depositary, regulator and unitholders. Our proposed
guidance clarifies that firms can use systems that, for example, combine on- and off-
chain records to achieve this where it cannot be achieved fully on-chain, as long as
the records can be merged to meet unitholder inspection requirements and provide
aggregate unitholder data.
2.20 The use of a public or consortium-based network for issuing and settlement of
tokens could create conflicts of laws that may bring into doubt whether the fund has
legal domicile and jurisdiction for service in the UK. ‘Mirroring’ arrangements, where
conventional technology books and records are held off-chain, may limit the ability to
fully benefit from use of DLT. Firms should consider the extent of activity carried out
in the UK when assessing if a proposed operating model satisfies the requirements of
COLL and the OEIC Regulations.
2.21 Firms must consider whether they and any service providers are required to be
registered under the Money Laundering Regulations (MLRs) to support the proposed
operational and tokenisation model. This includes where the firm or the fund is required
to hold cryptoassets, even in small volumes to cover transaction charges, often referred
to as ‘gas fees’, used to pay some platforms. The Treasury’s draft statutory instrument
exempts firms who are performing certain regulated activities for specified investment
cryptoassets from having to register under the MLRs. We will continue to work with the
Treasury as this regime is formed.
2.22 The additional transparency from DLT may result in unitholder deals or dealing
intentions being publicly visible on chain ahead of transactions in underlying securities
or assets. Where relevant, firms should consider the implications of this in product
design and ongoing liquidity monitoring controls, to ensure that investors are not
disadvantaged.
Question 5: Do our COLL rules and proposed guidance provide
sufficient flexibility to support fund tokenisation use-cases
that use public networks?

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Chapter 3
Fund efficiency and direct dealing in
authorised funds
Introduction
3.1 This chapter sets out proposals to introduce a new direct dealing model for processing
unitholder deals in units of authorised funds, where the fund or its depositary acts as
principal in unit deals with end investors, rather than the authorised fund manager (AFM).
3.2 Direct dealing may help AFMs to transition to a tokenised fund environment, as AFMs
no longer need to perform back-to-back transactions with investors and the fund.
This additional flexibility and choice will allow AFMs to decide the most efficient dealing
model for a given fund and its investors and distribution channels. The proposals in this
chapter are relevant to all authorised funds, not only tokenised funds.
3.3 Introducing these rules now will allow firms to consider changes to fund operations and
platforms to address direct dealing in parallel with changes to implement T+1 securities
settlement by October 2027, together with any plans for fund tokenisation.
Question 6: Do the proposals in this Chapter provide adequate
flexibility for firms considering tokenisation and the
migration to T+1 securities settlement?
Direct Dealing in Authorised Funds
3.4 DP23/02 explored how our fund rules could be made more effective or proportionate,
to address market developments and make better use of technology in fund operations.
This included the Investment Association’s (IA) proposal for an alternative model for unit
dealing in authorised funds, Direct 2 Fund or D2F.
3.5 Respondents to the DP strongly supported D2F, subject to further consideration of
identified legal and operational questions, including on the depositary’s role. We have
continued to engage with the IA’s working group, the UK Depositary Association and
other industry stakeholders to progress the model.
3.6 Under current UK market practice, the AFM generally acts as principal in unit deals with
end investors, rather than the fund itself. The AFM buys units from redeeming investors
(redemptions) and sells units to subscribing investors (sales). To do this, the AFM
maintains a float of units in the fund, commonly referred to as the manager’s ‘box’, and
initiates separate direct transactions with the fund or depositary to issue or cancel units
it holds to manage the level of units in each fund in the box.
3.7 Many AFMs operate a zero or flat box policy. This means all unitholder deals are
replicated in back-to-back transactions with the fund, or the AFM maintains a normally

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fixed (de minimis) level of units to deal with administrative or operational errors.
However, the nature of the principal model means that investors, and the fund, have
interim exposure to the AFM during the dealing process. The dealing model creates
significant operational overheads for the AFM, including the costs of complying with
our client money rules and prudential implications of the balance sheet exposure due to
acting as principal.
3.8 The D2F model was proposed to manage these exposures and allow for a potentially
simpler operating model. This simpler model means unitholder deals are affected
through direct issue and cancellation of units in the fund, in exchange for settlement of
cash directly between investors and the fund. This is technically permitted under our
current rules. However, many of our rules are drafted on the basis of the AFM dealing as
principal, and do not allow for some features that industry participants have suggested
would make operational practice more efficient.
3.9 The D2F model is consistent with practice in other fund domiciles and will allow UK firms
and service providers to more easily apply global operating models.
Introduction as an optional, alternative operating model.
3.10 We will support use of both direct dealing, including in the form of D2F, and the existing
box/principal model, both of which are an effective means of delivering good outcomes
for consumers. We recognise that AFMs are allowed to commit their own capital to
a fund, via the box, and participate in its risk and returns. If the manager is willing to
commit capital, the box can be used to ‘smooth’ unitholder deals over a period. This can
prevent frictional transactions in underlying fund assets or cover any gap in investors not
paying for purchased units by the settlement date.
3.11 Our rules set controls on the AFM’s box operations and the role of the depositary.
These controls aim to ensure that box decisions are made within a short period of the
valuation point, that any modifications to box instructions must have the depositary’s
consent and that the fund is reimbursed where errors occur. The price of unit sales and
redemptions (or maximum range of prices) must also reflect the issue and cancellation
price of units, excluding fees, disclosed in the prospectus.
3.12 We have strengthened these controls in recent years. We strengthened how client
money rules apply to cash held for settling transactions in units (PS14/09). AFMs must
treat cash linked to the issue or redemption of units as client money, where not paid
to the depositary, fund or investor by close of the following business day, as set out in
CASS 7.11.21R. This reduces risks of an AFM’s failure or insolvency while unit deals are
in progress. We also introduced rules through the Asset Management Market Study
(PS18/08) that require AFMs to pay profits from riskless netting of unitholder deals in
dual priced funds into the fund.
3.13 Our existing rules provide mechanisms for unit deals to be made on a direct basis using
cash, or for the ICVC or depositary to issue or cancel units in exchange for other assets,
known as an in-specie issue or cancellation. In specie transactions are routine but
infrequent and are typically used by institutional investors with the capability to receive
or deliver a pro-rata share of assets in a fund.

15
3.14 We are introducing flexibility to our rules to support broader use of direct dealing,
including the D2F model, as an optional, alternative process. AFMs may operate solely
on a direct dealing basis, and we propose to remove the requirement to deal as principal
in COLL 6.2.16R, where unitholders are offered the ability to deal directly with the fund
on the equivalent terms. Equally, AFM’s will remain able to deal as principal and operate a
box, allowing them to adopt the most efficient unit dealing model for their funds.
Question 7: Do you support the introduction of an optional regime to
allow for direct dealing in authorised funds?
Impact on our Handbook
3.15 We propose amending our existing rules within the current structure and retaining
existing definitions wherever possible. COLL 6.2.13R expects the AFM will arrange for
payment of cash or cleared funds to the ICVC or depositary following the issue of units.
Where a fund uses direct dealing, it will be investors who are contractually obliged to
make this payment. The manager will need to be satisfied that there are appropriate
arrangements in place to ensure the target investors in the fund will be able to settle
deals in the specified time period.
3.16 The AFM can cancel deals in fund units where an investor does not complete them.
Where the manager acts as principal, it will bear the costs of deciding not to recover
costs incurred from that investor. In a direct deal, the manager should still bear the costs
where it makes this choice, rather than the fund.
3.17 So we propose requiring AFMs to cover interest costs for late payments where the value
exceeds a de-minimis level agreed with the depositary and the AFM has opted not to
cancel deals. We will implement this by an amendment to COLL 6.2.13R.
3.18 A consequence of direct dealing is that cash routinely flows between unitholders
and the fund or depositary. This removes the interim exposure to the AFM, and the
resultant requirement for the AFM to apply our client money rules. Cash received by
the fund forms part of scheme property and is held subject to our normal rules in COLL
governing the opening of accounts at eligible banks, regular performance of account
reconciliations and depositary oversight. The AFM may still need to hold dealing cash as
client money where, for example, funds cannot be reconciled or payments to investor
bank accounts are returned.
3.19 We also propose consequential changes to rules in COLL, including those governing
suspension of dealing, the redemption determination process for LTAF and our controls
on investor eligibility for ACS, to ensure the effect of these rules is maintained where
AFMs do not deal as principal.

16
The Issues and Cancellations Account
3.20 The D2F model that we propose includes a specific bank account, referred to as an
‘Issues and Cancellations Account’ (or IAC), to receive payments from, and make
payments to, investors. This is consistent with practice in other fund centres such as
Ireland and Luxembourg. We propose to recognise the purpose of such an account in
COLL, and the respective responsibilities of the AFM and depositary, to ensure that fund
accounting, oversight and governance processes operate effectively where this type of
account is used.
3.21 Funds are commonly operated as ‘umbrella’ structures with multiple sub-funds providing
different investment strategies or rights to investors. Each sub-fund is a functionally
separate pool of assets and is priced and accounted for individually. However, an
umbrella fund can be simpler to administer than a range of standalone funds and offers
potential economies of scale. We propose to allow firms to operate IAC accounts at
umbrella level, subject to certain safeguards.
3.22 Under the D2F model, payments from individual investors for deals carried out at a
given valuation point can be aggregated in the IAC so that a single bulk transfer is made
from the IAC to the relevant sub-fund on the settlement date for that valuation point.
This resembles cash flow processes in the box/principal model where a single payment
is paid into a sub-fund on settlement date for units issued to the AFM. Investors and
distributors may also be able to make a single payment into the IAC for deals in multiple
sub-funds in that umbrella, reducing the number of payment accounts in use. Our
discussion with industry has confirmed that this functionality is a key requirement for
D2F to achieve full commercial uptake.
3.23 The IAC would constitute scheme property of the relevant fund and could be opened in
the name of an ICVC, or the depositary on behalf of an ICVC, an AUT or an ACS that is
a co-ownership scheme. In 2011, the UK introduced a protected cell regime for ICVCs.
Under this, the assets of a sub-fund belong exclusively to that sub-fund and cannot be
used to discharge liabilities of any other person, including the ICVC itself or another sub-
fund. Any legal agreements an ICVC enters into must reflect this segregated liability.
Any provisions or activity that is inconsistent with this are void. Umbrella AUTs and co-
ownership ACS must be managed in accordance with similar standards.
3.24 An umbrella IAC may not be suitable for all umbrellas. So we are proposing a requirement
for AFMs to ensure that using an IAC does not pose undue risk to unitholders. For
example, if there is an increased risk of contagion due to the specifics of any particular
sub-fund, or there is reason to anticipate higher than normal volumes of late payments
due to a fund’s target market. We therefore propose allowing an umbrella to have both
an omnibus IAC structure for more than one sub-funds and individual IACs used solely
for specific sub-funds.
3.25 To manage risks from omnibus IAC accounts, and to comply with the principles of
segregated assets and liabilities, AFMs must promptly identify individual payments and
attribute them to a specific sub-fund. Sums that cannot be attributed must be returned
to the sender or moved to a client money account maintained by the AFM by close of
the business day following receipt. The operation and governance arrangements for the
IAC, including reconciliation of cash movements, must ensure these conditions are met.

17
3.26 The IAC should be operated in a way that ensures sums received ahead of settlement
date on one sub-fund cannot be used to cover sums unpaid by incoming investors on
another. Similarly, an IAC should not go overdrawn. If either of these scenarios happen,
it is possible that assets of a sub-fund have been used to meet liabilities of another. As
cash in the IAC will form part of scheme property, the fund will bear the credit risk to the
bank operating the account as with any other cash held by the fund.
3.27 Our existing investment and borrowing powers rules for both UCITS and NURS limit
the proportion of scheme property that may consist of deposits with a single body to
20%. These rules also limit the extent and persistency of fund borrowing. These remain
core risk controls for retail schemes and the balance in the IAC, or proportion of any
overdraft, attributed to each fund or sub-fund will form part of this exposure to keep
these controls effective.
3.28 Consistent with this principle, we also propose to withdraw a specific element of
existing guidance in our UCITS and NURS investment and borrowing powers for all
funds, independent of the model used for unit dealing. At present COLL 5.2.11AG (3)
and COLL 5.6.7AG (3) indicate that all uninvested capital cash held with the depositary,
or its group for UCITS, should be included when calculating exposure to the depositary.
Our intention was to avoid limiting the value of income that a fund could hold pending
distribution, by excluding such cash from exposure limit calculations. We note that
AFMs’ cash management and diversification tools have developed in the intervening
period and that income cash is not subject to specific ring-fencing if there is a default. If
this proposal is implemented, we will provide a 12-month period for any affected firms
to adjust operational processes to account for withdrawal of the guidance. We invite
specific feedback on this point.
3.29 Where breaches of our control requirements do occur, the AFM should report this to the
depositary, as with current expectations. The depositary should assess the materiality
of any error, and any implications for the sufficiency of the AFM’s controls, as part of
its ongoing oversight of the fund and AFM, including the impact of any consequential
pricing errors.
3.30 We know some scenarios, including processing very large issue and cancellation orders
or distribution payments, may require a scheme to hold more than 20% of scheme
property with a specific bank. Where this has occurred due to circumstances beyond
the AFM’s or depositary’s control, our rules provide existing forbearance to allow for
resolution as soon as reasonably practical in the interests of unitholders. This could be
achieved through processing the relevant payment on the settlement date disclosed to
unitholders.
3.31 Our rules also require the depositary to reconcile all cash flows at fund level, ensure that
subscription monies from investors reach the fund and reconcile the number of units in
issue between the fund accounting records and those of the transfer agent. As money
held in the IAC will be scheme property, adopting D2F may increase the number of
accounts on which depositary oversight is carried out.
3.32 As the D2F model is broadly consistent with practice in other jurisdictions, including
within the EU, we do not expect changes to the AIFMD and UCITS V cash flow
monitoring regime will be needed to allow us to introduce D2F.

18
3.33 We want to provide flexibility for AFMs to establish optimal reconciliation procedures for
a specific fund or range of funds, based on the intended investor base, dealing frequency
and distribution strategy.
Question 8: Do our proposed requirements for operation of the
IAC provide a proportionate control environment while
ensuring funds are operated, and overseen, in line with
principles of segregated liability?
Question 9: Do you agree with our proposals in respect of overdrafts
and limits on fund exposure to a given bank or group? If not,
why?
Question 10: Do you agree we should include all cash held at a given bank
within our spread of risk rules for UCITS and NURS? If not,
why?
The IAC as Scheme Property
3.34 Under COLL 6.7.17R and COLL 15.8.15PR, assets and payments that are not attributable
to a single sub-fund must be allocated between the sub-funds in a way which is fair
to unitholders generally. Sums in the IAC that have been attributed will appear in the
accounts for a particular sub-fund. However, while unattributed sums in the IAC are
scheme property, including these as a component of the NAV for individual sub-funds
may create accounting errors.
3.35 After reconciliation controls have been completed, any unattributed sums should be
promptly removed from the IAC and returned to sender or a client money account.
Pending completion of reconciliation controls, sums in the account should be treated as
scheme property. The fund still bears the credit risk to the bank holding the cash and so
these sums should be included in exposure calculations. However, sums that the AFM
reasonably believes it may be unable to attribute to a sub-fund should not form part of
the price of units.
3.36 Firms may want to use alternative accounting mechanisms that achieve this same
effect. For example, for pricing purposes, the AFM may only consider the outstanding
aggregate share issue debtors and creditors in the valuation of a sub-fund, rather than
the account balance on the IAC. However, this must be supported by an undertaking
from the AFM that the IAC balance can be considered zero for the purposes of a specific
valuation point.
3.37 We also propose clarifying and re-stating certain existing rules where existing Handbook
text is inconsistent. This includes COLL 5.2.13R, which sets limits on investment in
collective investment schemes by reference to the ‘value of the UCITS’ rather than
scheme property. Similarly, COLL 5.5.3R cash and near cash, refers to holding cash
to support redemptions. We propose to replace this with a broader reference to unit
dealing to support broader use of direct dealing.

19
3.38 Our approach to introducing direct dealing for LTAFs and QIS’ follows the general
position established for UCITS and NURS. However, we propose a modification to
address the presence of omnibus or individual IACs in LTAFs. COLL 15.2.6R allows the
AFM of an LTAF discretion not to appoint an external valuer where the scheme property
of an LTAF is solely other collective investment schemes (CIS)/alternative investment
funds (AIFs) and these have an external valuer. The intended scope of this rule was to
set appropriate standards for the valuation of long-term assets, rather than to require
all scheme property of an LTAF to be in CIS/AIF to use the exemption. We propose
amending this rule so that cash or assets such as gilts held for liquidity purposes can be
valued by the AFM using a conventional approach.
Question 11: Do you agree with our proposed accounting controls in
respect of use of IAC? If not, why?
Question 12: Do you agree with our proposal to provide additional clarity
on cash held by LTAF and the requirement to appoint an
external valuer? If not, why?
Investor Disclosures and Changes to Existing Schemes
3.39 Our existing rules on the contents of instruments which constitute a scheme and fund
prospectuses require firms to disclose procedures for unit dealing and consequences
of participation in the scheme. These rules do not require any substantial amendments,
but our draft instrument addresses some consequential changes and requires that
certain information is disclosed to investors.
3.40 We propose requiring the prospectus of a direct dealing fund to provide a brief summary
of the implications of using an IAC where an investor or the fund becomes insolvent
or cannot make payments. This should include the potential impacts to both ongoing
investors in the fund, and those with deals in progress who have paid cash into the IAC
or are awaiting payments from the fund, and the application of the Financial Services
Compensation Scheme (FSCS) in such scenarios.
3.41 If the AFM has correctly considered the impact of introducing the IAC, eg there are
no sub-funds in the umbrella with a substantially different risk/investor base using the
same IAC, then introducing direct dealing in this context could be classed as a ‘notifiable’
change in operational policy. Direct investors will require reasonable notice as bank
account details for payments will need to be amended.
3.42 In a scheme of arrangement, the status of unattributed sums must be adequately
considered. For example, if a fund is split, the remaining fund may be significantly smaller
than the assets transferred out. This would result in remaining investors having an
undue exposure to the credit risk of the IAC holding bank due to unattributed sums. So
we propose that unattributed sums in an IAC are resolved before making a scheme of
arrangement, for example by transfer to a client money account.

