On 12 March 2021, European Parliament rapporteur Johan van Overtveldt (BE, ECR) published his draft report on the European Commission’s proposal for a Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT) [link]. The proposal is part of the Commission’s September 2020 legislative package, which also includes a proposal for a Regulation on Markets in Crypto-Assets (MiCA) and a proposal for a Regulation on digital operational resilience for the EU financial sector (DORA).
The draft Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLTR) creates a bespoke legal regime for the practical application of DLT in post-trade services. The DLTR will provide a regulatory framework for the development of DLT multilateral trading facilities (DLT MTFs) and DLT securities settlement systems (SSS), including for the granting and withdrawal of specific permissions and exemptions.
In the report, the rapporteur writes that he considers that DLT can bring a number of potential benefits in the provision of financial services and that an ambitious approach should be taken in that regard. The rapporteur supports the overall objectives of the Commission, whose aim is to provide legal certainty by establishing uniform requirements for operating DLT market infrastructures and to support innovation by removing obstacles to the application of DLT in the financial sector. Yet, the rapporteur has a number of concerns on the original proposal and proposes to amend it in the following manner:
While acknowledging that the envisaged scope of the Regulation foresees limits in terms of both financial thresholds and instruments that can be accepted under the DLT Pilot Regime, the rapporteur proposes to amend the two thresholds:
- Financial thresholds: the rapporteur understands the Commission’s approach to establish an aggregate threshold for the total market value of DLT transferable securities, as this strikes a balance between openness to innovation and the protection against financial stability risks. However, the rapporteur proposes to take a more prudent approach for the accomplishment of the Commission’s objectives. The proposed amendments limit the maximum market capitalisation of the issuer of DLT transferable securities to less than EURO 50 million for both shares and bonds.
- Admissible securities: the rapporteur amends the proposal by making it possible for sovereign bonds to be admitted to trading or to be recorded on a distributed ledger. Furthermore, an amendment is proposed which includes DLT exchange-traded funds (ETFs) under the list of admissible securities.
- Technology-neutral wording on use of DLTs: the rapporteur proposes to include an amendment making it clear that liability for the functioning of any particular DLT should always remain with the DLT market infrastructure, regardless of the type of DLT it operates.
- Level playing field
New type of DLT infrastructure: the Commission proposal provides DLT MTFs the possibility to undertake central securities depository activities under the DLT Pilot Regime, but at the same time the DLT SSS would be unable to perform MTF activities. In this context, the rapporteur proposes to ensure that a DLT MTF doing settlement services must follow the same requirements as a DLT SSS, and vice versa, and proposes to create a new type of market infrastructure, a ”DLT Trading and Settlement System” for operators wishing to combine both trading and post-trading roles.
- Early-exit assessment
In the original proposal, the Commission provided that the DLT Pilot Regime should last five years, after which the Commission should assess the costs and benefits of extending the regime on DLT market infrastructures or not. The rapporteur keeps this time period in his legislative report, but includes a provision stating that the Commission should publish such a report after the third year of the DLT Pilot Regime as well.
Following the publication of the report, the rapporteur will present it in the European Parliament’s Economic and Monetary Affairs (ECON) Committee. The legislative report is likely to be amended during the course of discussions with other committee members and shadow rapporteurs. We expect these discussions to take place in Q2 2021. After the adoption of the legislative report in the ECON Committee, the European Parliament plenary as a whole must adopt the report. Trilogue negotiations with the Council will start once both co-legislators have adopted their legislative report.