On 24 September 2020 the European Commission published (i) a new
draft regulation comprised by a draft pilot regime on distributed
ledger market infrastructure, which sets out the requirement on
multilateral trading facilities and securities settlement systems
using DLT (so-called 'DLT market infrastructures')
(the "Pilot Regime") and (ii) a draft
directive for a proposal to amend to the existing definition of
'financial instruments' pursuant to directive 2014/65/EU
("MiFID II").
The proposed Pilot Regime will allow certain market participants
(including authorised investment firms and market operators) to be
licensed to operate DLT multilateral trading facilities
("MTF") and for central securities
depositories ("CSD") to operate DLT
securities settlement systems.
As a starting point, the Pilot Regime subjects DLT MTFs and DLT
CSDs to the existing regulation of multilateral trading facilities
and securities settlement systems. The Pilot Regime will thus only
be available to entities already holding a license to operate MTFs
or as a (traditional) CSD, respectively. However, and most
importantly, the Pilot Regime allows for MTFs and CSDs licensed to
operate DLT multilateral trading facilities and securities
settlement systems, to apply for exemptions from the existing rules
to the extent that such rules are incompatible with the use of the
particular DLT. Such exemptions include the possibility for DLT
MTFs to (i) use settlement coins (i.e. commercial bank money in a
tokenised form) when performing the settlement of transactions in
DLT transferable securities and (ii) be exempted from the
obligation of intermediation in order to provide access for retail
investors on the DLT MTF. Given that traditional double-entry book
keepings securities accounts do not always exist in a DLT system,
DLT CSDs may be exempted from the rules relating to the notion of
'securities account' or 'book-entry form'.
The Pilot Regime will only apply to securities meeting certain
eligibility requirements designed to ensure that the Pilot Regime
will only be operated at small scale. For shares, the market
capitalisation or the tentative market capitalisation of the issuer
of DLT transferable securities should be less than EUR 200 million
and for bonds, less than EUR 500 million in issuance size.
The Pilot Regime is intended to run for a period of five years
after which ESMA will prepare a report on the Pilot Regime for the
Commission to assess whether the pilot regime should become
permanent in its current proposed form or in a modified form.
Amendments to the definiton of financial instruments
Related to the introduction of the proposed Pilot Regime, the Commission has also proposed an amendment to the definition of financial instruments pursuant to article 4 of MiFID II. Specifically, the Commission has proposed to replace the existing definition set out in article 4(1), point 15 to include such instruments issued by means of DLT. The purpose thereof is to provide certainty as regards crypto-assets and is deemed necessary by the Commission to establish a temporary exemption for multilateral trading facilities.
A new Dawn for the use of DLT?
As the proposal remains subject to review by the European Parliament, the exact scope of the Pilot Regime is unclear. However, it is clear that it is both the opinion and desire of the Commission that DLT will have an increasingly important role within EU financial markets and that the use of DLT in finance has gone from being viewed as a somewhat exotic technology towards a technology of critical importance to ensure the future competitiveness of EU financial markets.
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