20
Question 13: Do you agree with our proposals in respect of investor
disclosures and communications? If not, why?
Responsibility for Anti-Money Laundering Controls
3.43 Industry participants and trade bodies, including the UK Depositary Association, have
pointed out that broader use of direct dealing may alter existing roles and responsibilities
when performing anti-money laundering controls on end investors in authorised funds.
Under a box/principal model, the AFM contracts with end investors and is therefore
considered a relevant person for the purposes of the Money Laundering, Terrorist
Financing and Transfer of Funds (Information on the Payer) Regulations 2017/692.
3.44 Under a direct dealing model, unit deals take place between the investor and the fund
or depositary. Where the fund is an ICVC, the ICVC would itself be the relevant entity,
and the AFM, as the authorised corporate director of the ICVC, could undertake
these functions. Where the fund is an ACS or AUT, the fund itself does not have legal
personality. Identifying the relevant person or persons may require specific analysis
based on the instrument constituting the scheme and the effect of broader UK
legislation. We do not have a definitive view on this, and are exploring with industry
participants how we can provide flexibility to ensure that all authorised fund legal
structures can make broader use of direct. Firms should take specific advice where
necessary on individual fund structures.
3.45 The AFM is responsible for the relationship with end investors in the scheme. We accept
that in many cases it may not be economically viable or practical for the depositary to
undertake responsibility for obligations under money laundering and similar legislation to
transactions with end investors.
3.46 Our intention is that our consultation proposals will be available for all types of legal
entity from the effective date of the final rules. Firms proposing to launch new funds
using direct dealing, or to convert existing funds to direct dealing, will need to ensure
scheme documents are clear about who has responsibility for AML and will carry out this
activity.
3.47 The Joint Money Laundering Steering Group (JMLSG) produces detailed guidance
for UK firms on how to comply with their legal and regulatory obligations for money
laundering and terrorist financing. This guidance will remain a key resource for firms.
When considering a firm’s systems and controls against money laundering and terrorist
financing, we will consider whether the firm has followed relevant provisions of the
JMLSG’s guidance, and any guidance we have issued.
Dealing with small sums arising from fund operations
3.48 We know that, in some circumstances, AFMs and depositaries may identify small sums
remaining part of scheme property following a scheme of arrangement, during or
following the process of termination or winding up of a fund (orphan monies). These
sums can often be immaterial or of such low value that prevents efficient distribution
when divided among fund investors. The administrative costs of managing such sums
can often be greater than their value.

21
3.49 Firms have approached us about including powers within schemes of arrangement or
notification of the winding up of a fund or termination of a sub-fund to pay such sums to
charity.
3.50 In August 2024, we introduced new rules to allow AFMs to participate in the expanded
second phase of the Dormant Assets Scheme (DAS) established through the Dormant
Assets Act 2022. This included powers to transfer orphan monies to the DAS, subject to
the AFM maintaining records and the AFM asking contactable unitholders to renounce
any residual interests in the fund. We recognised that for very small sums, this may be
impractical for AFMs to action and that we would consider alternative options for future
consultation.
3.51 We want to provide an efficient mechanism for AFMs and depositaries to handle these
very small sums. We will permit disclosures within new scheme of arrangement or
winding up notifications allowing non-material sums to be paid to a recognised charity
during the winding up or termination process. The AFM and depositary should agree a
de minimis amount on a per unitholder or per fund basis and how these sums should be
treated.
3.52 This kind of mechanism may not have been disclosed in historic mergers or fund
closures. When setting our final rules on extension of the DAS, we also noted that
in many scenarios, viable records of unitholders might no longer exist, potentially
preventing use of the DAS. While COLL provides for such monies to be paid into court,
this process also presents practical difficulties, and an alternative would also be helpful.
We intend to explore further with firms what additional powers would help deal with
legacy sums, subject to compliance with broader legislation including Regulation 33 (4)
of the OEIC Regulations.
Question 14: Do you agree that fund AFMs should bear the cost of
exercising discretion for late payments? If not, why?
Question 15: Are there scenarios where this may not be appropriate or
such costs should be allocated differently?
Question 16: Do you support introducing broader powers to deal with
historic orphan monies? What legal or regulatory barriers
might prevent introducing such a process?

22
Chapter 4
Fund tokenisation roadmap
4.1 A March 2024 report from the AMT’s TWG, Further Fund Tokenisation, identified 2
priority use-cases that firms would test, with support from the UK authorities:
• Fully on-chain investment markets, with tokenised funds investing in tokenised
securities such as fixed-income or other asset classes.
• The use of Tokenised Money Market Fund (tMMF) units as collateral where eligible
under the UK regime for non-centrally cleared derivative contracts.
4.2 This chapter explores how our rules can support these next steps and use-cases, and
where our rules may require further development. We want to be ambitious and apply a
flexible approach. We will collaborate with industry on prioritisation and the tools we use.
4.3 We summarise feedback to Chapter 7 of CP23/28, ‘Updating the regime for Money
Market Funds’. We also explore how further use of tMMFs can support efficient
exchange of collateral.
4.4 We also set out our thinking and early positions on how funds could operate fully on-
chain, using money or money-like instruments that can operate with programmable
ledgers for settlement. We invite views on an interim environment that could operate
ahead of introducing the UK’s regime for qualifying stablecoins. We also want to
confirm our expectation that authorised funds can hold cryptoassets that are specified
investments, including DIGIT, and confirm that authorised funds can use public DLT
networks.
4.5 The UK Government announced its Wholesale Financial Markets Digital Strategy in
July 2025, setting out the UK’s ambition to take a leading role in realising the benefits
of DLT. The Strategy includes support for digital payments, the Treasury’s DIGIT pilot
and encourages the development of collateral mobility solutions. The Government
and regulators intend to work with industry to encourage live market activity, both
experimentally and by supporting rapid scaling up and roll out of commercial products.
The Government will announce a Digital Markets Champion to co-ordinate this
collaboration. We continue to work with firms on how to progress a staged process
towards increasing the adoption of tokenisation and DLT.
Tokenised money market funds and response to CP23/28
4.6 CP23/28 set out proposals to mitigate financial stability risks and formed part of delivery
of the Smarter Regulatory Framework for financial services, replacing retained EU law
with regulation tailored to the UK.
4.7 Chapter 7 asked questions on future developments in the use of MMF units, including
use as collateral, and how tokenisation might help. Our questions focused on MMFs
posted as collateral in non-centrally cleared derivatives transactions to mitigate
counterparty credit risk. Following the 2008 financial crisis, global regulators introduced
the Uncleared Margin Rules (UMR), which mandated the exchange of initial margin

23
(IM) and variation margin (VM) for uncleared over-the-counter (OTC) derivatives. This
increased demand for high-quality, liquid collateral that can be universally accepted.
4.8 Respondents to CP23/28 were very supportive of investors posting and accepting
MMF units as collateral for non-centrally cleared derivatives. Many noted that posting
MMF units would reduce the market pressure of forced sales, as seen in recent market
events. They referenced the 2022 mini-budget event when Liability Driven Investment
(LDI) pools were forced to sell gilts or other assets to realise cash which amplified a
downward price spiral. Counterparties receiving this cash would often then invest it back
into MMFs. Respondents said this cycle of transactions out of and then back into MMFs
would have been unnecessary if MMF units were acceptable as collateral. There was also
strong support for tokenisation as a development which would reduce market friction
for the benefit of overall financial stability, including in a stress scenario.
4.9 Further advantages noted by respondents included a reduction in trading costs,
increased efficiency in transferring assets, and an increased ability for banks to rely on
short-term funding markets (STFM). The use of MMFs also presented advantages for
counterparties’ liquidity and treasury management activity by providing an alternative
to cash buffers. Some respondents suggested that holding cash to post collateral may
reduce portfolio performance by forgoing the higher level of interest which MMFs pay.
Respondents noted a benefit of posting MMF units would be for investors to enjoy lower
counterparty risk as the MMFs provide a spread of risk across underlying banks and
issuers.
4.10 We also asked about potential barriers to the use of MMFs as collateral. Many
respondents suggested that transferring MMF units to counterparties would be
onerous. This was due to the requirement of a stock transfer form and the lack of an
obligation for managers to process these forms on the same day. Some respondents
also noted that it may be difficult for the MMF manager to know their underlying
clients if investors are able to transfer MMF units freely. This could complicate liquidity
management in MMFs or mask investors with a sizeable individual position. Respondents
also suggested that some investors may struggle to understand the underlying assets
in an MMF and to assess whether they are eligible for collateral purposes, or to calculate
how the value of an MMF should be discounted to reflect ineligible underlying assets.
4.11 We asked respondents to give feedback on the potential for tokenised MMF (tMMF)
units to overcome these barriers. They generally said there are many advantages to
tMMFs in a collateral context. The use of a distributed immutable ledger shared among
multiple parties can provide a transparent record of ownership and transactions could
reduce disputes over collateral eligibility or valuation. It also enables investors to verify
and track their assets in real time, increasing trust among market participants.
4.12 Others pointed towards operational efficiency: they stated that DLT offers the
possibility of automating collateral management processes, reducing operational costs
and errors, and could provide almost instantaneous settlement (atomic settlement).
Smart contracts could execute Credit Support Annex (CSA) terms automatically
streamlining margin calculation and settlement. Some respondents also suggested
that tokenisation could make partial shares of MMF units feasible. This would potentially
increase the investor base and democratise MMF investment.

24
4.13 We asked what disadvantages and challenges might arise where tMMFs are used as
collateral. Many respondents discussed issues around differing regulatory frameworks
across jurisdictions. They reported uncertainty about the eligibility of MMFs as collateral
under UK EMIR, as well as inconsistent interpretation of terms such as ‘highly liquid’ and
‘low risk’ which directly impact the eligibility of MMF units. Different types of tokenisation
platform have differing degrees of decentralisation. Responses indicated this may add
to the legal uncertainty about the nature of ownership rights of assets.
4.14 Some respondents noted that the tokenisation of MMF units might even exacerbate a
liquidity run during times of stress. The more transparent record of transactions would
enable investors to see a rapid sell off in real time. This may spur investors to redeem
simultaneously, putting further procyclical pressure on asset prices. If the underlying
assets of the MMF units experience increased liquidity challenges, the ability of a MMF to
meet redemption requests may be undermined. This diminishes the attractiveness of
tMMFs for use as collateral. Counterparties in transactions to fulfil margin requirements
will prefer collateral that is universally accepted, highly liquid and stable in value. A
counterparty may also be reluctant to accept collateral which it cannot itself deliver as
collateral in further transactions.
4.15 Respondents also highlighted operational and technological risks of using tMMFs
as collateral. Some noted cybersecurity threats, data integrity and consistency,
data privacy and access as well as money laundering and KYC risks. One respondent
suggested that smart contracts could introduce risk if they do not operate as expected
or are compromised by a bad actor.
Our response
We acknowledge the balanced arguments put forward by respondents,
and the strong support for posting MMF units as collateral. We have
considered this feedback, including where respondents highlighted
existing regulatory and operational barriers on broader use of tMMFs for
collateral.
We recognise that the use of MMF units as collateral could mitigate
procyclical effects in market stress scenarios, and that MMFs offer
a means of delivering a diversified pool of exposures. We agree that
tokenisation has some specific utility in facilitating use of MMF units as
collateral. This includes reducing frictions associated with transfers of
units in conventional MMFs and potentially reducing some reconciliations.
We also acknowledge the possibility that the tokenisation of MMFs has
the potential to exacerbate runs during times of stress, as noted by
respondents.
We know industry sees the use of tMMFs for collateral as a near term
opportunity. Collateral is exchanged free of payment, so an accepted on-
chain cash instrument is not required for settlement. A number of firms
have carried out pilot test projects in the UK. For example, Aberdeen
Investments and Archax collaborated on an initiative using tokenised
units of Aberdeen Investment’s money market fund and UK gilts as
collateral for foreign exchange trades with Lloyds Banking Group.

25
We want to support firms taking tokenised collateral initiatives forward.
Widespread adoption will depend on legal and regulatory certainty,
particularly on a cross-jurisdiction basis, and a shift in market practices
for some exposures. We are continuing our work with industry both in the
UK, alongside the Bank of England, and internationally, through Project
Guardian, the IA’s Investment Fund 3.0 (IF3) Lab and ongoing work within
international standard setting bodies.
UK EMIR does not distinguish between tokenised and conventional
financial instruments when determining eligibility of particular
instruments for collateral regulation purposes. There are also no
restrictions on use of MMFs where firms provide collateral for uncleared
derivatives outside of the scope of UK EMIR.
UK UCITS (including UK UCITS MMFs of any MMF category), are eligible to
have their units exchanged as collateral for uncleared transactions under
UK EMIR, in accordance with the terms of Article 5 of RTS 2016/2251,
and where an appropriate haircut has been applied for any instruments
that do not fall under Article 4(1). This is provided they meet the relevant
criteria under Article 5, and invest in at least some of the instruments
that fall under Article 4(1). In addition, non-UK funds which meet the
criteria set out in Article 7(2)(b) of the Large Exposures (CRR) Part of the
Prudential Regulation Authority’s (PRA) Rulebook are eligible to have their
units exchanged as collateral, provided they meet the relevant criteria
under Article 5A of RTS 2016/2251. In practice, this means that certain
non-UK MMFs that invest only in bank deposits and public debt are
potentially eligible.
Any extension of eligible MMF categories must be within an acceptable
risk tolerance. Specifically, that ensures collateral remains safe, liquid and
assessable during market events, large levels of redemption requests
and insolvency scenarios. Our future policy work will reflect the need to
maintain strong prudential standards.
We recognise that the tokenisation of MMFs and the use of tokens
as collateral also has the potential to create new risks in the financial
system. In 2024, the Bank of England’s Financial Policy Committee noted
that while the use of tMMF units as collateral could reduce the need for
redemptions in stress events, new risks could be created in more severe
stress events where funds need to suspend redemptions, or where
confidence was lost that the MMF unit could be redeemed at par, and
where those funds units are being held as collateral across the financial
system.
The DSS offers a proportionate route to becoming a Bank-regulated
financial market infrastructure provider, capable of settling instruments
that fall inside or outside of the existing scope of the UK Central
Securities Depositories Regulation (UK CSDR), including MMFs. We will
both work with stakeholders to build on the opportunities presented by

26
DSS and to support firms wishing to explore use of tMMFs as collateral
outside the DSS.
Supporting use of stablecoins to settle unit deals
4.16 Firms have approached us about using digital currencies and stablecoins to support pilot
activity and commercial products.
4.17 To facilitate fully on-chain funds, the fund, its fund manager, its investors and service
providers may need to hold digital assets to facilitate unit deals and distribution
payments. This may include digital cash instruments such as tokenised deposits,
money-like instruments such as stablecoins, or, on a longer timeframe, digital payments
through central banks. The same parties may also need to hold cryptoassets, where
these are native to a particular blockchain network, to pay gas fees. Gas fees are similar
to a transaction charge and fund the operation of a blockchain network or pay those
who operate it.
This paper does not explore the ability of authorised funds to hold cryptoassets for
investment purposes. We intend to conduct a future, broader review of the eligible
assets regime for authorised funds. We will consider whether the ability of funds
to hold non-financial cryptoassets for investment could be part of that review. We
expect that funds should be denominated in fiat currency. We invite feedback on
how digital cash instruments and stablecoins can be used as a functional tool for
cash transfers, and the use of cryptoassets to pay gas fees.
4.18 Operating models may vary across firms’ proposals, particularly whether the fund
operates on a direct dealing or box model. In a box model, the fund itself may not need
to hold cryptoassets to settle deals if conversion takes place on the AFM balance sheet.
Where a fund needs to hold cryptoassets this could be by the fund, or the AFM or
depositary on behalf of the fund.
4.19 Firms are exploring this at a time when there are changes underway in relation to
stablecoins and other cryptoassets. In May 2025, we consulted in CP25/14 on proposed
rules and guidance for stablecoin issuance and cryptoasset custody. This followed the
Treasury’s publication of a draft Statutory Instrument and Policy note in April. The draft
legislation proposed a definition for qualifying stablecoins and a new regulated activity
for stablecoin issuance. We want to support the development of qualifying stablecoins
and fully on chain funds in the UK.
4.20 We are therefore considering how an interim environment for funds, potentially using
our sandboxes, or waivers or modifications of existing rules, could support innovation
ahead of finalising the UK regime. This would allow firms to launch or test fully on-chain
authorised funds. Firms using waivers or the sandbox would need to transition to any
final standards once live, as with any other developing environment.

27
4.21 Our rules for authorised funds currently set limits on the categories of assets that funds
can invest in or hold for operational and liquidity management purposes. These were
developed for conventional assets, and do not always address new risks, nuances of new
technology, or assets that are not financial instruments.
4.22 COLL 5.2.6AR sets out the general asset eligibility rules for UK UCITS. We think this rule
could be amended to allow a new category or categories of asset, or to provide specific
exemptions for the use of digital cash instruments and money-like instruments for
limited purposes, other than the pursuit of a scheme’s investment objectives. In Annex
1 we have set out some suggested amendments to how the rules could be potentially
modified for those funds which need this additional flexibility. This could be progressed
via a rule modification where the relevant statutory conditions are satisfied, or through
an amendment to our rules in a future formal consultation.
4.23 Where a firm proposes to use a stablecoin as a settlement asset, the features of that
stablecoin should be consistent with the Treasury’s proposed definition of qualifying
stablecoin. This definition is not limited to UK issued stablecoins. However, it requires
the product to seek or purport to maintain a stable value in relation to a referenced fiat
currency, through the holding of fiat currency, or fiat currency and other assets. We
will review whether UK issued stablecoins would be more appropriate for settlement of
deals in authorised funds as the regulatory regime is finalised. Where stablecoins are
used as a settlement asset at a systemic level, HMT also has the ability to recognise
these as systemic stablecoins, which are subject to dual regulation by the Bank
of England and the FCA. The Bank of England and the FCA will explore the use of
stablecoins as a settlement asset for wholesale financial market use cases in the DSS.
4.24 We do not believe algorithmic stablecoins, or those backed by cryptocurrencies, which
would fall outside of the definition of qualifying stablecoin, would be appropriate for
settlement of deals in authorised funds.
Question 17: Are there any other purposes for which funds, fund
managers, or investors may need to hold cryptoassets to
support fund operations on-chain?
Question 18: Would our potential amendments to COLL provide
sufficient flexibility for firms to use digital cash and money
like instruments for operational purposes, including unit
dealing?
Question 19: Would a limited sandbox or standard waivers/modifications
be appropriate routes to allow us to develop a final regime
in collaboration with industry? What features may be
desirable in such a regime?
4.25 Alongside eligible assets, our rules for unit dealing also refer to use of fiat cash. For
example, COLL 6.2.13R(2) requires the AFM to make payments for units issued in cash
or cleared funds except for where in-specie issues take place. To support projects,
technical changes to these rules would be required. We ask firms to engage early with

28
us on the changes required to support a particular initiative, and assess any required
waivers and modifications.
4.26 Firms may also wish to establish tokenised share classes of existing schemes or
establish tokenised feeder funds that hold units in a conventional master scheme. Firms
should consider if waivers and modifications would be required.
Question 20: Do any other areas of our rules conflict with or prevent
use of digital cash instruments or money-like instruments
for unit dealing, distribution payments, or for payment of
charges and fees?
Question 21: Would our existing rules, including the Consumer Duty,
provide enough protection for investors if we allow a fund
to hold cryptoassets for settlement and fund operational
purposes only?
Tokenised financial assets
4.27 Today, most tokenised funds invest in conventional financial assets. The further fund
tokenisation report identified funds investing in tokenised financial assets – often known
as security tokens or specified investment cryptoassets, such as tokenised bonds –
could bring investment management benefits. For example, faster settlement times or
lower costs as the number of intermediaries involved in transactions decreases.
4.28 We want to support the development of the tokenised asset market. We are supporting
firms looking to use the DSS to issue, trade and settle digital securities. This includes
where funds use a DSD to settle transactions or invest in tokenised securities issued
by DSS participants. We, alongside, the IA, the MAS, and the Investment Management
Association of Singapore (IMAS) are exploring the impact of tokenisation from the
investor’s perspective. This collaboration will study the changing opportunities for
investors and how they can share in the benefits of tokenisation. It will support firms in
product development to align with consumer protection and market integrity goals as
the market undergoes digital change.
4.29 Our investment and borrowing rules in COLL do not impose any regulatory barriers
to prevent UK authorised funds from investing in tokenised forms of eligible assets.
We anticipate that UK authorised funds will be able to invest in digital gilt instruments
that are issued under the Treasury’s DIGIT pilot. DIGIT will be a digitally native UK
Government debt instrument (a transferable security) held on DLT. At Mansion House
in July, the government set out its intention that it will issue DIGIT on a platform within
the DSS. This included life-cycle events taking place on chain. As confirmed in July 2025,
firms will be able to acquire digital Gilts issued through DSS platforms and will be able
to settle the cash leg on-chain. Investments in digital Gilts must be aligned with the
investment objectives of the scheme as set out in its prospectus. Fund managers may
need to discuss their intent to invest in tokenised assets with the depositary to make
sure the depositary is satisfied that adequate custody arrangements can be provided for

29
the investment. Material risks arising from the custody of tokens should be appropriately
disclosed to investors.
Question 22: Are there other associated regulatory, operational or
commercial barriers to investing in tokenised assets? What
could we do to address these issues?
Public DLT networks
4.30 Firms have highlighted the benefits of using public DLT networks in fund management.
We have seen examples of products where firms use the open nature of public networks
to create new distribution channels to reach investors. We have also heard how public
networks can support liquidity and treasury management functions where capital is not
‘locked’ in different private blockchains. We anticipate greater use of public networks
to continue. We also expect institutional-grade standards to develop which facilitate
interoperability between networks, either through token or smart contract standards
(such as ERC-7786), or new networks.
4.31 The FSB and IOSCO have identified risks specific to the use of public DLT networks. For
example, malicious actors may front-run transaction orders awaiting validation to gain an
advantage, or, logic errors in smart contracts, where the underlying code is erroneous,
causing unintended and irreversible outcomes. They also identified operational limits
to existing networks which make them insufficient to process the large volumes of
transactions that go through conventional market infrastructure. These technological
and operational risks and limitations may bring consumer protection, market integrity
and market stability risks.
4.32 In response, there are several initiatives that attempt to enhance network integrity
for financial services. For example, the Global Layer One project seeks to develop
standards for market infrastructure to enable the interoperability and scale required to
support capital markets. Many of these initiatives continue to progress and we will follow
developments closely.
4.33 We do not object in principle to fund managers using public blockchains. This is
provided their use does not prevent firms meeting regulatory obligations. This will
require careful consideration of operational resilience and data privacy risks. Our recent
consultation paper CP25/25 confirms that we do not consider use of permissionless
networks to be an outsourcing arrangement. This allows firms to use a wide range of
networks appropriate to their operating model and benefit from the openness of public
blockchains to achieve distribution benefits.

