Market infrastructures based on distributed ledger technology

SUMMARY OF:

Regulation (EU) 2022/858 on a pilot regime for market infrastructures based on distributed ledger technology

WHAT IS THE AIM OF THE REGULATION?

It aims to establish a temporary common European Union (EU) pilot regime for financial services based on distributed ledger technology (DLT)*.
It aims to remove regulatory barriers to the issuing, trading and settlement of crypto-assets* that are financial instruments and to help regulators gain experience in the use of DLT.

KEY POINTS

The regulation covers the:

granting, withdrawal and modification of permission, including exemptions and compensatory or corrective measures, to operate DLT market infrastructure*;
operation and supervision of DLT market infrastructure;
cooperation between DLT market infrastructure operators, national authorities and the European Securities and Markets Authority.

Admission to trading or recording on a DLT market infrastructure under this pilot regime is limited to the following:

shares, the market capitalisation of which must be below €500 million;
bonds and other forms of securitised debt, including depositary receipts, or money market instruments with a value of less than €1 billion;
units in collective investment undertakings – the market value of the assets under management must be below €500 million;

The total value of all DLT financial instruments must not exceed €6 billion.

Operators of a DLT market infrastructure must satisfy clear conditions. These include:

establishing rules on the use of their technology, clear and detailed business plans and publicly available, up-to-date and detailed written documentation;
providing members, participants, issuers and clients with clear and unambiguous information;
ensuring secure IT and cyber arrangements;
having in place specific operational risk management procedures;
segregating the funds, collateral and DLT financial instruments they hold and assuming responsibility for any losses;
calculating the monthly average value of their holdings and submitting the data to the relevant national authority, which has the power to set lower limits than those in the regulation;
implementing a clear and timely transition strategy if their total value of DLT financial instruments reaches €9 billion;
cooperating closely with the relevant authorities designated by EU Member States, and submitting a 6-monthly report to them.

The regulation lays down the rules which operators of DLT market infrastructure must respect under existing EU financial legislation, while specifying the exemptions and flexibility that relevant authorities may allow in exchange for certain guarantees. These rules cover the following:

DLT multilateral trading facility (MTF) – Regulation (EU) No 600/2014 (see summary) and Directive 2014/65/EU (see summary);
DLT securities settlement system (SSs) – Regulation (EU) No 909/2014 (see summary);
DLT transferable securities (TSS) – Regulation (EU) No 600/2014 and Directive 2014/65/EU, and Regulation (EU) No 909/2014.

Rules on applications to operate a DLT infrastructure, whether MTF, SS or TSS, allow any legal person authorised as an investment firm to operate a regulated market (MTF), as a central security depository (CSD) or all three (TSS) to apply to operate a DLT trading facility. They also provide a procedure for new entrants to apply for operation of DLT infrastructure.

Among other things, the applicants must demonstrate:

sufficient prudential safeguards to meet liabilities and compensate clients;
safekeeping arrangements for clients’ DLT assets;
measures to ensure investor protection and handle client complaints and redress.

Successful applications are valid throughout the EU for 6 years, although the relevant authorities may also refuse or withdraw them or any related exemptions.

The European Securities and Markets Authority

The authority is developing, and periodically updating, the following guidelines:
- guidelines to establish standard forms and templates for applications to operate a DLT market infrastructure, which must be ready by 23 March 2023;
- guidelines to promote the consistency and proportionality of exemptions from existing legislation, which must be ready by 24 March 2025.
It publishes on its website the lists of DLT MTFs, SSs and TSSs, along with their duration, exemptions and any lower thresholds.
It coordinates with national authorities to build a common understanding of DLT and markets to develop a shared supervisory culture.
It will present, by 24 March 2026, a comprehensive report to the European Commission analysing implementation of the regulation. This is in addition to annual interim reports.

The regulation also amends Regulations (EU) Nos 600/2014 and 909/2014, and Directive 2014/65/EU.

FROM WHEN DOES THE REGULATION APPLY?

It applies from 23 March 2023.

BACKGROUND

Increasingly, customers are using mobile technology to interact with their banks. They use new ways to make payments, transfer money and invest.
Crypto-assets are one of the main applications of DLT. Some crypto-assets, such as those that qualify as financial instruments, are already covered by existing EU financial services legislation, while most crypto-assets fall outside the scope of current EU financial services legislation.
For further information, see:
- Digital finance (European Commission)
- Questions and answers: Digital finance strategy, legislative proposals on crypto-assets and digital operational resilience, retail payments strategy (European Commission).

KEY TERMS

Distributed ledger technology. A combination of database technology and cryptography, providing secure and accurate decentralised storage of data.

Crypto-asset. A digital representation of values or rights that can be transferred and stored electronically, using DLT or similar technology.

DLT market infrastructure. A DLT multilateral trading facility, settlement system or trading and settlement system.

MAIN DOCUMENT

Regulation (EU) 2022/858 of the European Parliament and of the Council of 30 May 2022 on a pilot regime for market infrastructures based on distributed ledger technology, and amending Regulations (EU) No 600/2014 and (EU) No 909/2014 and Directive 2014/65/EU (OJ L 151, 2.6.2022, pp. 1–33).

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