The European Parliament approves the Regulation on the DLT Pilot Scheme

On 30 May 2022, an agreement was reached on the Regulation on a pilot scheme for market infrastructures based on distributed registry technology (“DLT Pilot Regime”).

The Member States and the European Parliament have reached agreement on a European regulation for a pilot regime for market infrastructures based on distributed ledger technology or DLT.

Innovative approach: the future Regulation is a temporary (3 years) and targeted regulatory exemption regime, unique in the EU, aimed at regulating the admission to trading/quotation/settlement of financial instruments on distributed ledger technology (DLT).

The pilot regime aims to enhance the use of technology in the financial sector while protecting investors and financial stability. The application of the DLT-based regime offers a number of advantages in the provision of financial services, including

Reduced complexity,
improved end-to-end processing speed,
reduced operational and financial risks.

Once in force, European trading, clearing and settlement infrastructures for financial instruments, equipped with DLT technology, can be put into operation.

The negotiators decided that services relating to financial instruments provided through the DLT market should be subject to requirements, exemptions and authorisations limited to value thresholds such as : 

  • Shares: market capitalisation of less than EUR 500 million, 
  • Bonds or other forms of securitised debt: an issue volume of less than EUR 1 billion, 
  • Bonds or other forms of securitised debt: an issue volume of less than EUR 1 billion, Units and shares of collective investment undertakings: holdings and shares of investment undertakings whose assets have a value of less than EUR 500 million.

Negotiators sought a balance between allowing innovation and experimentation to preserve financial stability. 

The regulation will enter into force 20 days after its publication in the Official Journal of the European Union and will be operational for three years. It will probably only be effective from the beginning of 2023.

The scheme distinguishes three different uses in different cases:

  • DLT Multilateral Trading Facility (“DLT MTF”) means a multilateral trading facility operated by investment services firms, or by market operators, authorised under MiFID II and which have received a specific authorisation under this Regulation.
  •  DLT Settlement System (“DLT SS”): the settlement system used by Central Securities Depositories (“CSDs”) authorised by Regulation 909/2014/EU (the “CSD Regulation”), and which have received a specific authorisation under the new regulation.
  • DLT Trading and Settlement System (“DLT TSS”): a system used to combine trading and post-execution activities in a single legal entity. 

Since the combination of trading and post-execution activities in a single legal entity is not provided for in the current regulations, DLT has made it possible to combine these two activities. Therefore, the pilot regime considered it justified to specifically legislate on infrastructures that combine both activities.

The agreement reached on the DLT pilot scheme should help foster the development of successful DLT projects in the EU. Europe will play a key role in the development of this technology as the marketing and settlement of financial instruments via DLT will provide an opportunity for improved efficiency, transparency and competitiveness.