30
Chapter 5
Supporting future tokenisation models
Tomorrow’s investor: changing consumer demands
5.1 In this chapter, we explore future tokenisation models put forward by industry.
Particularly, how ‘composability’ (which we explain below) and DLT could help firms to
offer consumers more personalised investments that better meet their financial needs.
5.2 Technology is driving changes in consumer expectations. Consumers increasingly
expect a single, complete and instant relationship with their money. Our Financial
Lives Survey (FLS) data shows how younger generations generally prefer a more direct
relationship with their investments. 49% of investment platform users are 55 years
and above, whereas 47% of users of neo-brokers – more commonly known as trading
apps – are aged 18-34. Neo-brokers typically offer consumers low-cost investments in
individual (or fractions of) securities, rather than funds.
5.3 Similarly, exchange-traded funds (ETFs) have become a popular way for retail investors
to access open-ended pooled investment vehicles. The instant ability to trade when the
market is open is one of the main drivers behind the popularity of ETFs among younger
investors. According to a YouGov and BlackRock survey, the 18–34-year-old investor age
range are 80% more likely to hold ETFs than older ranges.
5.4 We are aware that many firms see a form of tokenised portfolio management as a way
to service this new type of digital investor and facilitate generational wealth transfer.
Firms are exploring how tokenising assets and cash flows may enable them to provide
investment solutions similar to existing strategies for wealth clients, such as model
portfolio services (MPS) or discretionary investment management, at a retail scale.
5.5 It is not for us to shape the future of markets; but we welcome views on what role we
should play and how our regulations need to evolve to support future visions.
Question 23: How are changing investor habits and expectations
influencing the design of tokenised products?
Three stages to progress tokenisation
5.6 Many firms have discussed a future where DLT and tokenisation enables personalised
portfolio management on a retail client-by-client basis. Most agree this will happen over
3 phases.
5.7 Tokenisation of funds: This first stage uses DLT to maintain the unitholder register in
new and existing funds and fund services. This represents the current position in the
UK. In Chapter 2, we are supporting this first phase by giving Handbook guidance on

31
the Blueprint. Fund tokenisation may also include units being dealt and settled via DLT
using on-chain cash. We are enabling this in Chapter 3 and Chapter 4. Firms expect
that integrating DLT into fund management will reduce operational costs associated
with servicing the fund, such as register maintenance and reconciliations. Calastone
estimate this could achieve 23% savings in operating costs.
Figure 1: Stage One: Tokenised Funds – investor/asset relationship
Issuers Assets
Fund
Unitholders
Cash flows via
ownership of assets
Cash flows via
ownership of units
All unit holders
of same class
treated equally
in alignment
with fund
objectives.
Stage One: Tokenised funds– investor-asset
manager relationship
5.8 Tokenisation of assets: This second phase involves moving to a different relationship
between asset managers and clients which is similar to the way managed portfolios or
discretionary investment management services are delivered today, usually for wealth
clients. Programmable tokens and self-executing smart contracts allow consumers to
directly hold tokenised assets in a digital wallet. Model portfolio smart contracts may
also be maintained, where asset managers manage client holdings through ‘micro-
model portfolios’ to meet the financial needs and objectives of similar groups of
consumers. Direct holdings of tokens may reduce the complexity and costs associated
with operating a fund. It may also improve the customisability of investments if investors
hold tokens which meet their specific financial needs and goals, rather than being in a
general share class within a pooled vehicle.

32
Figure 2: Stage 2: Tokenised Assets – investor/asset relationship
2
Bonds Equities Deposits Gilts Property
Financial markets
Direct ownership
of assets and cash
flows via tokens
Stage Two: Tokenised assets– investor-asset
manager relationship
Direct holdings
of assets in
portfolios allows
for greater
customisation
than holding
units in a fund.
Portfolio manager – as asset allocation, matching,
valuation etc.
5.9 The tokenisation of cash flows: This target ‘end-state’ involves direct holdings of
tokenised assets being broken down into cash flows that constitute the assets. These
cash flows are represented in tokenised form. In this third phase, an adviser creates an
actuarial-style lifestyle plan of current and future financial needs for an investor and
assigns specific cash flow tokens to meet those needs, providing ongoing portfolio
management of cash flows. The tokenisation of cash flows makes investing highly
customisable to meet a wide range of bespoke client needs.

33
Figure 3: Stage Three: Tokenised cash flows – investor/asset relationship –
tokenised corporate bond example
Bond
Token
2027 principal
Token
2027 principal
Token
2027 principal
Token
2026 coupon
Token
2027 coupon
Token
2025 coupon
Stage Three: Tokenised flows– investor-asset manager relationship
Customisation
at scale to meet
individual needs
for investors on a
cash flow basis.
Investor A
Need: one-off
cost of car.
Investor B
Need: regular
income to
support
university cost.
Investor C
Need: cash
+ growth for
university fees in
3 years.
Issuer
Holdings represent
needs of investor via PM.
Direct ownership of
cash flows via tokens
Portfolio manager – eg asset allocation, matching,
valuation.
Question 24: Do you agree with the three phases described? Are these
developments industry is looking to pursue?
5.10 Some firms are exploring ‘composability’ throughout this 3 stage process, including
in the Guardian Funds Framework (GFF). Composability looks to maximise the ‘re-use’
of existing technological and operational components to build new DLT applications
and services. Composability may have the potential to simplify technological and asset
management processes and deliver operational and investment benefits across the
sector.
5.11 Composability can be thought of at 2 levels: tokens and processes. At the token level,
tokens can be used to make assets composable, by breaking down assets into the cash
flows that make up assets. At the process level, smart contracts may be layered on top
of tokens to reduce the number of technological operating processes across different
product types, asset classes and clients.
5.12 Composability relies heavily on the standardisation of tokens, smart contracts and
networks, as well as operational and regulatory processes. There are a wide range of
efforts to create common token standards. For example, the International Capital
Markets Association (ICMA) have created the ‘DLT Bond Data Taxonomy’ to provide a

34
foundational set of common definitions and data fields for tokenised bond issuances.
The GFF also set initial composable standards for fund tokens. We recognise that
standards are constantly evolving and want to support industry to develop good
standards and market practices.
5.13 This composable ‘end-state’ may have the potential to change the characteristics
of assets, such as illiquid assets. Tokenised cash flows may allow retail investors to
hold flows representing entitlements to, for example, a rental yield from a real estate
investment. In this example, the ownership of tokenised flows of illiquid assets may
reduce the structural liquidity mismatches found in open-ended collective vehicles
primarily investing in illiquid assets. It may also create a more active secondary market
for real-estate assets where ownership of cash flows are traded. Greater access to
private assets, including productive assets, can potentially deliver higher returns for
investors, improve investor outcomes through greater asset diversification and support
the growth of real investment in the UK economy.
5.14 Some industry participants have argued that this could make illiquid assets more
appropriate for retail investors. However, as with conventional products, such as
securitisations or real estate investment trusts (REITs), there is no guarantee that
there will be an active secondary market in a particular product even if the technical
functionality exists.
5.15 Investment processes may also need to be standardised to scale individual portfolio
management to a retail market. Most future visions use model portfolios to solve this
with a set of on-chain model portfolio smart contracts. DLT may allow the creation
of ‘micro-model portfolios’ to be managed by the firm at scale. Potentially on a more
targeted basis than a collective scheme, taking account of individual time horizons and
risk tolerance.
5.16 We see a degree of convergence between the adoption of tokenisation, the use of
model portfolios and targeted support as part of the Advice Guidance Boundary Review
(AGBR). Firms wanting to make suggestions to groups of consumers with common
characteristics, may use model portfolio smart contracts held in investor wallets to
efficiently deliver investment solutions and manage a potentially large number of retail
consumer accounts. Firms may progress all three initiatives together with the potential
to achieve better outcomes for consumers.
Question 25: What processes within the fund and investment
management lifecycle do firms want to begin to make
‘composable’?
Question 26: How does ‘composability’ impact the liquidity profile of
assets we currently think of as less liquid or illiquid?
Question 27: How might the tokenised portfolio management vision
enhance consumer outcomes?

35
Changing role of asset managers
5.17 In the second stage, discretionary investment management could be delivered at lower
cost and at scale by using DLT. The need for a fund structure may fall away as model
portfolios of assets could present consumers with more cost-effective and consumer-
specific investment propositions, without the intermediation cost of operating and
servicing a pooled vehicle.
5.18 In stage 3, consumers rely on specific flows for financial needs at critical and specific
times. There may be client demand for guaranteed future flows where the cash flow
is important to the client’s financial needs. So, asset managers may look to give some
sort of guarantee of the future flows by taking on principal risk, or the asset manager
(or digital custodian) may have to perform a token validation role to make sure the token
exists and will be executed as planned. Asset managers may need to compensate for
‘lost’ or ‘malfunctioning’ tokens.
5.19 Where investors primarily interact with asset managers via a DLT network, 2
fundamental changes could take place:
• Firstly, this may lead to a marketplace of flows. Consumers will be able to set
out their financial needs and digitally represent them. This could lead to asset
managers bidding for that account, based on who can best meet the needs
through asset and flow selection. There may be benefits to consumers, such as
greater choice between different investment propositions; greater competition
may also drive better consumer outcomes. However, there is also potential
for firms to take greater risk to ‘win’ an account, such as placing consumers in
inappropriate assets or flows.
• A new marketplace of tokenised flows may change the way capital issuers raise
capital. In this model, large issuances may be fragmented into a range of tokenised
flows held by many different consumers. This may have benefits for capital issuers,
such as allowing for more precise and targeted issuances to meet their financing
needs. It may also bring new risks to issuers, where intermediaries can no longer
effectively manage risks arising from investor behaviour. Funding may become less
predictable where issuer debt is owned by many retail investors with constantly
changing needs.
5.20 Existing roles in financial markets evolve or be re-purposed through the 3 stages.
For example, fund accounting activities may evolve into portfolio accounting for the
manager across its entire client base. Market infrastructure roles may also change. For
example, custodians may move from maintaining global central securities depositaries
(CSD) linkages, to providing access across different private and public blockchain
networks (interoperability). Some roles may disappear altogether.

36
Question 28: Do you foresee any other major changes to the role of asset
managers or other market participants in a tokenised flows
‘end-state’? What are the opportunities and risks?
Changing regulations
5.21 We do not endorse any particular future vision. However, we want to explore how
regulation may evolve to cater for these models, and how this might help us progress
our objectives and strategic priorities for firms, markets and consumers.
5.22 We believe our rules largely support experimenting with these proposed models. We
already regulate individual portfolio management services. Where our rules for funds
would no longer apply in stages 2 or 3, similar or equivalent expectations apply to firms
under our COBS rules and the Consumer Duty.
5.23 However, many of the expectations in COBS for individual portfolio management are not
as prescriptive as, for example, the COLL rules. This is because portfolio management
has historically been for wealth clients. As a result, our portfolio management rules
rely largely on suitability assessments, rather than the specific requirements in retail
authorised funds, such as investment powers and eligible assets, diversification and
spread of risk and standardised disclosures. These may be areas where we need to build
on existing regulation to ensure effective supervision and give firms the certainty to
scale tokenised portfolio management offerings.
5.24 We have some areas of concern where we think the portfolio management rules may
be inadequate for the scale of retail funds. For example, the lack of rules on investment
powers may lead to portfolios which do not meet diversification or liquidity needs of
their investors. We intend to conduct a review of the portfolio management rules to
ensure they are fit for future for firms and consumers, and that we have a proportionate
regime to support tokenised portfolio management.
5.25 Composable finance could also introduce embedded compliance where regulatory
requirements are programmed into tokens. This may lead to greater consumer
protection where only particular types of investors can invest in certain assets, such
as illiquid assets. Composable regulation may also improve market integrity outcomes,
such as where embedded financial crime controls mean that tokens can only be
transferred to addresses that have been undergone KYC/AML checks and are on an
‘allow list’.
5.26 One enabler of composability is on-chain digital identity. Asset managers require
certainty about the identity, profile and needs of the underlying consumers at scale. This
could be done cryptographically. Managers can verify the identity of the wallet address
through decentralised identifiers, such as non-fungible tokens (NFTs) acting as proof
of identity, or ‘soulbound’ tokens. Soulbound tokens are non-transferable tokens which
sit in an individual’s digital wallet and are a unique token that attest to the identity of the
wallet owner. Digital ID is also important for AML/CFT and KYC purposes.

37
5.27 The third phase looks very different to how consumers invest today. The following table
briefly sets out the key areas of our authorised funds rules and how they might need to
change in the third phase of tokenised cash flows:
Key theme: authorised
funds Relevance: future vision
Fund type & investor
eligibility
Existing standards to ensure higher-risk strategies can only be
sold to appropriate professional or institutional clients may need
to evolve.
Eligible assets/markets Existing controls may be re-purposed to ensure consumers are
invested in suitable and appropriate flows according to their
needs, such as if a vulnerable consumer’s financial needs change
rapidly, or market events affect an issuer or jurisdiction.
Investment and borrowing
limits
Controls may be needed to restrict permitted investments and
set out relevant limits, based on strategy and consumer type.
Future controls could be set for the strategy through smart
contracts.
Oversight/depositary
function
An independent investor oversight or audit function could be
considered. The transparency of public networks may alter the
nature of this function.
Investor disclosures Newly created cash flows may require a form of standardised
disclosure. This could be targeted at consumers or the adviser.
Benchmarks and
performance
Consumers will need new metrics to compare performance of
other tokenised portfolios and make a judgment on their current
service. There is potential for bespoke, tailored investor reporting.
Pricing and dealing Existing controls, including best execution, may be revised to
ensure appropriate pricing if flows are sold as a ‘package’.
Safeguarding assets Digital custodians will safeguard assets and maintain appropriate
books and records. The transparency of public networks may
change how this function is performed.
Auditing and valuation Audit standards may need to be amended to address flows.
Standards may need to be introduced to govern valuation of
portfolios and its frequency.
Investor rights Standards needed around investor rights, especially right to
redeem across different asset/flow classes, and right to vote/
attend meetings where assets broken down.
Liquidity management Standards will need to revise how asset managers ensure they
can manage inflows and outflows of tokens as client and market
circumstances change, including ongoing presence of market
makers in flow marketplace.
Conflicts of interest Potential for new conflicts if the asset manager is both token
selector and token issuer.
Governance & INEDs Independent directors may need different skillsets / focus areas
such as technology expertise.

38
Key theme: authorised
funds Relevance: future vision
Complaints &
compensation
Role of FSCS and the Financial Ombudsman may need to evolve
to include how compensation costs are funded when new asset
classes and firm functions are used in the retail market to ensure
the ‘polluter pays’.
Suspension & wind-down General management of insolvency of issuers and liquidation to
be considered where underlying cash flows of assets are held
disparately.
Side pockets Standards to be re-purposed to manage suspended/sanctioned
flows committed to a consumer.
Overseas funds/
recognition
International standards may need to be developed to allow for
overseas tokens to be recognised and UK tokens to be distributed
in other markets.
5.28 We are interested to hear from firms which areas of regulation may need to change
in this future vision. We see this as a potential opportunity for us to take a more
proportionate, less prescriptive approach, while maintaining high standards of consumer
protection and market integrity.
5.29 There may be some risks which are reduced in the model, such as the liquidity mismatch
in open-ended collective vehicles. Many existing risks of DLT may remain, such as
dependence on a concentrated number of DLT platforms or digital custodians. New
risks may also emerge.
Question 29: How might market integrity and financial stability risks
evolve in the future tokenised portfolio management
model?
Question 30: What areas of the current funds framework will need to
be recreated in the future vision? What areas could be
simplified across different parts of the Handbook?
Question 31: What areas of the Handbook, or wider rules and legislation,
do we need to reconsider to support the growth of the
proposed tokenisation models?
Question 32: What should the FCA’s role look like in this future vision?

