UT/2024/000002 - [2025] UKUT 00188 (TCC)

Although not formally raised as a ground of appeal, CBNA’s skeleton and oral arguments included a challenge to the application of the relevant legal principles to the facts as found by the FTT. CBNA contended that, had the correct principles been properly applied, several activities which the FTT had rejected as exempt should have been found to fall within the exemption. Specifically, CBNA argued that these activities constituted specific and essential functions of the transactions, were intrinsically connected to them, and had a substantive impact on the legal rights and obligations of SPLC and its clients.

We do not accept that the FTT misapplied the relevant legal principles. The FTT correctly identified the core requirement: that for a service to be exempt, it must effect a change in the legal and financial relationship between the parties to a transaction in securities. The additional descriptors relied upon by CBNA—such as “specific and essential” or “intrinsically connected” or “capable of having an impact on the substance [of the legal relationship]”—do not constitute separate legal tests or detract from the central requirement of legal effect. To the extent CBNA’s case on misapplication relies on these then those were not principles the FTT was required to apply. We will address however CBNA’s challenge insofar as it concerns the FTT’s application of the correct test (the need for the service to alter the legal and financial relationship).

CBNA’s submissions in relation to its role in cash transactions focused on two aspects: first, the determination and agreement of economic terms, and second, the performance and implementation of the transaction. However, we agree with the FTT that providing pricing tools, models, and risk parameters, while operationally important, does not itself alter the legal relationship between the parties. Similarly, CBNA’s role in facilitating settlement through CREST, resolving breaks, and performing netting calculations, while necessary to the completion of the transaction, does not amount to executing the transaction in the legal sense required.

In relation to derivatives, CBNA described a more complex “lifecycle”, including pricing, delta hedging, allocation, collateral and payment management, corporate actions, and termination processes such as novation and trade compression. While these functions may be integral to the administration and risk management of derivative positions, the particular activities carried out by CBNA did not, in our view, in themselves, create, alter, or extinguish legal rights as between SPLC and its clients. The activities such as allocation and rebooking were essentially affirmation or administrative processes. Collateral and payment management, including dispute resolution and netting, did not in themselves constitute execution of the securities transaction. Although, on the face of it, one might expect that something termed an execution algorithm would constitute execution, it was, in essence, the provision of infrastructure which enabled giving the instructions for transactions between others to take place. The use of automated systems or execution algorithms did not change the legal character of the transaction. That remained one entered into by SPLC and its counterparties whether that was with clients or with counterparties to a hedging transaction (which would in its own right constitute a transaction in securities). The evidence does not support the conclusion that CBNA performs the act of execution; rather, it facilitated and supported transactions executed by others. Thus, in contrast to the activity of SPLC and those counterparties, which resulted in changes to the legal relationship between them when the transaction was carried out, the support and facilitation provided by CBNA did not.

We therefore disagree the FTT erred in its legal approach or in applying that to reach its conclusions. CBNA’s role, while operationally significant and technologically sophisticated, does not meet the legal test for exemption. The test is not whether a party is involved or integral to the execution process, but whether the services it provides as a distinct whole performs the functional act of executing a transaction in securities.

Accordingly we agree with Mr Beal’s core submission that the provision of a technological trading infrastructure that helps SPLC to build and fulfil its transactions with external clients is not the same as functionally executing the transactions. There was nothing in the FTT’s findings (which we have found were not susceptible to challenge) which suggested that test was met.