On 23 March 2023, the new DLT Pilot Regime entered into force. This European market infrastructure regulation aims to promote distributed ledger technology (DLT) in securities trading and settlement and to overcome limitations and regulatory gaps in existing regulation, in particular in the Central Securities Depositories Regulation (CSDR) and the Markets in Financial Instruments Regulation (MiFIR).
More details on the DLT Pilot Regime and the key contacts can be found in our Navigator on the DLT Pilot Regime.
But what is the DLT Pilot Regime all about?
The DLT Pilot Regime a regulatory sandbox. It creates a controlled environment in which DLT market infrastructures can develop and test DLT based business models for a period of up to six years. Interested market participants (or new entrants) need to apply for a specific license under the DLT Pilot Regime to act as DLT market infrastructure. Under such license, market participants may be released from certain obligations in the existing EU market infrastructure regulation, while being subject to obligations under the DLT Pilot Regime to mitigate any resulting risks.
The DLT Pilot Regime applies to DLT financial instruments, i.e. stocks, bonds and fund units that are issued, recorded, transferred and stored using DLT.
It provides for the introduction of new types of DLT Market Infrastructure:
- DLT multilateral trading facilities (DLT MTF): A DLT MTF is a multilateral trading facility (MTF) that only admits to trading DLT financial instruments. Trading platforms for crypto-assets that operate on a multilateral basis already exist. However, they usually do not trade crypto-assets that also qualify as DLT Financial Instruments but mainly cryptocurrencies.
- DLT settlement systems (DLT SS): A DLT SS is a settlement system that settles transactions in DLT Financial Instruments against payment or against delivery and that allows the initial recording of DLT Financial Instruments or allows the provision of safekeeping services in relation to DLT Financial Instruments.
- DLT trading and settlement systems (DLT TSS): DLT TSS are a novelty. They combine the services performed by DLT MTF and DLT SS. This combination of trading and post-trading activities within a single entity is not envisaged by the existing rules.
The permission of DLT-based market infrastructure under the DLT Pilot Regime creates advantages as opposed to traditional market infrastructure. Most notably, it permits direct trading access to a larger group, including, potentially, retail investors and, thus, removes the need for broker/dealer (and therefore cost-savings). Furthermore, the DLT Pilot Regime enables a secondary market for DLT financial instruments.
However, it remains to be seen whether these benefits outweigh the limitations of the DLT Pilot Regime. The most notable limitation of attractiveness are the size limits at the moment of admission to trading:
- DLT Shares: shares, the issuer of which has a market capitalisation of less than EUR 500m.
- DLT Bonds: with an issue size of less than EUR 1bn (disregarding corporate bonds issued by issuers whose market capitalisation did not exceed EUR 200 million at their initial issuance).
- DLT Fund Units: the market value of the assets under management of which is less than EUR 500m.
Benefits and limitations should be carefully weighed when considering acting as DLT market infrastructure or rely on DLT market infrastructure when issuing or investing in DLT financial instruments. Your key contacts in the Navigator on the DLT Pilot Regime are glad to discuss these topics with you.