39
Annex 1
Potential amendments in respect of
cryptoassets
1. In Chapter 4, as part of our discussion section on a roadmap for tokenisation, we invited
feedback on how COLL might be amended to allow authorised funds to hold digital
cash instruments and money-like instruments for limited purposes, other than the
pursuit of a scheme’s investment objectives. In this Annex, we set out some suggested
amendments on how our rules could be potentially modified for those funds which need
this additional flexibility.
2. This could be progressed via a rule modification where the relevant statutory conditions
are satisfied, or through an amendment to our rules in a future formal consultation. We
welcome feedback on this text through questions 18 and 19 of this consultation paper.
Potential amendments in respect of authorised funds holding cryptoassets
for limited purposes
5.2.6A R Subject to COLL 5.2.6BR, the scheme property of a UCITS scheme must,
except where otherwise provided in the rules in this chapter, consist solely of
any or all of:
…
5.2.6B R (1) The scheme property of a UCITS scheme that is a tokenised fund may
also include an ancillary digital asset if it complies with the provisions of
this rule and the rules in this section.
(2) A tokenised fund may only hold an ancillary digital asset in its scheme
property to the extent that it fulfils the following criteria:
(a) The potential loss which the scheme may incur with respect to
holding the ancillary digital asset is limited to the amount paid for
it;
(b) The holding of the ancillary digital asset does not compromise the
ability of the authorised fund manager to comply with its obligation
to redeem or cancel units at the request of any qualifying
unitholder (see COLL 6.2.16 R(3)); and
(c) The ancillary digital asset is entrusted to the depositary for
safekeeping in accordance with COLL 6.6B.18R or COLL 6.6B.19R.
(3) An ancillary digital assets may only be held in the scheme property to the
extent that it is reasonably necessary to do so for:
(a) the issue, cancellation, sale and redemption of units;
(b) the distribution of the income of a scheme;
(c) the making of payments out of scheme property where permitted
under COLL 6.7.4(R); and
(d) other purposes which are ancillary to the investment objectives of
the tokenised fund.

40
Potential amendments in respect of authorised funds holding cryptoassets
for limited purposes
(4) In this rule:
(a) an ‘ancillary digital asset’ means a qualifying cryptoasset that:
(i) seeks or purports to maintain a stable value in relation to a
referenced currency, through the cryptoasset issuer holding,
or arranging for the holding of currency, or currency and
other assets; and
(ii) is native to a particular distributed ledger technology and
its use is necessary to initiate transactions on the relevant
network; and
(b) a ‘tokenised fund’ means an authorised fund that issues units in
the form of a ‘cryptoasset’ (as defined in section 417 (Definitions)
of the Act).

41
Annex 2
Questions in this paper
Question 1: Does the proposed guidance provide adequate clarity on how
firms can use DLT to support the operation of fund registers?
Question 2: Are there any challenges in meeting the current
requirements where DLT platforms are used, or in respect
of emerging use-cases?
Question 3: Do our existing rules and proposed guidance provide
sufficient flexibility to allow for firms operating the register
to use smart contracts for the purposes above?
Question 4: What role can regulators play in supporting the
development of token standards that promote effective
governance and positive consumer outcomes?
Question 5: Do our COLL rules and proposed guidance provide
sufficient flexibility to support fund tokenisation use-cases
that use public networks?
Question 6: Do the proposals in this Chapter provide adequate
flexibility for firms considering tokenisation and the
migration to T+1 securities settlement?
Question 7: Do you support the introduction of an optional regime to
allow for direct dealing in authorised funds?
Question 8: Do our proposed requirements for operation of the
IAC provide a proportionate control environment while
ensuring funds are operated, and overseen, in line with
principles of segregated liability?
Question 9: Do you agree with our proposals in respect of overdrafts and
limits on fund exposure to a given bank or group? If not, why?
Question 10: Do you agree we should include all cash held at a given bank
within our spread of risk rules for UCITS and NURS? If not,
why?

42
Question 11: Do you agree with our proposed accounting controls in
respect of use of IAC? If not, why?
Question 12: Do you agree with our proposal to provide additional clarity
on cash held by LTAF and the requirement to appoint an
external valuer? If not, why?
Question 13: Do you agree with our proposals in respect of investor
disclosures and communications? If not, why?
Question 14: Do you agree that fund AFMs should bear the cost of
exercising discretion for late payments? If not, why?
Question 15: Are there scenarios where this may not be appropriate or
such costs should be allocated differently?
Question 16: Do you support introducing broader powers to deal with
historic orphan monies? What legal or regulatory barriers
might prevent introducing such a process?
Question 17: Are there any other purposes for which funds, fund
managers, or investors may need to hold cryptoassets to
support fund operations on-chain?
Question 18: Would our potential amendments to COLL provide
sufficient flexibility for firms to use digital cash and money
like instruments for operational purposes, including unit
dealing?
Question 19: Would a limited sandbox or standard waivers/modifications
be appropriate routes to allow us to develop a final regime
in collaboration with industry? What features may be
desirable in such a regime?
Question 20: Do any other areas of our rules conflict with or prevent
use of digital cash instruments or money-like instruments
for unit dealing, distribution payments, or for payment of
charges and fees?
Question 21: Would our existing rules, including the Consumer Duty,
provide enough protection for investors if we allow a fund
to hold cryptoassets for settlement and fund operational
purposes only?

43
Question 22: Are there other associated regulatory, operational or
commercial barriers to investing in tokenised assets? What
could we do to address these issues?
Question 23: How are changing investor habits and expectations
influencing the design of tokenised products?
Question 24: Do you agree with the three phases described? Are these
developments industry is looking to pursue?
Question 25: What processes within the fund and investment
management lifecycle do firms want to begin to make
‘composable’?
Question 26: How does ‘composability’ impact the liquidity profile of
assets we currently think of as less liquid or illiquid?
Question 27: How might the tokenised portfolio management vision
enhance consumer outcomes?
Question 28: Do you foresee any other major changes to the role of asset
managers or other market participants in a tokenised flows
‘end-state’? What are the opportunities and risks?
Question 29: How might market integrity and financial stability risks
evolve in the future tokenised portfolio management
model?
Question 30: What areas of the current funds framework will need to
be recreated in the future vision? What areas could be
simplified across different parts of the Handbook?
Question 31: What areas of the Handbook, or wider rules and legislation,
do we need to reconsider to support the growth of the
proposed tokenisation models?
Question 32: What should the FCA’s role look like in this future vision?

44
Annex 3
Cost-Benefit Analysis
Summary
1. The UK is the second-largest investment management centre globally after the US,
overseeing £1.43tr in authorised funds. Authorised funds (i.e. funds regulated by the
FCA, including retail products) are a key mechanism for delivering investment services
via low-cost pooled vehicles.
2. Currently, investors transact through Authorised Fund Managers (AFMs), who act as
principal in unit deals with investors. This structure exposes the fund and investors to
the AFM and requires that the money the manager receives must be segregated and
treated as client money. This extra layer can reduce efficiency in the dealing in funds,
reduce competitiveness and increase prices for customers.
3. This cost-benefit analysis (CBA) evaluates the impact of introducing an optional new
dealing model for authorised funds, called Direct to Fund (D2F). Under D2F, cash flows
directly between the fund and investors, removing interim exposure, associated risks,
and the need for client money safeguards. It also eliminates transactions between the
fund and the authorised fund manager, simplifying fund dealing operations. The simpler
model may also assist firms wishing to launch tokenised funds.
4. By reducing intermediaries, investment firms will free up resources that could then be
used more productively. It might also attract fund managers from other countries to
launch products in the UK because they face lower risks. These risks result from fund
managers acting as principals and having to commit capital in order to act as such, which
has liquidity impacts for the firm and may require the manager to borrow money. For
example, if an end investor fails to pay the manager on time, the manager may need to
still meet the terms of its own contract with the fund. Furthermore, developments in
blockchain linked to D2F may have positive spillovers into other sectors and enhance
overall economic productivity.
5. Our policy aims to reduce the regulatory burden on authorised funds in the UK. By
adopting D2F, these funds will remove interim exposure and the associated risks, while
the associated costs are expected to be minimal, primarily limited to familiarisation with
the new framework. Importantly, even a relatively small number of firms adopting this
channel would be sufficient for the overall benefits to outweigh the costs.
6. Over a 10-year appraisal period, we estimate a net present value benefit between £27m
and £57m coming from a reduction in the fees charged by fund managers to investors.
Based on our understanding of the market, we assume a 2.5% reduction in costs
associated with operating the fund register, with a market uptake starting at 1% and
rising to 33% at the end of the appraisal period. Estimated costs are £100K, stemming
solely from one-off familiarisation with new regulatory material.

45
Table 1: Summary of costs and benefits (10 years, present values, upper and
lower bounds)
Group Affected Item Description PV Benefits PV Costs
Firms Familiarisation Costs £100K
Investors Reduction in fees £27m-57m
Total Impacts £27m-57m £100K
Net Impact +£27m-57m NPV
7. By introducing the possibility of trading funds using D2F channel, we are creating a
framework for increased innovation, efficiency and competitiveness in UK financial
markets, supporting our Secondary International Competitiveness and Growth
objective.
8. Overall, we anticipate that allowing investors to trade directly with funds delivers
significant net benefits and is proportionate. The proposed rules and guidance will
introduce higher efficiency and lower risks for investors who choose to purchase funds
whilst Fund managers will benefit from reduced risk D2F. We also estimate benefits as
being more substantial than familiarisation costs to funds for those funds that choose to
adopt D2F.
Introduction
9. The Financial Services and Markets Act (FSMA), as amended by the Financial Services
Act 2012, requires us to publish a cost benefit analysis (CBA) of our proposed rules.
Specifically, section 138I requires us to publish a CBA of proposed rules, defined as
‘an analysis of the costs, together with an analysis of the benefits that will arise if the
proposed rules are made’.
10. This CBA quantifies the costs and benefits of introducing an optional new model for
dealing in units of authorised funds, called Direct to Fund (D2F). D2F can be used by all
authorised funds. It will offer a more efficient, streamlined process. This simplification
may encourage take up of fund tokenisation. Our CBA is based on an assessment of
how the proposed model alters operational processes within Authorised Fund Managers
(AFMs), and how these changes might alter consumer outcomes.
11. This CBA has the following structure:
• The market
• Problem and rationale for intervention
• Our proposed intervention
• Options assessment
• Baseline and key assumptions
• Benefits

46
• Costs
• Competition assessment and wider economic impacts
• Monitoring and evaluation
The Market
12. This section describes the existing fund marketplace (both globally and within the UK),
including trends we have observed in recent years.
Funds in Existing Financial Markets
13. A fund is an investment vehicle that pools together money from many different
investors. It is operated by a fund manager whose duties include choosing underlying
investments on behalf of investors. Funds can invest in various types of assets, such as
shares, bonds or property, depending on the fund’s investment objective.
14. Retail and institutional investors use funds to generate a return on their investments.
Retail consumers may use funds to save for retirement, support a large purchase or
earn higher returns than holding their assets in a savings account. Institutional investors
typically use funds to get better returns on money that otherwise would be stored as
cash or to meet future expected or potential liabilities and cash flow requirements.
15. According to the Investment Association (IA), the net asset value of UK authorised funds
(funds regulated by the FCA, including retail products) in 2023 was £1.46 trillion. The UK
is the second largest investment management centre in the world, only after the US and
manages 37% of all assets managed in Europe. Authorised funds, as a low-cost pooled
vehicle, play a key role in the distributing investment management services. Pooled
investment vehicles allow investors, such as retail consumers, for whom it may not be
cost efficient to appoint an individual portfolio manager, to benefit from professional
investment management services.
16. The chart below shows the total value of authorised funds by type of asset, including
holdings in fund of funds. The overall value of authorised funds fluctuates based on
both investor flows and broader macroeconomic conditions. The value of assets has
increased from approximately £0.9 trillion in 2015 to almost £1.5trn in 2024, stabilising
after global market falls in 2022 linked to expectations regarding higher interest rates
and the impact it would have on consumers, businesses, stock and bond prices.

47
-
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
£ Trillions
Value of UK authorised funds (by asset)
Equity Fixed Income Money Market Mixed Asset Property Other
Value of UK authorised funds by asset. The figure includes double counting of investments through funds of funds
(FOFs). Assets are counted first as investment in a FOF and then as FOF investment in other funds. This gives the best
asset breakdown of investors’ choices since the Investment Association cannot identify FOFs holdings of funds by
asset.
Direct to Fund (D2F) model and tokenisation
17. In the UK, under current market practice, investors who buy or sell units in an authorised
fund do so through the AFM, which acts as principal. That is, the AFM is the counterparty
to any transaction. The fund manager maintains a float (known as a box) of units to
facilitate this and initiates a separate transaction with the fund or depositary to manage
the amount of units it holds in the box. Under this model the fund and its investors have
exposure to the manager when dealing. So money received by the manager must be
segregated and treated as client money, subject to the exemptions in CASS 7.11.21 (R).
18. Authorised fund managers commonly outsource unit dealing processes and operation
of the register of investors in the fund to an administrator, commonly known as a
registrar in the UK or transfer agent internationally. Fees for this service may be based
on a fixed annual amount per unit holder. However, increasingly, pricing reflects the level
of intermediation in fund distribution and may instead be calculated as a percentage of
the fund’s Net Asset Value (NAV). Many firms also operate an ‘all-in-fee’ model whereby
charges are included within broader fund administration and investment management
charges. Where fees are disclosed discretely, our assessment of the market suggests
that prices are typically within the range of £10 per unit holder per annum (+VAT), or
between 0.07% and 0.15% of fund NAV (Net Asset Value). We have obtained this data
from a sample of scheme prospectuses available online. Using this as proxy for the costs
of unit dealing we estimate that costs associated with the operation of fund registers
were between £1bn and £2.2bn last year.

48
19. In the D2F model, cash moves directly between the fund and unitholders. This removes
the interim exposure, the associated risks, and the resulting requirement for the
manager to apply our client money rules. Instead, cash received by the fund forms part
of scheme property and is held in accordance with the standard rules set out in the
COLL. These rules cover eligible banks, reconciliations and depositary oversight.
20. D2F may further act as an enabler of fund tokenisation. Tokenisation is a way of
representing an asset, or ownership of an asset, by recording it on distributed ledger
technology (DLT). DLT is a digital system that records details of transactions in multiple
locations at the same time, rather than on a centralised database.
21. The elimination of back-to-back transactions represents a significant efficiency gain
in fund operations. This benefit applies equally in a tokenised fund environment, where
minting and burning tokens to facilitate primary unit transactions can occur without first
transferring units from the fund manager alongside corresponding payments.
22. Tokenisation was the second most cited initiative in feedback to our discussion paper
‘Updating and Improving the UK regime for Asset Management’ (DP23/2). Fund
managers are interested in integrating DLT because it has the potential to automate
administrative processes or provide new avenues for distribution. By reducing
intermediaries, tokenisation offers the opportunity for investment firms will be able to
free up resources and spend them on productive projects.
23. Fund tokenisation is expected to develop rapidly in terms of assets under management.
PwC reported that AuM (Assets under Management) are projected to increase from
$40bn in 2023 to more than $317bn by 2028. This would still represent a very small
fraction (0.12%) of total assets traded in conventional financial markets worldwide
today, $271tr (data is coming MSCI). The majority of tokenisation projects are limited to
experimental pilots with few products operated today at commercial scale.
Problem and rationale for intervention
24. Ineffective or outdated regulation can be harmful and lead to poorer outcomes for firms
and investors by preventing them from utilising efficiencies in new technologies. In this
case, existing FCA regulation restricts firms’ ability to adopt more efficient methods
of dealing, as all funds are required to deal with an authorised fund manager. Allowing
broader use of direct dealing, provides an optional alternative process for dealing in units
of authorised funds. Its introduction provides firms with flexibility to use a model more
consistent with international practice. This results in harm to market integrity and UK
international competitiveness through:
• Higher prices. The costs of unit dealing and the operation of a fund’s register are,
ultimately, borne by customers. If regulation forces funds to keep an additional
operational step, it could increase costs and so prices borne by customers.
• Reduced efficiency and competitiveness. The existing model is largely unique to
the UK. According to the Investment Association (IA), its increased administrative
burden, heightened regulatory risk due to the application of CASS rules, and higher
capital requirements for AFM to provide unexpected fund liquidity place the UK

49
industry at a competitive disadvantage. These additional operational layers also
introduce inefficiencies into the process.
D2F may allow some fund managers to apply global or EU operating models,
increasing efficiencies from tokenisation, creating future business models and
improving international operability.
• Risk for investors. Ineffective regulation poses a potential risk to investors as
reported on the IA paper on D2F. At present, investors typically deal with the AFM
as principal. If the AFM defaults, payments between fund managers and investors
may be at risk, where cash is held other than as client money through exemptions
in existing CASS rules. Investors with funds in the client money account may face
losses if the bank or banks holding client money default. In the D2F structure,
investors and the fund are exposed to each other in deals, and the fund is exposed
to the bank holding cash. Our proposal includes controls to manage and mitigate
these risks.
25. The primary driver of the above harms is a regulatory failure, in which our current rules
do not allow firms to take advantage of innovation in fund management technologies.
This results in a reliance on intermediaries which could be avoided, creating higher costs
and reduced efficiencies.
26. Our regulatory environment inhibits innovation because it does not allow the adoption
of tokenisation into funds. It undermines UK competitiveness to compete with other
economies who are starting to adopt this technology, with the risk of harmful side
effects for the broader UK economy. Lower market efficiency could capture resources
that could be freed and reinvested into productive alternatives. D2F offers flexibility
for firms to choose the most appropriate dealing model for a given fund. It may also
assist in take up of tokenisation. Regulatory barriers to each of these could weaken the
international competitiveness of the UK relative to peers, as well as influence market
liquidity and efficiency.
Our Proposed Intervention
27. We are designing a regime based on our operational and strategic objectives, with a view
to mitigate the risks relying on AFM may present. These are:
a. Protecting Consumers
b. Supporting Market Integrity
c. Promoting Competition
28. By providing regulatory clarity to firms, we are aiming to support market integrity and
promote fair and effective competition. Our intervention also furthers our Secondary
International Competitiveness and Growth Objective, through creating a more efficient
fund market.
29. This intervention aims to enhance market quality, which we anticipate will ultimately
result in improved consumer outcomes. Direct dealing will not generally be investor

50
visible, but by providing firms more flexibility to reduce overheads and operational
processes, transactions could be finalised quicker and reduce the amount of fees
paid by investors. Where payments are channelled through the AFM today, the AFM
is exposed to counterparty risk if 3rd parties do not complete settlement by the
designated settlement date. In the D2F model, we will still require AFMs to meet interest
charges and costs incurred by the fund if unpaid deals are not cancelled. However, direct
principal risk is removed which will ease capital requirements for AFMs.
30. In addition, our intervention seeks to improve competition in UK asset management
markets, through enabling the use of fund tokenisation market, which could result
in more innovative and efficient products. By lowering the costs to set up a fund, we
anticipate our intervention will lower barriers to entry.
31. At the same time, higher levels of efficiency permitted through the D2F model, could
also boost the UK’s international competitiveness by reducing fees and freeing up firm
resources that could be invested elsewhere. Such measures could collectively assist in
the economic growth of the UK in the medium to long term. This policy aligns the UK
with international standards and supporting our Secondary Objective.
Causal Chain
32. Through introducing a new way for authorised funds to bypass the AFM through D2F, we
anticipate an increase in adoption of fund tokenisation. This in turn will allow for funds to
reduce costs and create further incentives to innovate using DLT (Decentralised Ledger
Technology). We expect this to create more efficient fund management within the UK,
supporting UK international competitiveness. Traditional funds will likely also adopt this
system and reduce costs, free-up resources, and increase efficiency.
33. Our causal chain demonstrates how we expect our regulatory intervention results in
changes in the market which have knock-on effects which ultimately result in reduce
harm for consumers. Nodes within the chain have been informed by relevant academic
literature and our understanding of the market that we have established through our
firm engagement.
34. Our key assumptions are:
• Firms change their behaviour as a result of our intervention, including adjusting
business models in line with our proposed requirements
• Introducing regulation provides greater clarity and regulatory certainty to firms,
which results in increased market entry.
• Direct dealing funds result in lower costs for fund management, without creating
additional risks or burdens for firms.

51
4
Proposal: Firms make broader use
of direct dealing
HARM REDUCED
Increased use of fund tokenisation and higher firm entry
thanks to simpler requirements. Increased efficiency,
entry rates and lower fees in traditional funds
Firms switch to D2F
Improved international
competitiveness due lower
barriers. The UK attracts
traditional funds
UK authorised funds adopt
tokenisation and the UK
becomes a lead domicile for
such funds
Lower fees for investors and
more efficient trading
Lower risk for investors and
funds
Interventions
Firm changes
FCA outcomes
Outcomes
Drivers of
international
growth and
competitiveness
Effect on
international
growth and
competitiveness
Options Assessment
35. Before producing the rule detailed on the next section, we considered if there were any
alternative options which could enable us to achieve our same intended outcomes. The
primary alternative option we examined was:
• Issuance of waivers on COLL sourcebook: COLL (Collective Investment
Schemes) provides a regime of product regulation for authorised funds. This
sets appropriate standards of protection for investors by specifying a number
of features of those products and how they are to be operated. By issuing
individualised waivers, we could allow funds to adopt D2F at FCA discretion.
36. The benefits from this option are that it would not require us to change our existing
regulation to implement, which could reduce familiarisation costs to firms from
engaging and responding to our CP, in addition to speeding up the possibility for D2F and
tokenisation adoption. However, as COLL only considers direct dealing as an exceptional
event, we agreed with the industry request to develop a specific regime for direct
dealing. In amending our rules, we are confirming fund managers will have flexibility to
use the model most appropriate for a given fund and its investors. This is preferable than
the alternative option because it speeds the adoption of D2F and they are not subject to
an application process.

52
Baseline and Key Assumptions
37. We assess the impacts of our proposed new rules against a baseline, or ‘counterfactual’
scenario, which describes what we expect will happen in the absence of our proposed
policy change. We compare a ‘future’ under the new policy, with an alternative ‘future’
without the new policy. We construct the baseline based on evidence of the current
situation in the sector and extending this into the future.
38. The baseline for our CBA in this CP is a scenario in which we do not intervene with
our proposals. If we choose not to intervene, firms would not benefit from the
additional flexibility, i.e. the possibility of using D2F instead of existing processes.
We want to intervene so that firms can implement D2F at the earliest opportunity
thereby promoting competition and innovation in the interest of customers and Uk
competitiveness.
39. Our baseline framework assumes that without our proposed intervention tokenisation
adoption across the UK remains limited, but is more widely adopted elsewhere. Under
this scenario, the UK may lose competitiveness in fund and asset management relative
to its current position as a global leader. This is the case because other countries are
creating the regulation to allow for the adoption of tokenisation technology.
40. We do not quantify these wider economic impacts because despite having the tools, we
consider that it is not proportionate.
41. The primary costs for firms from the introduction of D2F model are their familiarisation
costs from building direct dealing platforms and adjusting their business model
accordingly. These one-off infrastructure costs to firms may be significant and its
success is not guaranteed.
42. As our proposed regulatory changes permit firms to engage in D2F but do not require
them to, these costs will be elective for firms, and we assume firms will only incur
these costs if the business model case for direct dealing supports the high-up front
investment. That is, discounted longer-term cost savings in operational expenditure
as a result of direct dealing will exceed the initial one-off costs to introduce operational
platforms. We account for this uncertainty through a conservative assessment in the
number of funds adopting direct dealing over the course of the appraisal period, as
outlined below.
Key Assumptions
43. The analysis in this annex is based on a number of key assumptions which we set out
below:
• We assume D2F is initially adopted by a small number of UK funds, following our
intervention, growing to 33% of the net asset value in UK authorised funds by the
end of our 10-year appraisal period. This estimate is based on our engagement
with the industry and the responses to our DP23/2. We welcome feedback on this
assumption

53
• We assume the total value of UK authorised funds is £1.5tr and remains constant
throughout our appraisal period. This assumption aims to provide a conservative
estimate that delivers a lower bound for our benefit estimation.
• We assume the firms affected by the policy are those managing authorised AIFs
(Alternative Investment Funds) and/or UK UCITS. A UK UCITS fund (Undertakings
for the Collective Investment in Transferable Securities) is a fund that complies
with our regulatory environment for funds and can be promoted to retail investors.
Authorised AIF includes UK non-UCITS retail schemes (NURS) which offer more
flexible investment and borrowing powers than available under the UCITS regime.
we estimate 132 firms are in scope based on our Standardised Costs Model (SCM).
• Firm populations can be estimated based on firms currently authorised by us and
which may seek to introduce the proposed direct dealing model.
• D2F will remove exposure to the fund manager in authorised fund unit deals, and
introduce a more efficient regime, aligned with international practice. We assume
this will improve competition, allowing global asset managers to adapt global
processes more readily to UK operations and benefit smaller managers who may
be unable to secure overdraft facilities.
• Fees charged to funds for register and transfer agents are estimated at 0.07%-
0.15% of total AUM for the AFM model.
• We expect that by adopting D2F, all UK authorised funds will reduce ongoing costs
associated with operating fund registers and dealing processes by 2.5%.
• We assume that competition in the funds markets means cost savings in asset
manager operational expenditure are passed on to clients (both retail consumers
and institutional investors)
44. And use the following terms:
• Unless stated otherwise, all references to ‘average’ are the mean average.
• All price estimates are provided in 2025 figures
Summary of impacts
45. Over our 10-year appraisal period, we estimate a net benefit (PV-adjusted) ranging
between £27m and £57m. We approximate these benefits through a 2.5% reduction
in costs associated with operating the fund register. While costs reduction is small, the
aggregate size of the UK funds market drives the total net benefit we anticipate accruing
to firms.

54
46. Total costs are £100K coming from one-off familiarisation costs associated with our
proposed new rules.
Group Affected Item Description PV Benefits PV Costs
Firms Familiarisation Costs £100K
Investors Reduction in fees £27m-57m
Total Impacts £27m-57m £100K
Net Impact +£27m-57m NPV
Benefits
47. The D2F model reduces the cost of operating UK authorised funds through removing
box management overheads and reduces the capital costs to fund managers associated
with acting as principal.
48. We assume 1% of existing funds will start using D2F in the first year, reflecting industry
feedback that early adopters will be those with a specific driver to use the new
alternative model. This may include firms piloting D2F in products such as institutional
LTAF (Long Term Asset Funds) with infrequent dealing and a small investor base.
49. We then assume this percentage increases gradually every year until reaching 33% of
fund by the end of our appraisal period. This reflects our expectation of a general trend
for firms to migrate to D2F given the simpler operational processes and resultant lower
costs, as opportunities arise. This could include the launch of a new fund range, or a
new firm entering the UK wanting to use a model consistent with operations elsewhere.
According to this assumption, the expected value of funds to be traded using D2F to be
£14.5bn.
50. Using registrar and transfer agent fees as a proxy for costs associated with unit dealing,
we estimate potential average cost savings of between £3m and £6.6m annually. The
bounds are determined by the fact that fees paid by investors range between 0.07%
and 0.15% of NAV. These arise due to lower asset management paid to funds using the
direct dealing model.
51. Across our appraisal period is 10 years, and we have applied a discount factor of 3.5%,
generating total discounted benefits ranging between £27m and £57m.
Annual benefit (average*) Discounted total benefits
Market benefits from use of
Direct dealing
£3m- £6.6m £27m- £57m
*Average benefits per year dividing by the appropriate annuity rate

55
Illustrative benefit to hypothetical UK fund
52. The benefits above accrue across market participants and are aggregated across UK
funds. To contextualise this within the context of an individual UK fund, we consider the
following hypothetical example of a fund operating in the UK with £10bn AUM.
53. Based on our understanding of transfer agent fees, we estimate the fund is spending
approximately £7m- £15m annually on costs associated with maintaining the fund
register and dealing processes.
54. If the fund were to move to a direct dealing model, a hypothetical 2.5% reduction in such
costs could result in cost savings of between £0.2m - £0.4m annually. Over the course
of our 10-year appraisal period, and assuming the fund immediately moved to the D2F
model, it could be expected to see reduced costs of between £1.8m- £3.8m in total.
Costs
55. We assume the only costs associated with implementing D2F are familiarisation costs,
i.e. the cost to firms and service providers of reading and assessing the updated
regulatory material. This is a one-off cost arising on publication.
56. There are no further costs associated with this policy for the purposes of this CBA as
implementing D2F is optional. The new model is not a mandatory change that firms
operating or providing services to authorised funds must comply with. If an AFM wants
to use D2F, or its service providers, will need to provide the appropriate platforms and
product offerings, and necessary governance, control environment, and updates to legal
documentation. However, firms will only do so having concluded it is the best model for
a given fund and its investor base or target market.
57. Total costs are estimated using our standardised cost model (SCM), assuming familiarisation
costs from firms reading a standard legal document of 50 pages in length. We assume a total
of 132 firms are potentially affected. That is, 13 large, 47 medium and 72 small firms. The
scope of the proposals is limited to those firms managing authorised AIFs and a UK UCITS.
58. Total familiarisation costs are estimated at £100K. This figure is small and despite the
uncertainty around our benefits, only a small number of firms would need to take up this
new channel for the benefits to outweigh the costs.
Regulatory
requirement
Transition
costs (per
firm)
Transition
costs
(population)
Ongoing
Costs
(per firm)
Ongoing
Costs
(population)
Total
Population
cost
Familiarisation
costs
£1,500
(average*)
£100k £0 £0 £100K
Total Costs £1,500
(average*)
£100k £0 £0 £100K
*Firm average is based on the number of firms impacted, accounting for their size

56
Competition and Wider Economic Impacts
Competition Impacts
59. In terms of competition, funds adopting D2F may have an first mover advantage with
respect to competing products. However, the ability to reduce fees and attract new
clients through this will be offset by how far that first movers may have higher costs
from developing investor and market understanding of the new model. Early adopters
may also incur a greater proportion of the costs of service providers developing new
platforms, pending broader demand.
60. Where firms combine implementation of D2F with platform changes for tokenisation
and T+1 settlement, there may be some economy in product development. T+1
settlement is a shortened trade cycle in financial markets where a buyer receives a
security, and a seller receives payment one business day after the original trade date
(T). This transition from the older T+2 cycle aims to increase market efficiency, improve
liquidity, reduce risks for market participants, and align with evolving financial market and
technology standards.
61. First movers in tokenisation and D2F may gain a cumulative competitive advantage,
especially if tokenisation becomes widespread across investors.
62. We consider the risks of market concentration and inefficiencies to be small. Instead,
we anticipate the broader package of proposals and discussion material in this paper
will promote competition in the sector. Investors should expect an increasingly dynamic
market for authorised funds, with healthy competition between asset managers so that
consumers share in any realised benefits of tokenisation and D2F.
Wider Economic Impacts
63. The “Direct to Fund” proposals, which should create some efficiencies for funds
reducing reliance on intermediaries and providing regulatory clarity for firms. This
intervention reflects regulatory innovation and a rebalanced risk approach, enabling
firms to adopt more efficient processes and explore tokenisation while maintaining
appropriate safeguards.
64. By simplifying fund dealing and supporting tokenisation, the proposals are expected to
increase FS productivity through lower operational costs and streamlined processes.
They will also help promote competition and innovation, as new entrants can launch
tokenised funds more easily, and enhance international competitiveness by aligning
UK practices with global standards and attracting foreign investment.
65. Broader economic impacts include improved domestic capital allocation, as tokenised
funds and efficient dealing models free resources for productive investment, and
strengthen the role of consumers as economic agents, responding to demand for
instant, app-based investment products. It also helps support risk allocation and
mitigation, as operational risks tied to intermediaries are reduced.

57
66. Collectively, these effects contribute to higher productivity and competitiveness in
the UK financial sector, reinforcing the country’s position as a global financial centre.
They will generate positive spillovers into innovation and technology adoption,
including distributed ledger applications, and create new jobs in fund management and
technology. Improved liquidity and investment flows will support long-term economic
growth and resilience.
Monitoring and evaluation
67. To evaluate the success of our policy, we will examine the adoption rate of D2F on UK
authorised funds, through our normal authorisation and supervision processes. We
believe that a higher use of D2F will translate into lower fees for investors, as firms can
select the optimal model for a given fund, and support the adoption of tokenisation.
68. Depending on data availability, we will look to test how D2F and tokenisation affect
consumer charges over the longer term. We will also consider how the UK compares
relative against other international competitors to see if our attractiveness improves
after this policy is released.
69. Given that adopting D2F will be optional for firms, we do not propose any active
monitoring strategy.
Question 33: Do you agree with our assumptions and findings as set
out in this CBA on the relative costs and benefits of the
proposals contained in this consultation paper? Please give
your reasons.

58
Annex 4
Compatibility statement
Compliance with legal requirements
1. This Annex records the FCA’s compliance with a number of legal requirements
applicable to the proposals in this consultation, including an explanation of the FCA’s
reasons for concluding that our proposals in this consultation are compatible with
certain requirements under the Financial Services and Markets Act 2000 (FSMA).
2. When consulting on new rules, the FCA is required by section 138I(2)(d) FSMA to
include an explanation of why it believes making the proposed rules (a) is compatible
with its general duty, under section 1B(1) FSMA, so far as reasonably possible, to act
in a way which is compatible with its strategic objective and advances one or more of
its operational objectives, (b) so far as reasonably possible, advances the secondary
international competitiveness and growth objective, under section 1B(4A) FSMA, and
(c) complies with its general duty under section 1B(5)(a) FSMA to have regard to the
regulatory principles in section 3B FSMA. The FCA is also required by section 138K(2)
FSMA to state its opinion on whether the proposed rules will have a significantly
different impact on mutual societies as opposed to other authorised persons.
3. This Annex also sets out the FCA’s view of how the proposed rules are compatible with
the duty on the FCA to discharge its general functions (which include rule-making) in a
way which promotes effective competition in the interests of consumers (section 1B(4)).
This duty applies in so far as promoting competition is compatible with advancing the
FCA’s consumer protection and/or integrity objectives.
4. In addition, this Annex explains how we have considered the recommendations made by
the Treasury under s 1JA FSMA about aspects of the economic policy of His Majesty’s
Government to which we should have regard in connection with our general duties.
5. This Annex includes our assessment of the equality and diversity implications of these
proposals.
6. Under the Legislative and Regulatory Reform Act 2006 (LRRA) the FCA is subject to
requirements to have regard to a number of high-level ‘Principles’ in the exercise of
some of our regulatory functions and to have regard to a ‘Regulators’ Code’ when
determining general policies and principles and giving general guidance (but not when
exercising other legislative functions like making rules). This Annex sets out how we have
complied with requirements under the LRRA.

59
The FCA’s objectives and regulatory principles: Compatibility
statement
7. The proposals set out in this consultation are primarily intended to advance the FCA’s
operational objectives of:
• Delivering consumer protection – securing an appropriate degree of protection for
consumers
• Enhancing market integrity – protecting and enhancing the integrity of the UK
financial system
• Building competitive markets – promoting effective competition in the interests of
consumers.
8. The consultation aims to ensure that the relevant market, funds and asset
management, functions well by providing firms with the ability to innovate and operate
funds in the most efficient manner, while ensuring good consumer outcomes. We set
out how we consider our proposals advance our operational objectives in more detail
in paragraphs 1.13 to 1.17 of this consultation, including how these promote effective
competition in the interests of consumers and secure an appropriate degree of
protection for consumers.
9. They are also relevant to the FCA’s secondary objective to facilitate the international
competitiveness and growth of the UK economy in the medium to long term (subject
to alignment with international standards) through promoting innovation and improving
confidence in the UK as a fund domicile of choice for tokenised and conventional funds,
as set out in paragraph 1.2 to 1.4.
10. In preparing the proposals set out in this consultation, the FCA has had regard to the
regulatory principles set out in s 3B FSMA.
The need to use our resources in the most efficient and economic way
11. These proposals will help firms seeking to launch tokenised products, and help ourselves
and other supervisors in determining how to prioritise future regulatory change within
our authorised fund regime and work with industry participants, trade bodies and the UK
Government as we progress a broader digitalisation strategy.
12. We could set out our expectations on fund tokenisation through our ongoing
engagement with the industry and trade bodies. However, consulting on our proposals
provides greater certainty to the industry, and showcases the FCA as a leading thought
leader in innovation, while a discussion paper allows for greater input from firms and will
provide the necessary feedback to support tokenisation and drive innovation.
13. The COLL sourcebook already envisages direct dealing with the fund or depositary as
an exceptional event, but does not currently support it as the sole option for authorised
retail funds. We have already been approached by firms seeking waivers of existing
rules to use Direct 2 Fund but do not believe this provides adequate opportunity for
stakeholder input.

60
The principle that a burden or restriction should be proportionate to the benefits
14. 1We have carefully considered the proportionality of our proposals, including through
consultation with internal and external stakeholders throughout the development of our
proposals.
15. The proposals may require firms to make changes, with associated costs, where they
operate authorised funds or provide services to firms who do. The broad package of
changes in this paper are optional and firms can continue to use existing dealing models
and operate conventional funds. We consider that our proposals are proportionate and
the benefits outweigh the costs. The CBA in Annex 3 sets out the costs and benefits of
our proposals.
The need to contribute towards achieving compliance by the Secretary of State with
section 1 of the Climate Change Act 2008 (UK net zero emissions target) and section
5 of the Environment Act 2021 (environmental targets)
16. On balance, we do not think there is any contribution the proposals outlined in this
consultation can make to these targets. We acknowledge that some public networks
operate using “proof of work” consensus methods that are energy intensive. However,
these networks are not generally suitable for record keeping and do not provide the
virtual machine functionality necessary to support smart contracts and tokenisation
of financial services products. Fund managers are subject to the ESG Sourcebook, the
requirements of which include an obligation on firms to ensure that sustainability claims
are fair, clear and not misleading, and that they do not use a sustainability label unless
they meet the relevant conditions. In Chapter 5 of CP25/25, we proposed to apply
the ESG Sourcebook to cryptoasset firms in the same way as it applies generally to all
FSMA-authorised firms.
The general principle that consumers should take responsibility for their decisions
17. Our proposals illustrate how firms can comply with our existing rules and standards for
the operation of fund registers, and our discussion chapter explores how regulation may
evolve to support and protect consumers in more expansive tokenisation eco-systems.
We are conducting joint work with UK and international trade bodies in consultation with
consumer representatives to ensure that investors share in the benefits of tokenisation.
18. Our proposals do not inhibit consumers’ ability to access a range of products, nor do
they seek to remove from consumers the need to take responsibility for their own
decisions in relation to their use of regulated and unregulated products and services.
The responsibilities of senior management
19. We consider that our proposals are likely to enhance the ability of senior management
of AFMs to take responsibility for their decisions by clarifying how we will approach
supervision and authorisation of funds.
The desirability of recognising differences in the nature of, and objectives of,
businesses carried on by different persons including mutual societies and other kinds
of business organisation

61
20. Our proposals are specifically designed to be proportionate and build on existing
obligations in our Handbook. Our proposals are broadly optional and will apply only to
firms wishing to operate tokenised products or use direct dealing models.
The desirability of publishing information relating to persons subject to requirements
imposed under FSMA, or requiring them to publish information
21. We have had regard to this principle and believe our proposals are compatible with it. Our
proposals operate within the existing authorised fund regime.
The principle that we should exercise of our functions as transparently as possible
22. We have developed the proposals in this consultation/discussion paper in close
collaboration with industry and other external and internal stakeholders. Our proposals
are based on requests from industry and we have consulted informally with firms and
trade bodies prior to publication.
In formulating these proposals, the FCA has had regard to the importance of
taking action intended to minimise the extent to which it is possible for a business
carried on (i) by an authorised person or a recognised investment exchange; or (ii) in
contravention of the general prohibition, to be used for a purpose connected with
financial crime (as required by s 1B(5)(b) FSMA).
23. Our proposals are intended to support firms to act as a strong line of defence against
financial crime. For instance, we have recognised that our requirements may interact
with requirements under financial crime legislation in our proposals for direct dealing.
Expected effect on mutual societies
24. The FCA does not expect the proposals in this paper to have a significantly different
impact on mutual societies, given the sectoral limit to fund and asset management.
Compatibility with the duty to promote effective competition
in the interests of consumers
25. In preparing the proposals as set out in this consultation, we have had regard to the
FCA’s duty to promote effective competition in the interests of consumers. This is set
out in more detail in paragraphs 1.13 to 1.14 of the Consultation Paper.
Equality and diversity
26. We are required under the Equality Act 2010 in exercising our functions to ‘have due
regard’ to the need to eliminate discrimination, harassment, victimisation and any
other conduct prohibited by or under the Act, advance equality of opportunity between
persons who share a relevant protected characteristic and those who do not, to and

62
foster good relations between people who share a protected characteristic and those
who do not.
27. As part of this, we ensure the equality and diversity implications of any new policy
proposals are considered. The outcome of our consideration in relation to these matters
in this case is stated in paragraph 1.29 to 1.31 of this Consultation Paper.
Legislative and Regulatory Reform Act 2006 (LRRA)
28. We have had regard to the principles in the LRRA and Regulators’ Code (together the
‘Principles’) for the parts of the proposals that consist of general policies, principles
or guidance. We consider that these parts of our proposals are compliant with the
five LRRA principles – that regulatory activities should be carried out in a way which is
transparent, accountable, proportionate, consistent and targeted only at cases in which
action is needed.
• Transparent – We are consulting on our proposed changes with industry to
articulate our proposals. Through consultation and pro-active engagement both
before and during consultation, we are being transparent and providing a simple
and straightforward way to engage with the regulated community.
• Accountable – We are consulting on these changes and will publish final rules after
considering all feedback received. We are acting within our statutory powers, rules
and processes.
• Proportionate – We recognise that firms may be required to make changes to how
they carry out their business and have provided for an implementation period to
give them time to do so. The CBA sets out further detail on the costs and benefits
of our proposals.
• Consistent – Our approach would apply in a consistent manner across firms
operating tokenised funds or implementing direct dealing models.
• Targeted – Our proposals will enhance our ability to provide targeted firm
engagement and consider how to best deploy our resources.
• Regulators’ Code – Our proposals are carried out in a way that supports firms
to comply and grow through our consideration of their feedback via the CP
and refining our proposals where necessary. Our CP, CBA, draft instrument,
accompanying annexes public communications and communications with firms
are provided in a simple, straightforward, transparent and clear way to help firms
meet their responsibilities.

63
Annex 5
Abbreviations used in this paper
Abbreviation Description
ACS Authorised Contractual Scheme
AFM Authorised fund manager
AGBR Advice Guidance Boundary Review
AI Artificial intelligence
AIF Alternative Investment Fund
AIFM Alternative Investment Fund Manager
AML/CFT Anti-money laundering and counter terrorist financing
AMT UK Asset Management Taskforce
AUM Assets under management
AUT Authorised Unit Trust
CASS Client Assets Sourcebook
CBA Cost-benefit analysis
CBDC Central bank digital currency
CIS Collective investment scheme
COBS Conduct of Business Sourcebook
COLL Collective Investment Scheme Sourcebook
CP Consultation Paper
CRR Capital Requirement Regulation
CSA Credit Support Annex
CSD Central securities depositary

64
CSDR UK Central Securities Depositary Regulation
D2F Direct to fund
DAS Dormant Asset Scheme
DIGIT UK Digital Gilt Instrument Pilot
DLT Distributed ledger technology
DP Discussion Paper
DSD Digital securities depositary
DSS UK Digital Securities Sandbox
EMIR UK European Market Infrastructure Regulation
ERC Ethereum request for comment
ESG Environmental, social and governance
ETF Exchange traded fund
EU European Union
FCA Financial Conduct Authority
FLS Financial Lives Survey
FOS Financial Ombudsman Service
FSB Financial Stability Board
FSCS Financial Services Compensation Scheme
FSMA Financial Services and Markets Act
GFF Project Guardian Funds Framework
IA Investment Association
IAC Issues and Cancellations Account
ICMA International Capital Markets Association
ICVC Investment Company with Variable Capital

65
IF3 Investment Association’s Investment Fund 3.0 Lab
IM Initial margin
IMAS Investment Management Association of Singapore
IOSCO International Organisation of Securities Commissions
JMLSG Joint Money Laundering Steering Group
KYC Know your customer
LDI Liability-driven investment
LTAF Long-term Asset Fund
MAS Monetary Authority of Singapore
MLRs Money Laundering Regulations
MMF Money market fund
MPS Model portfolio service
NAV Net asset value
NFT Non-fungible token
NURS UK Non-UCITS Retail Scheme
OEIC Open-ended Investment Company
OTC Over-the-counter transaction
PRA Prudential Regulatory Authority
PS Policy Statement
QIS Qualified Investor Schemes
REIT Real estate investment trust
SCM Standardised cost model
STFM Short-term funding markets
SYSC
Senior Management Arrangements, Systems and Controls
Sourcebook

66
tMMF Tokenised money market fund
TWG UK Asset Management Taskforce Technology Working Group
UCITS UK Undertakings for Collective Investment in Transferable Securities
UMR Uncleared margin rules
VM Variation margin

Appendix 1
Draft Handbook text

FCA 2025/XX
COLLECTIVE INVESTMENT SCHEMES (USE OF DISTRIBUTED LEDGER
TECHNOLOGY IN AUTHORISED FUNDS) INSTRUMENT 2025
Powers exercised
A. The Financial Conduct Authority (“the FCA”) makes this instrument in the exercise
of its powers under section 139A (Power of the FCA to give guidance) of the
Financial Services and Markets Act 2000.
Commencement
B. This instrument comes into force on [date].
Amendments to the Handbook
C. The Collective Investment Schemes sourcebook (COLL) is amended in accordance
with the Annex to this instrument.
Citation
D. This instrument may be cited as the Collective Investment Schemes (Use of
Distributed Ledger Technology in Authorised Funds) Instrument 2025.
By order of the Board
[date]

FCA 2025/XX
Page 2 of 8
Annex
Amendments to the Collective Investment Scheme sourcebook (COLL)
In this Annex, underlining indicates new text and striking through indicates deleted text,
unless stated otherwise.
6 Operating duties and responsibilities
…
6.4 Title and registers
Application
6.4.1 R …
(2) COLL 6.4.9 COLL 6.4.9R (Plan registers) also applies to the ACD, any
other director and the depositary of an ICVC.
6.4.1A G COLL 6.4.10G (Using distributed ledger technology to operate the unitholder
register) and COLL 6 Annex 4 (Use of distributed ledger technology for the
operation and maintenance of registers for authorised funds) apply to the ACD
of an ICVC, the authorised fund manager of an AUT or ACS, and the
depositary of an authorised fund.
…
Plan registers
6.4.9 R …
Using distributed ledger technology to operate the unitholder register
6.4.10 G COLL 6 Annex 4 provides guidance on the use of distributed ledger
technology for the operation and maintenance of the register of an authorised
fund.
Insert the following new annex, COLL 6 Annex 4, after COLL 6 Annex 3 (Guidance notes on
UK UCITS management company of UCITS schemes: Derivative Use Report (FSA042:
UCITS)). All of the text is new and is not underlined.
6
Annex
4
Use of distributed ledger technology for the operation and maintenance of
registers for authorised funds
Application and purpose
6
Annex
4.1
G This Annex applies to the authorised fund manager and the depositary of an
AUT, ACS or ICVC which is a UCITS scheme or a non-UCITS retail scheme.

FCA 2025/XX
Page 3 of 8
6
Annex
4.2
G The guidance sets out the FCA’s views on how distributed ledger technology
(DLT) may be used in the operation and maintenance of the register of an
authorised fund. It also identifies a number of other matters which firms
should consider.
6
Annex
4.3
G The guidance is designed for authorised fund managers and depositaries of
authorised funds that are considering using DLT in this way.
6
Annex
4.4
G In COLL 6 Annex 4.34G to COLL 6 Annex 4.36G (Personal data and other
information recorded on a register using DLT), a reference to a ‘data
controller’ has the same meaning as in data protection legislation.
Powers of the responsible firm to make changes to the register
6
Annex
4.5
G (1) The rules in COLL and provisions of the OEIC Regulations require the
authorised fund manager or the depositary of the authorised fund to
establish and maintain a register of unitholders and ensure it is
complete and up to date.
(2) In this Annex, the person who is responsible for maintaining the
register for an authorised fund is referred to as the ‘responsible firm’.
6
Annex
4.6
G The requirements on the responsible firm to establish and maintain a register
in relation to a UCITS scheme or a non-UCITS retail scheme and keep it up to
date are set out in the following places:
(1) in relation to schemes that are AUTs or ACSs, COLL 6.4.4R (Register:
general requirements and contents); and
(2) in relation to an ICVC, paragraphs 1 and 3 of Schedule 3 to the OEIC
Regulations.
6
Annex
4.7
G To ensure that a register recorded on DLT is accurate and kept up to date, the
responsible firm will need to have the power and the ability to make
amendments to the register. Where the register is recorded on DLT, or utilises
records on DLT, the responsible firm will need to ensure that it can amend that
register as necessary without requiring the consent or agreement of any third
party. This does not extend to consents or agreements that support the normal
operation of the DLT network such as standard consensus mechanisms that
validate the authority of those providing instructions to the network.
6
Annex
4.8
G The ability of the responsible firm to make unilateral changes to such a
register may not exist by default. Such functionality could be delivered
through ‘smart contracts’ (see COLL 6 Annex 4.11G to COLL 6 Annex 4.15G
(Smart contracts and eligibility verification)), or through off-chain
functionality embedded into contractual terms with unitholders. The
responsible firm may also be able to effect updates to the register through
direct control of private keys, or a ‘master-node’ function.
Remedying changes to a register made by a third party

FCA 2025/XX
Page 4 of 8
6
Annex
4.9
G In addition to being used to operate a register, DLT may provide other
opportunities. For example, DLT may allow distributors or unitholders to
instruct or request amendments to the register. Records on DLT are formed by
reference to a series of transactions, including ‘burning’ and ‘minting’ tokens
representing units. DLT may allow distributors or unitholders to instruct or
request amendments to the register by submitting new records to the DLT.
6
Annex
4.10
G In the FCA’s view, the use of DLT which allows parties other than the
responsible firm to alter the register of an authorised fund can still be
compatible with the rules and the OEIC Regulations, provided the responsible
firm is able to make unilateral changes to the register – for example, to reverse
incorrect entries or create new ones. The responsible firm will also need to
have processes and procedures in place to identify incorrect entries and then
take remedial action to rectify them.
Smart contracts and eligibility verification
6
Annex
4.11
G The use of DLT may enable unitholders to transfer units between themselves
or to third parties. This gives rise to the risk the register is incomplete and not
up to date and also that a unit is transferred to a person who is not an eligible
unitholder under the rules, the Act, the instrument constituting the fund or the
prospectus.
6
Annex
4.12
G To address these risks, the responsible firm should consider whether additional
technology controls are required to ensure that the units are only transferred
to, from, or between eligible unitholders.
6
Annex
4.13
G One way in which such transfers of units could be controlled is through
arrangements whereby tokens are transferred only to known account numbers
that the authorised fund manager has verified as belonging to a person who is
an eligible unitholder. This is often referred to as ‘whitelisting’, or having an
‘allow list’ which references a set of addresses on the DLT enabled through
‘smart contracts’.
6
Annex
4.14
G Such functionality could also be used to keep track of a unitholder’s tax status
or their right to access certain classes of unit with a particular fee rate or
minimum investment limit. A firm may utilise accepted token standards that
allow for the verification of a unitholder’s identity and ensure that they have
the necessary capacity and credentials to hold units.
6
Annex
4.15
G Where the responsible firm relies on smart contracts for the verification of
unitholder addresses or the operation or management of the fund, these should
be regularly audited to meet evolving industry standards – for example, in
relation to security. This will help the responsible firm demonstrate
compliance with its obligations under Principle 2, which requires a firm to
conduct its business with due skill, care and diligence, and Principle 3, which
requires a firm to take reasonable care to organise and control its affairs
responsibly and effectively, with adequate risk management systems.

FCA 2025/XX
Page 5 of 8
Aggregation of units
6
Annex
4.16
G In broad terms the COLL rules and the OEIC Regulations also require that a
register specifies the number of units in each class held by a unitholder (see
COLL 6.4.4R(3)(b)) and paragraph 6(1)(c) of Schedule 3 to the OEIC
Regulations).
6
Annex
4.17
G This may be challenging where an authorised fund uses DLT, as each group of
network transactions are recorded as blocks on the blockchain and a
unitholder may hold positions through different wallets represented by
different addresses.
6
Annex
4.18
G To comply with the requirements referred to in COLL 6 Annex 4.16G, the
responsible firm should ensure there are systems in place (whether on or off
DLT) that can aggregate the information held on the DLT.
Management of network risks and outsourcing
6
Annex
4.19
G An interruption to a DLT network could prevent the authorised fund manager
or the responsible firm from accessing the register to look at the positions of
unitholders looking to redeem their units.
6
Annex
4.20
G As already noted, Principle 3 requires a firm to take reasonable care to
organise and control its affairs responsibly and effectively, with adequate risk
management systems. Firms are also required to assess and manage risks
including operational risks under the requirements in SYSC 7 (Risk control),
COLL 6.11 (Risk control and internal reporting), COLL 6.12 (Risk
management policy and risk measurement), FUND 3.7 (Risk management)
and articles 38 to 45 of the AIFMD level 2 regulation.
6
Annex
4.21
G To comply with these requirements, the FCA expects an authorised fund
manager to include within its risk management policies and procedures the
risks of DLT network outages. An authorised fund manager should ensure
that it has appropriate operational and business resilience plans that enable it
to manage such risks.
6
Annex
4.22
G The authorised fund manager should have alternative processes and
contingencies in place to allow for unitholders to buy, redeem or transfer their
units in the event of a network outage, including where use of fiat money or
off-chain processes may be necessary.
6
Annex
4.23
G In exceptional circumstances where the DLT network becomes unavailable for
an extended period of time, the authorised fund manager and the depositary
should have processes and procedures in place to allow the authorised fund to
be wound-up in accordance with the rules in COLL 7, by realising the assets
and distributing the proceeds to unitholders proportionately to their respective
interests.

FCA 2025/XX
Page 6 of 8
Inspection of the register
6
Annex
4.24
G COLL 6.4.4R(6)(c) requires the responsible firm to make the register available
for inspection free of charge in the United Kingdom. Paragraph 9 of Schedule
3 to the OEIC Regulations requires the register to be kept available for
inspection at the company’s head office or at another place in that part of the
United Kingdom where the company is registered which has been notified to
the FCA under regulation 36(3)(b).
6
Annex
4.25
G To comply with these requirements, a firm may use systems that combine both
on- and off-chain records where this cannot be achieved fully on DLT.
Public or consortium-based DLT networks
6
Annex
4.26
G Where public or consortium-based DLT networks are used for the issue and
settlement of units, these activities may take place overseas.
6
Annex
4.27
G The authorised fund manager and the depositary should consider whether
such arrangements give rise to conflicts of laws in relation to the scheme and
the particular arrangements proposed as regards the scheme’s domicile and its
jurisdiction or service.
Compliance with the Money Laundering Regulations
6
Annex
4.28
G Authorised fund managers and depositaries will need to ensure they comply
with the requirements of the Money Laundering Regulations and applicable
sanctions regimes.
6
Annex
4.29
G A firm may need to be registered as a cryptoasset business under the Money
Laundering Regulations where it is providing tokenised units in exchange for
cash and where this is recorded on a register that is operated through DLT.
6
Annex
4.30
G Where a firm is registered under the Money Laundering Regulations, the firm
will need to assess its exposure to the risk of money laundering. The firm
would need to put in place the necessary policies, controls and procedures to
mitigate the risks identified.
6
Annex
4.31
G A firm registered under the Money Laundering Regulations must take steps to
ensure it knows sufficient information about the identity of its customers, and
understand the nature of its expected relationship with those customers. When
undertaking certain activities in the course of business, a firm subject to the
Money Laundering Regulations must apply the customer due diligence
measures set out in regulation 28 of the Regulations where a firm establishes a
business relationship, carries out an occasional transaction, suspects money
laundering or terrorist financing or doubts the accuracy of customer
identification information.
6
Annex
4.32
G Customer due diligence measures include duties to identity customers, verify a
customer’s identity and assess, and where appropriate obtain information on,
the purpose and intended nature of the business relationship or occasional

FCA 2025/XX
Page 7 of 8
transaction. The information that a firm obtains from its customers will form
the basis for subsequent ongoing monitoring. A firm is also required to keep
records to demonstrate compliance.
6
Annex
4.33
G A firm could support its compliance with these requirements by having
appropriate controls in place such as ‘whitelisting’ where units can only be
transferred to known account numbers. However, systems which operate on
the basis of ‘blacklisting’ (or a ‘deny list’) for specified wallet addresses
would require additional verification procedures to ensure that the firm
complies with its obligations under the Money Laundering Regulations, the
rules and other legislation.
Personal data and other information recorded on a register using DLT
6
Annex
4.34
G Where an authorised fund uses DLT to operate the register, the responsible
firm and/or any other person who is the data controller of the personal data in
the register (if different) will need to ensure they comply with data protection
legislation. This is particularly the case where public networks are used, and
recorded information is not secured through encryption by default.
6
Annex
4.35
G When considering how to comply with the data protection legislation, the
responsible firm and/or any other person who is the data controller (if
different) should consider inherent risks such as the permanence of records on
the DLT network and that emerging technology such as quantum computing
could compromise information about unitholders.
6
Annex
4.36
G Information on the DLT may also allow trading strategies to be identified or
deduced. For example, where transactions in units are recorded or instructed
on DLT before execution at a future valuation point, it may be possible for
third parties to anticipate large deals in underlying securities. Where relevant,
a firm should consider the implications of this in product design and ongoing
liquidity monitoring controls and ensure that unitholders are not adversely
affected.
Amend the following text as shown.
8 Qualified investor schemes
…
8.5 Powers and responsibilities
…
8.5.8 R …
8.5.8A G (1) COLL 6 Annex 4 provides guidance on the use of distributed ledger
technology for the operation and maintenance of the register of an
authorised fund.

FCA 2025/XX
Page 8 of 8
(2) The guidance referred to in (1) applies to the authorised fund manager
and the depositary of an authorised fund subject to the rules in this
chapter as if references to a UCITS scheme or non-UCITS retail
scheme were references to a qualified investor scheme.
…
15 Long-term asset funds
…
15.7 Powers and responsibilities of the authorised fund manager and the
depositary
…
15.7.12 R …
15.7.12
A
G (1) COLL 6 Annex 4 provides guidance on the use of distributed ledger
technology for the operation and maintenance of the register of an
authorised fund.
(2) The guidance referred to in (1) applies to the authorised fund manager
and the depositary of an authorised fund subject to the rules in this
chapter as if references to a UCITS scheme or non-UCITS retail
scheme were references to a long-term asset fund.
…

FCA 2025/XX
COLLECTIVE INVESTMENT SCHEMES (DIRECT DEALING)
INSTRUMENT 2025
Powers exercised
A. The Financial Conduct Authority (“the FCA”) makes this instrument in the exercise
of the powers and related provisions in or under:
(1) the following sections of the Financial Services and Markets Act 2000 (“the
Act”):
(a) section 137A (The FCA’s general rules);
(b) section 137T (General supplementary powers);
(c) section 139A (Power of the FCA to give guidance);
(d) section 247 (Trust scheme rules); and
(e) section 261I (Contractual scheme rules);
(2) regulation 6(1) of the Open-Ended Investment Companies Regulations 2001
(SI 2001/1228); and
(3) the other rule and guidance making powers listed in Schedule 4 (Powers
exercised) to the General Provisions of the FCA’s Handbook.
B. The rule-making provisions listed above are specified for the purposes of section
138G(2) (Rule-making instruments) of the Act.
Commencement
C. This instrument comes into force on [date].
Amendments to the Handbook
D. The Glossary of definitions is amended in accordance with Annex A to this
instrument.
E. The Collective Investment Schemes sourcebook (COLL) is amended in accordance
with Annex B to this instrument.
Citation
F. This instrument may be cited as the Collective Investment Schemes (Direct Dealing)
Instrument 2025.
By order of the Board
[date]

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Annex A
Amendments to the Glossary of definitions
unless otherwise stated.
Insert the following new definitions in the appropriate alphabetical position. The text is not
underlined.
direct dealing (in COLL) the direct issue and cancellation of units in accordance with
COLL 6.2.7AR (Issue and cancellation of units by a direct dealing
scheme), or COLL 6.2.7AR as applied by COLL 8.5.10R (Issue and
cancellation of units) or COLL 15.8.5R (Issue and cancellation of
units).
direct dealing
scheme
an authorised fund or a sub-fund which:
(a) operates direct dealing arrangements only; and
(b) operates an issue and cancellation account.
issue and
cancellation
account
a bank account held by, or for or on behalf of, an authorised fund or a
sub-fund the purpose of which is to receive money for the issue of units
and to pay out money for the cancellation of units.
omnibus issue
and cancellation
account
an issue and cancellation account held by an authorised fund that is an
umbrella, for or on behalf of 2 or more sub-funds.
Amend the following definitions as shown.
limited
redemption
arrangements
(1) (in relation to an authorised fund that is not a direct dealing
scheme) the arrangements operated by an authorised fund
manager for the redemption of units in an authorised fund
where the authorised fund manager holds himself itself out to
redeem units in that scheme less frequently than twice in a
calendar month in accordance with COLL 6.2.19R (Limited
redemption); or
(2) (in relation to an authorised fund that is a direct dealing
scheme) the arrangements operated for the cancellation of units
less frequently than twice in a calendar month in accordance
with COLL 6.2.19R (Limited redemption).
redemption (1) (in relation to units in an authorised fund that is not a direct
dealing scheme) the purchase of them units from their holder
by the authorised fund manager acting as a principal; or

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(2) (in relation to units in an authorised fund that is a direct dealing
scheme) a cancellation of units by:
(a) the ICVC; or
(b) in relation to an AUT or ACS, the depositary or, where
permitted by the instrument constituting the fund, the
authorised fund manager.
sale (1) (in COLL) (in relation to units in an authorised fund that is not
a direct dealing scheme) the sale of units by the authorised fund
manager as principal;
(2) (in COLL) (in relation to units in an authorised fund that is a
direct dealing scheme) the issue of units by:
(a) the ICVC; or
(b) in relation to an AUT or ACS, the depositary or, where
permitted by the instrument constituting the fund, the

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Annex B
Amendments to the Collective Investment Schemes sourcebook (COLL)
unless stated otherwise.
3 Constitution
…
3.2 The instrument constituting the fund
…
Table: contents of the instrument constituting the fund
3.2.6 R This table belongs to COLL 3.2.4R (Matters which must be included in the
instrument constituting the fund).
…
Restrictions on sale, issue, cancellation and redemption
13 Where relevant, the restrictions which will apply in relation to the
sale, issue, cancellation and redemption of units under COLL
6.2.16R (Sale and redemption).
…
ACSs: UCITS and NURS eligible investors
…
27F A statement that the authorised contractual scheme manager must
redeem, or in respect of a direct dealing scheme effect the
cancellation of, units as soon as practicable after becoming aware
that those units are vested in anyone (whether as a result of
subscription or transfer of units) other than a person meeting the
criteria in paragraph 27E.
…
…
4 Investor Relations
…

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4.2 Pre-sale notifications
…
Table: contents of the prospectus
4.2.5 R This table belongs to COLL 4.2.2 R (Publishing the prospectus).
…
Characteristics of the units
…
5A ACSs: UCITS and NURS eligible investors
…
(b) A statement that the authorised contractual scheme manager
must redeem units redeem or effect the cancellation of units
as soon as practicable after becoming aware that those units
are vested in anyone (whether as a result of subscription or
transfer of units) other than a person meeting the criteria in
paragraph 5A(a).
…
Dealing
17 The following particulars:
(a) the procedures, the dealing periods and the circumstances in
which the authorised fund manager will effect:
…
(ii) any direct issue or cancellation of units:
(A) by an ICVC or in the case of an AUT or ACS
by the depositary of an AUT or ACS (as
appropriate) through the authorised fund
manager or, where permitted by the
instrument constituting the fund, the
authorised fund manager in accordance with
COLL 6.2.7R(2) (Issue Direct issue and
cancellation of units through an authorised
fund manager); or
(B) in relation to a direct dealing scheme, by an
ICVC or, for an AUT or ACS, the depositary

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or, where permitted by the instrument
constituting the fund, the authorised fund
manager in accordance with COLL 6.2.7AR
(Issue and cancellation of units by a direct
dealing scheme);
(b) the circumstances in which the redemption or cancellation of
units may be suspended;
…
(g) the circumstances and procedures for the limitation or
deferral of redemptions or cancellations in accordance with
COLL 6.2.19R (Limited redemption) or COLL 6.2.21R
(Deferred redemption);
(h) …
(i) whether a unitholder may effect transfer of title to units on
the authority of an electronic communication and if so the
conditions that must be satisfied in order to effect a transfer;
and
(j) if the authorised fund manager deals as principal in units of
the scheme and holds them for that purpose, a statement of
its policy for doing so and, where applicable:
…
(ii) a statement of non-accountability as referred to in
COLL 6.7.16G; and
(k) if an issue and cancellation account is used, an explanation
of the potential consequences if a person with whom money
in the issue and cancellation account has been placed on
deposit becomes insolvent or is otherwise be unable to make
payments.
…
…
5 Investment and borrowing powers
…
5.2 General investment powers and limits for UCITS schemes
…

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Valuation guidance
5.2.5 R …
5.2.5A G One of the effects of COLL 5.2.5R(1) is that for the purposes of this
chapter, sums in an issue and cancellation account which the authorised
fund manager reasonably believes are not attributable to a particular sub-
fund or scheme are excluded from the valuation of scheme property of any
sub-fund or scheme (as applicable) (see COLL 6.3.3R(3) (Valuation)).
…
Guidance on spread: general
5.2.11A G …
(3) In applying the spread limit of 20% in value of scheme property
which may consist of deposits with a single body, all uninvested
cash comprising capital property that the depositary holds should
be included in calculating the total sum of the deposits held by it
and other companies in its group on behalf of the scheme. [deleted]
…
Investment in collective investment schemes
5.2.13 R A UCITS scheme must not invest in units in a collective investment scheme
(“second scheme”) unless the second scheme satisfies all of the following
conditions, and provided that no more than 30% of the value of the UCITS
scheme scheme property is invested in second schemes within (1)(b) to (e):
…
…
5.5 Cash, borrowing, lending and other provisions
…
Cash and near cash
5.5.3 R (1) Cash and near cash must not be retained in the scheme property
except to the extent that this may reasonably be regarded as
necessary in order to enable:
…
(b) redemption of dealing in units; or
…
…

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General power to borrow
5.5.4 R …
(8) …
(9) Sums in an issue and cancellation account which the authorised
fund manager reasonably believes are not attributable to a particular
sub-fund or scheme are not to be used to repay money borrowed
under this rule.
Borrowing limits
…
5.5.5A G An authorised fund manager should ensure when calculating the
authorised fund’s borrowing for COLL 5.5.5R(1) that:
(1) the figure calculated is the total of all borrowing in all currencies by
the authorised fund; and
(2) long and short positions in different currencies are not netted off
against each other; and
(3) any borrowing in an issue and cancellation account is attributed to a
scheme or sub-fund but any sums in an issue and cancellation
account which the authorised fund manager reasonably believes are
not attributable to a particular sub-fund or scheme are excluded from
the value of the scheme property of any sub-fund or scheme (as
applicable).
…
5.6 Investment powers and borrowing limits for non-UCITS retail schemes
…
5.6.7A G …
be included in calculating the total sum of the deposits held by it on
behalf of the scheme. [deleted]
…
5.7 Investment powers and borrowing limits for NURS operating as FAIFs
…

FCA 2025/XX
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5.7.6 G …
be included in calculating the total sum of the deposits held by it on
behalf of the scheme. [deleted]
…
6 Operating duties and responsibilities
…
6.2 Dealing
…
Purpose
6.2.2 G …
(2) An authorised fund manager of an AUT, ACS or ICVC is
responsible for arranging for the issue and the cancellation of units
for the authorised fund. An authorised fund manager of an AUT,
ICVC or co-ownership scheme is permitted to sell and redeem units
for its own account. An authorised fund manager of a limited
partnership scheme is only permitted to sell and redeem units as
agent for the scheme. The rules in this section are intended to ensure
that the authorised fund manager treats the authorised fund and
unitholders fairly when dealing, or arranging for the issue or
cancellation of dealing in units, and treats clients fairly when they
purchase or sell deal in units.
(3) This section also sets out common standards for how the amounts in
relation to unit transactions are to be paid. These arrangements,
which may vary according to whether or not the authorised fund
manager deals as principal, include the initial offer of units, and the
exchange of units for scheme property and issues and cancellations
of units by an ICVC, or by the depositary of an AUT or ACS, carried
out directly with the unitholder.
…
…
Issue and cancellation of units in an AUT or ACS

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6.2.6 R (1) The Except where the authorised fund is a direct dealing scheme,
the depositary must issue or cancel units in an AUT or ACS when
instructed by the authorised fund manager.
(1A) Where the authorised fund is a direct dealing scheme that is an AUT
or ACS, the depositary or, where permitted by the instrument
constituting the fund, the authorised fund manager must issue or
cancel units by making a record of the issue or cancellation and of
the number of the units of each class concerned.
(2) Any instructions given by the authorised fund manager under (1)
must state, for each class of unit to be issued or cancelled, the
number to be issued or cancelled, expressed either as a number of
units or as an amount in value (or as a combination of the two).
(3) If the depositary is of the opinion that it is not in the interests of
unitholders that any units should be issued or cancelled or that to do
so would not be in accordance with the trust deed, contractual
scheme deed or prospectus, it must notify the authorised fund
manager of that fact and:
(a) where (1) applies, it is then relieved of the obligation to issue
or cancel those units; or
(b) where (1A) applies, the authorised fund manager must not
issue or cancel those units, or must effect the cancellation of
that issue or the reversal of that cancellation.
…
Issue Direct issue and cancellation of units through an authorised fund manager
6.2.7 R (1) The authorised fund manager of an authorised fund that is not a
direct dealing scheme may require, on agreement with the
depositary, or may permit, on the request of the investor, direct
issues and cancellations of units by an ICVC or by the depositary of
an AUT or ACS.:
(a) the ICVC; or
(b) (where the scheme is an AUT or ACS) the depositary or,
where permitted by the instrument constituting the fund, the
(2) …
Issue and cancellation of units by a direct dealing scheme
6.2.7A R The authorised fund manager and depositary of a direct dealing scheme,
and an ICVC and any other director of an ICVC that is a direct dealing
scheme, must ensure that:

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(1) the issue and cancellation of units is made only by:
(a) the ICVC; or
(b) (where the scheme is an AUT or ACS) the depositary or,
where permitted by the instrument constituting the fund, the
authorised fund manager;
(2) the direct dealing scheme operates an issue and cancellation
account in accordance with COLL 6.2.7BR (Operation of an issue
and cancellation account);
(3) the authorised fund manager is not permitted to deal in units of the
scheme as principal;
(4) the instrument constituting the fund provides for the arrangements
described in (1) to (3);
(5) the prospectus provides details of the procedures to be followed,
which must be consistent with the rules in this section; and
(6) all classes of units in a sub-fund, or a scheme which is not an
umbrella, must use the same issue and cancellation account.
Operation of an issue and cancellation account
6.2.7B R An authorised fund manager, a depositary, an ICVC and any other director
of an ICVC of an authorised fund that is a direct dealing scheme which
uses an issue and cancellation account, must ensure that:
(1) money which is not attributed to the scheme, or to a specific sub-
fund, must be returned to the sender or paid into a client bank
account by close of the business day following receipt;
(2) where an omnibus issue and cancellation account is used, the assets
of one sub-fund must not be used to meet the liabilities of another;
(3) money in the issue and cancellation account attributed to a sub-
fund, or unattributed sums allocated in accordance with COLL
6.7.17R (Allocation of scheme property) must be included for the
purposes of COLL 5.2.11(3) (Spread: general) and COLL 5.6.7R(2)
(Spread: general);
(4) the issue and cancellation account must be operated so that it is not
overdrawn as at the close of any business day; and
(5) (a) (subject to (5)(b)), the issue and cancellation account must
be reconciled promptly;
(b) a reconciliation should be performed in respect of each
dealing day as at a fixed point; and

FCA 2025/XX
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(c) where the scheme has fewer than 2 regular valuation points
for the purposes of dealing in units in any month,
reconciliations should be performed at a frequency
consistent with the frequency of such valuation points.
6.2.7C G (1) An authorised fund manager should be able to demonstrate that it
has effective controls over the operation of any issue and
cancellation account.
(2) An authorised fund manager should ensure that all errors which
result in a breach of COLL 6.2.7AR (Issue and cancellation by a
direct dealing scheme) or COLL 6.2.7BR (Operation of an issue and
cancellation account) are recorded. As soon as an error is
discovered, the authorised fund manager should report the fact to
the depositary, together with details of the action taken, or to be
taken, to avoid repetition of the error.
6.2.7D G (1) In determining whether any sub-funds of an umbrella should share
an issue and cancellation account, the authorised fund manager
should be satisfied such use presents minimal risk of adverse
consequences for unitholders.
(2) The matters an authorised fund manager should consider in (1)
include:
(a) contagion risk;
(b) the strategy, risk profile and target market of each sub-fund
and its use of leverage; and
(c) whether individual cash movements can be promptly
attributed to the correct sub-fund.
…
Box management errors guidance
6.2.12 G Explanatory table: This table belongs to COLL 6.2.2 G(4) (Purpose).
Correction of box management errors
…
3 Recording and reporting of box management errors
…
(3) A depositary should also make a return returns to the FCA
(in the manner prescribed by SUP 16.6.8R SUP 16.6.6R) on
a quarterly basis.

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Payment for units issued
6.2.13 R (1) The authorised fund manager of a scheme that is not a direct dealing
scheme must, by the close of business on the fourth business day
following the issue of any units, arrange for payment to the depositary
of an AUT or ACS or the ICVC of:
…
(3) …
(4) The authorised fund manager of a direct dealing scheme must ensure
adequate arrangements are in place for unitholders or their agents to
make timely payments to the ICVC or the depositary of the AUT or
ACS.
(5) Where an investor in a direct dealing scheme has not made payment to
the ICVC or the depositary of the AUT or ACS within the period
specified in the prospectus, the authorised fund manager must
reimburse the authorised fund for any lost interest unless the amount
involved is not, in the depositary’s opinion, material to the authorised
fund.
Payment for cancelled units
6.2.14 R (1) On cancelling units the authorised fund manager must, before the
expiry of the fourth business day following the cancellation of the
units or, if later, as soon as practicable after delivery to the depositary
of the AUT or ACS or the ICVC of such evidence of title to the units as
it may reasonably require, require the depositary to pay, or arrange for
payment of:
…
in accordance with (1A).
(1A) The depositary or authorised fund manager must pay arrange for
payment of the amount in (1), as relevant:
(a) …
(b) where relevant, to the unitholder;
…
…
…
Sale and redemption

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6.2.16 R (1) …
(1A) Paragraphs (2), (3), (4), (6) and (7) of this rule do not apply to a direct
dealing scheme.
(2) …
(2A) The authorised fund manager of a direct dealing scheme must ensure
that, at all times during the dealing day, the issue of units in the
authorised fund is effected at the request of an investor, in accordance
with the conditions in the instrument constituting the fund and the
prospectus unless:
(a) it has reasonable grounds to refuse such issue; or
(b) the issue of units is prevented under COLL 6.2.18R (Limited
issue).
(3) …
(3A) Subject to COLL 6.2.19R (Limited redemption) and COLL 6.2.21R
(Deferred redemption), the authorised fund manager of a direct
dealing scheme must ensure that, at all times during the dealing day,
the cancellation of units in the authorised fund is effected at the
request of a qualifying unitholder, in accordance with the conditions in
the instrument constituting the fund and the prospectus unless it has
reasonable grounds to refuse such cancellation.
(4) …
(4A) On agreeing to a cancellation of units in (3A), the authorised fund
manager of a direct dealing scheme must ensure that the unitholder is
paid the appropriate proceeds of the cancellation within the period
specified in (5) unless it has reasonable grounds for withholding all or
any part of the proceeds.
(5) Except where (5A) applies, the period in (4) or, as applicable, (4A)
expires at the close of business on the fourth business day following
the later of:
(a) the valuation point at which the price for the redemption or
cancellation was determined; or
(b) the time when the authorised fund manager person responsible
for redeeming or cancelling units has all the duly executed
instruments and authorisations to effect (or enable the
authorised fund manager to effect) the transfer of title to the
those units or their cancellation.
…

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(6) …
(6A) Except where (7A) applies, and subject to COLL 6.2.21R (Deferred
redemption), the person responsible for the issue and cancellation of
units for a direct dealing scheme must issue or cancel them at a price
determined no later than the end of the business day immediately
following the receipt and acceptance of an instruction to do so, or at
the next valuation point for the purposes of dealing in units if later.
(7) …
(7A) Where the authorised fund operates limited redemption arrangements,
the person responsible for the issue and cancellation of units in a direct
dealing scheme must issue or cancel units at a price determined no
later than the expiry of a period of 185 days from the date of the receipt
and acceptance of the instruction to issue or cancel.
…
(11) Paragraph Paragraphs (4) and (4A) does do not apply where COLL
6.2.17AR (Transfers under the Dormant Assets Act 2022) applies.
Sale and redemption: guidance
6.2.17 G (1) The prospectus of an authorised fund may allow the authorised fund
manager to identify a point in time in advance of a valuation point (a
cut-off point) after which it will not accept instructions to sell, issue,
cancel or redeem units at will not be accepted for that valuation point.
In order to protect customers’ interests, the cut-off point should be no
earlier than the close of business on the business day before the
valuation point it relates to. If there is more than one valuation point in
a day the cut-off should not be before any previous valuation point.
…
(3) Where (1) applies, different cut-off points may be used to differentiate
between the methods of submitting dealing instructions to sell or
redeem to the authorised fund manager but not to differentiate between
unitholders or potential unitholders.
…
…
Limited redemption
6.2.19 R …
(2) Where (1) applies, the scheme must provide for sales and redemptions
or (in the case of a direct dealing scheme) issues and cancellations at
least once in every six months.

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(3) Within a scheme, unit classes unit classes may operate different
arrangements for sales, issues, cancellations and redemptions of units
provided there is no prejudice to the interests of any unitholder, subject
to COLL 6.2.7AR(6) (Issue and cancellation of units by a direct
dealing scheme).
(4) The scheme may provide for issues or sales of units of any class to be
executed at a greater frequency than redemptions or cancellations of
units of the same class.
…
Deferred redemption
6.2.21 R (1) Subject to (1A), (3), and (4), the instrument constituting the fund and
the prospectus of an authorised fund which has at least one valuation
point on each business day may permit deferral of redemptions or (in
the case of a direct dealing scheme) cancellations at a valuation point
to the next valuation point where the requested redemptions or
cancellations exceed 10%, or some other reasonable proportion
disclosed in the prospectus, of the authorised fund’s value.
(1A) Subject to (3) the instrument constituting the fund and the prospectus
of a non-UCITS retail scheme operating as a FAIF may permit deferral
of redemptions or (in the case of a direct dealing scheme) cancellations
at a valuation point to a following valuation point where the requested
redemptions or cancellations exceed 10%, or some other reasonable
proportion disclosed in the prospectus, of the authorised fund’s value.
(2) Any deferral of redemptions or (in the case of a direct dealing scheme)
cancellations under (1) or (1A) must be undertaken in accordance with
the procedures explained in the prospectus which must ensure:
(a) the consistent treatment of all unitholders who have sought to
redeem or cancel units at any valuation point at which
redemptions or cancellations are deferred; and
(b) that all deals relating to an earlier valuation point are completed
before those relating to a later valuation point are considered.
…
…
6.3 Valuation and pricing
…

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Valuation
6.3.3 R (1) To determine the price of units the authorised fund manager must
carry out a fair and accurate valuation of all the scheme property in
accordance with the instrument constituting the fund and the
prospectus.
(2) …
(3) For the purposes of (1), sums in an issue and cancellation account
which the authorised fund manager reasonably believes are not
attributable to a particular sub-fund or scheme are excluded from the
valuation of scheme property of any sub-fund or scheme (as
applicable).
…
Dilution
6.3.8 R (1) Subject to (1A), when arranging to sell, redeem redeem, issue or cancel
cancel units, or when units are issued or cancelled cancelled under
COLL 6.2.7R(1) (Issues Direct issue and cancellation of units through
an authorised fund manager) or COLL 6.2.7AR (Issue and cancellation
of units by a direct dealing scheme), an authorised fund manager is
permitted to:
…
…
(3) A dilution levy becomes due and payable at the same time as payment
or transfer of property becomes due for the issue, sale, redemption or
cancellation and any such payment in respect of a dilution levy must be
paid to the depositary to become part of scheme property as soon as
practicable after receipt.
…
…
Publication of prices
6.3.11 R Where the authorised fund manager is prepared to deal in units, or is willing
to issue or cancel units, under COLL 6.2.7 COLL 6.2.7R or where the
authorised fund is a direct dealing scheme (see COLL 6.2.7AR), it the
authorised fund manager must make the dealing prices public in an
appropriate manner.
…

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7 Suspension of dealings, termination of authorised funds and side pockets
…
7.2 Suspension and restart of dealings
Requirement
7.2.-3 R (1) …
(1A) Sums in an issue and cancellation account which the authorised fund
manager reasonably believes are not attributable to a particular sub-
fund or scheme are excluded from the value of the scheme property of
any sub-fund or scheme (as applicable).
…
…
7.3 Winding up a solvent ICVC and terminating or winding up a sub-fund of an
ICVC
…
Manner of winding up or termination
…
7.3.7A G For the purposes of this section an ICVC may be treated as having been wound
up or a sub-fund terminated upon completion, where relevant, of all of the
steps in (1) to (3):
…
(2) the scheme property being realised or distributed in accordance with
COLL 7.3.7R(8) which should include appropriate resolution of
unattributed sums in any issue and cancellation account; and
…
…
7.4 Winding up an AUT and terminating a sub-fund of an AUT
…
When an AUT is to be wound up or a sub-fund terminated
7.4.3 R (1) Upon the happening of any of the events or dates referred to in (2) and
not otherwise:
…

FCA 2025/XX
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(d) the manager must cease to issue or cancel, or to arrange the
issue or cancellation of units under COLL 6.2.7R (Issue Direct
issue and cancellation of units through an authorised fund
manager) or COLL 6.2.7AR (Issue and cancellation of units by
a direct dealing scheme), except in respect of the final
cancellation under COLL 7.4.4R (1) or (2);
…
7.4.4 R (1) Where COLL 7.4.3R(2)(f) applies, the trustee or, where permitted by
the instrument constituting the fund, the authorised fund manager must
cancel all units in issue and the trustee must wind up the AUT or
terminate the sub-fund in accordance with the approved scheme of
arrangement.
…
7.4.4A G For the purposes of this section, an AUT may be treated as having been wound
up or a sub-fund terminated upon completion, where relevant, of all of the
steps in (1) to (3):
…
COLL 7.4.4R(5) which should include appropriate resolution of
…
…
7.4A Winding up a solvent ACS and terminating a sub-fund of a co-ownership
scheme
…
When an ACS is to be wound up or a sub-fund of a co-ownership scheme
terminated
7.4A.4 R (1) Upon the happening of any of the matters or dates referred to in (3),
and subject to the requirement of (4) being satisfied, and not otherwise:
…
(d) the authorised contractual scheme manager must cease to issue
or cancel, or to arrange the issue or cancellation of units under
COLL 6.2.7R (Issue Direct issue and cancellation of units
through an authorised fund manager) or COLL 6.2.7AR (Issue

FCA 2025/XX
Page 20 of 29
and cancellation of units by a direct dealing scheme), except in
respect of the final cancellation under COLL 7.4A.6R(1) or (2);
…
…
…
…
7.4A.7 G For the purposes of this section, an ACS may be treated as having been wound
up or a sub-fund of a co-ownership scheme terminated upon completion,
where relevant, of all of the steps in (1) to (3):
…
COLL 7.4A.6R(5) which should include appropriate resolution of
…
…
7.6 Schemes of arrangement
…
Schemes of arrangement: requirements
7.6.2 R …
(7) …
(8) Scheme property in the form of any unattributed sums in an issue and
cancellation account should not form part of any scheme of
arrangement under this rule.
…
8 Qualified investor schemes
8.1 Introduction
Application
8.1.1 R …
(2) …

FCA 2025/XX
Page 21 of 29
(3) In this chapter, references to the value of scheme property or the value
of the fund mean the net value determined in accordance with COLL
8.5.9R (Valuation, pricing and dealing).
…
8.4 Investment and borrowing powers
…
8.4.10 R …
8.4.10A G When calculating an authorised fund’s borrowing for COLL 8.4.10R(2), the
authorised fund manager should ensure that any borrowing in an issue and
cancellation account is attributed to a scheme or sub-fund but any sums in an
issue and cancellation account which the authorised fund manager reasonably
believes are not attributable to a particular sub-fund or scheme are excluded
from the value of the scheme property of any sub-fund or scheme (as
applicable).
…
8.5 Powers and responsibilities
…
Valuation, pricing and dealing
8.5.9 R (1) The value of the scheme property is the net value of the scheme
property after deducting any outstanding borrowings (including any
capital outstanding on a mortgage of an immovable).
…
(11) …
applicable).
…
Issues and cancellations of units
8.5.10 R …
(2) …

FCA 2025/XX
Page 22 of 29
(3) The authorised fund manager must arrange ensure adequate
arrangements are in place for the issue and cancellation of units and
pay payment of money or assets to or from the scheme, depositary, or
where relevant, unitholders for the account of the scheme as required
by the prospectus, and, where applicable, in accordance with the
Money Market Funds Regulation.
…
(6) …
(7) COLL 6.2.7AR (Issue and cancellation of units by a direct dealing
scheme) and COLL 6.2.7BR (Operation of an issue and cancellation
account), and the guidance in COLL 6.2.7CG and COLL 6.2.7DG
apply to a qualified investor scheme that is a direct dealing scheme.
…
Transfer of units in an ACS
…
8.5.10C G The FCA recognises that some transfers of units arise by operation of law
(such as upon death or bankruptcy of the unitholder, or otherwise) and are
accordingly outside the control of the authorised contractual scheme
manager. The authorised contractual scheme manager is expected to comply
with its responsibilities under COLL 8.5.10ER (Redemption of ACS units in a
QIS by an authorised contractual scheme manager) in those cases by
redeeming, or arranging for the cancellation of, those units.
…
Redemption of ACS units in a QIS by an authorised contractual scheme manager
8.5.10E R The authorised contractual scheme manager of a qualified investor scheme
which is an ACS must redeem, or arrange for the cancellation of, units in the
scheme as soon as practicable after becoming aware that those units are vested
in anyone (whether as a result of subscription or transfer of units) other than a
person meeting the criteria in COLL 8 Annex 2(1) and (2) (ACS Qualified
Investor Schemes: eligible investors).
Sale and redemption
8.5.11 R (-1) Paragraphs (1), (2) and (3) of this rule do not apply in relation to a
direct dealing scheme.
(1) …
that, at all times during the dealing day, the issue of units in the
authorised fund is effected at the request of an eligible investor (within

FCA 2025/XX
Page 23 of 29
any conditions in the instrument constituting the fund and the
prospectus which must be fair and reasonable as between all
unitholders and potential unitholders) for whom the authorised fund
manager does not have reasonable grounds to refuse such sale.
(2) …
that, at all times during the dealing day, the cancellation of units
owned by any eligible unitholder in the authorised fund is effected at
the request of that unitholder (within any conditions in the instrument
constituting the fund and the prospectus), unless the authorised fund
manager has reasonable grounds to refuse such cancellation.
(3) …
(3A) On agreeing to a cancellation of units within (2A), the authorised fund
manager must ensure that the unitholder is paid the appropriate
proceeds of the cancellation within any reasonable period specified in
the instrument constituting the fund or the prospectus, unless it has
reasonable grounds for withholding payment.
(4) Payment of proceeds on redemption must be made by the authorised
fund manager in any manner provided for in the prospectus which
must be fair and reasonable as between redeeming unitholders and
continuing unitholders.
…
15 Long-term asset funds
…
15.2 Eligibility to act as the authorised fund manager
…
Appointment of external valuer or authorised fund manager with knowledge, skills
and experience of valuing long-term assets
15.2.6 R …
(5) The authorised fund manager need not appoint an external valuer
under (1) if:
(a) the scheme property of the long-term asset fund is constituted
solely of units or shares in other collective investment schemes
or AIFs, excluding cash and other liquid assets used for non-
investment purposes such as unit dealing; and
(b) an external valuer performs the valuation function of each such
collective investment scheme or AIF.

FCA 2025/XX
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…
…
15.3 Constitution
…
Table: contents of the instrument constituting the fund
15.3.6 R This table belongs to COLL 15.3.5R.
…
3 Constitution
The following statements:
…
(9) for an ACS:
(a) the contractual scheme deed:
…
(v) states that the authorised contractual scheme
manager of an ACS must redeem or arrange for
the cancellation of units as soon as practicable
after becoming aware that those units are vested
in anyone (whether as a result of subscription or
transfer of units) other than a person meeting the
criteria in (iv)(A) and (B);
…
…
…
…
15.4 Prospectus and other pre-sale notifications
…
Table: contents of a long-term asset fund prospectus
15.4.5 R This table belongs to COLL 15.4.2R.

FCA 2025/XX
Page 25 of 29
…
13 Valuation of scheme property and due diligence
…
(2) A description of the valuation procedure and of the pricing
methodology for valuing assets, including the methods used in
valuing hard-to-value assets, in line with FUND 3.9
(Valuation), and details as to:
(a) how frequently and at what times of the day the scheme
property will be regularly valued to determine the price
at which units in the scheme may be purchased from or
redeemed by the authorised fund manager dealt and a
description of any circumstance where the scheme
property may be specially valued;
…
…
…
16 Dealing
The procedure and conditions for the issue, sale, redemption and
cancellation of units or shares including details of the following, in
fair, clear and plain language, using worked examples to explain how
these procedures might apply to unitholders in practice:
(1) the dealing days and times in the dealing day on which the
authorised fund manager will receive and determine requests
for the sale, issue, cancellation and redemption of units,
including any cut-off point for receiving redemption or
cancellation requests before the authorised fund manager
makes the next redemption determination (see COLL
15.8.12R(2)(a) (Dealing: redemption of units));
(2) the procedures for effecting the issue and cancellation of units
and settlement of transactions involving unitholders;
…
(4) the steps required to be taken by a unitholder in redeeming for
units in the long-term asset fund to be redeemed or cancelled
(see COLL 15.8.12R (Dealing: redemption of units)), using
worked examples to explain how these arrangements may affect
unitholders in the scheme, including:

FCA 2025/XX
Page 26 of 29
…
…
17 Issue of units in ACSs: eligible investors
…
(2) A statement that the authorised contractual scheme manager of
an ACS must redeem or arrange for the cancellation of units as
soon as practicable after becoming aware that those units are
vested in anyone (whether as a result of subscription or transfer
of units) other than a person meeting the criteria in (1).
…
…
…
15.6 Investment and borrowing powers
Application
…
15.6.2 R …
(2) …
(3) Where this section refers to value of scheme property, scheme property
is to be valued in accordance with COLL 15.8.2R.
15.6.2A G One of the effects of COLL 5.2.5R(1) is that, for the purposes of this chapter,
sums in an issue and cancellation account which the authorised fund manager
reasonably believes are not attributable to a particular sub-fund or scheme are
excluded from the valuation of scheme property of any sub-fund or scheme (as
applicable) (see COLL 15.8.2R(11) (Valuation, pricing and dealing)).
…
15.6.17 R …
15.6.17A G When calculating an authorised fund’s borrowing for COLL 15.6.17R(2), the
authorised fund manager should ensure that any borrowing in an issue and
cancellation account is attributed to a scheme or sub-fund but any sums in an
issue and cancellation account which the authorised fund manager reasonably
believes are not attributable to a particular sub-fund or scheme are excluded

FCA 2025/XX
Page 27 of 29
from the value of the scheme property of any sub-fund or scheme (as
applicable).
…
Investment limits for immovables
15.6.21 R The following limits apply in respect of immovables held as part of the
scheme property:
…
(3) the total of all premiums paid for options to purchase immovables must
not exceed 10% of the scheme value of the scheme property in any 12-
month period, calculated at the date of the granting of the option.
…
15.8 Valuation, pricing, dealing and income
…
Valuation, pricing and dealing
15.8.2 R …
(10) …
applicable).
…
Issue and cancellation of units
15.8.5 R …
(3) The authorised fund manager must arrange ensure adequate
arrangements are in place for the issue and cancellation of units and
pay for the payment of money or assets to or from the scheme,
depositary or where relevant, unitholders, for the account of the
scheme as required by the prospectus.
…
(5) The Except in respect of a direct dealing scheme, the authorised fund
manager may arrange for the ICVC, or instruct the depositary of the
AUT or ACS, to issue or cancel units where the authorised fund

FCA 2025/XX
Page 28 of 29
manager would otherwise be obliged to sell or redeem the units in the
manner set out in the prospectus.
(6) …
(7) COLL 6.2.7AR (Issue and cancellation of units by a direct dealing
scheme) and COLL 6.2.7BR (Operation of an issue and cancellation
account), and the guidance in COLL 6.2.7CG and COLL 6.2.7DG
apply to a long-term asset fund that is a direct dealing scheme.
…
Transfer of units in an ACS
…
15.8.8 G The FCA recognises that some transfers of units arise by operation of law
(such as upon death or bankruptcy of the unitholder, or otherwise) and are
accordingly outside the control of the authorised contractual scheme
manager. The authorised contractual scheme manager is expected to comply
with its responsibilities under COLL 15.8.10R (Redemption of ACS units in
an LTAF by an authorised contractual scheme manager) in those cases by
redeeming or arranging for the cancellation of those units.
…
Redemption of ACS units in an LTAF by an authorised contractual scheme
manager
15.8.10 R The authorised contractual scheme manager of a long-term asset fund which
is an ACS must redeem or arrange for the cancellation of units in the scheme
as soon as practicable after becoming aware that those units are vested in
anyone (whether as a result of subscription or transfer of units) other than a
person meeting the criteria in COLL 15 Annex 1R(1) and (2) (ACS Long-
Term Asset Funds: eligible investors).
…
Dealing: redemption of units
15.8.12 R …
(2) The redemption arrangements for a long-term asset fund must ensure
the following:
…
(h) The authorised fund manager must redeem the units at the price
determined in accordance with (f) and pay the unitholder, or
arrange for payment to the unitholder of, the appropriate
proceeds of redemption in accordance with paragraphs (4) and
(5).

FCA 2025/XX
Page 29 of 29
(3) Subject to COBS 2.1.4R (AIFMs’ best interests rule), COLL
6.2.7AR(6) (Issue and cancellation of units by a direct dealing scheme)
(as applied by COLL 15.8.5R) and COLL 15.3.2R (Classes of unit),
where the long-term asset fund has more than one class of unit, the
arrangements for the redemption of units may differ between classes
provided the arrangements for all classes of unit ensure the matters
specified in (2).
(4) After having effected a redemption request, the authorised fund
manager must pay or arrange payment of the full proceeds of the
redemption to the unitholder within any reasonable period specified in
the prospectus, unless it has reasonable grounds for withholding
payment.
(5) Payment of proceeds on redemption must be made, or arranged, by the
authorised fund manager in any manner provided for in the prospectus
which must be fair and reasonable as between redeeming unitholders
and continuing unitholders.
…
…
TP 1 Transitional Provisions
(1) (2)
Material to
which the
transitional
provision
applies
(3) (4)
Transitional
provision
(5)
Transitional
provision:
dates in force
(6)
Handbook
provision:
coming into
force
…
66 … … … … …
Amendments made by the Collective Investment Schemes (Direct to Fund)
Instrument 2025
67 The deletion of
COLL
5.6.7AG(3) and
COLL 5.7.6G(3)
G The deletion of the
guidance specified
in column (2) may
be disregarded.
[Editor’s
note: insert
the date on
which this
instrument
comes into
force until 12
months
afterwards]
[Editor’s
note: insert
the date on
which this
instrument
comes into
force]

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Telephone: +44 (0)20 7066 1000
Website: www.fca.org.uk
All rights reserved
Pub ref: 1-008988
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