publication of the European regulation Pilot scheme

Develop a secondary market for security token

This pilot project, with an initial duration of three years, extendable to six years, temporarily removes some requirements of the existing regulatory framework, in order to allow market infrastructure operators and new entrants to use the technology. blockchain to manage a multilateral trading facility (MSN) and / or a settlement-delivery system (SRL) on tokenized financial instruments (or ” security token “).

The result of a proposal by the European Commission as part of a series of measures on digital finance in Europe, the pilot scheme differs from the other measures in that it proposes regulatory exemptions aimed at the MiFID 2 and Purpose directives, as well as central depositories of securities Regulation ( CSDR) to test the technology blockchain in the context of market or post-trade activity. This regime will allow national and European actors and regulators to gain significant experience in the use of technology blockchain in market activities.

The implementation of this system is innovative in that, for the first time, a European text of direct application authorizes some market operators to derogate from certain provisions of ordinary legislation, under certain conditions.

DLT market infrastructure

The regulation defines a new category of actors: market infrastructures using distributed ledger technologies (Distributed accounting technology or “DLT”). This category refers to three distinct actors authorized by the national authorities of a member state of the European Union to register under this regime:

  • The DLT Multilateral Trading Facility or “MTF DLT”, a multilateral trading system for tokenized securities which only allows the trading of DLT financial instruments;
  • The DLT or “SR DLT” settlement system, a tokenized securities settlement system that regulates transactions in DLT financial instruments;
  • And a new actor, not previously envisaged by financial regulation, which provides both the services of a DLT MTF and a DLT SR, the DLT or “SNR DLT” trading and settlement system, which will allow a single entity to combine trading and settlement-delivery of tokenized financial securities.

The regulation limits the scope of this testing area to some financial instruments whose market value will be limited.

Next steps

Before the regulation enters into force, some steps still need to be completed. The European Securities and Markets Authority (ESMA) must amend the regulatory technical standards of the MIFIR and CSDR regulations to adapt them to the pilot regime and publish various guidelines.

The Member States of the European Union must designate the competent national authority responsible for issuing the regulatory approvals and exemptions that may be granted under the pilot project. In France, this competence could be shared between the MFA, the Prudential Control and Resolution Authority (ACPR) and the Banque de France. In order to simplify the accreditation process for players, a “one-stop-shop” principle is envisaged which allows a player not to have to interact with multiple authorities.

Finally, adaptations of national regulations in terms of movable law are to be expected, which remain national competences not harmonized by European law. In France, based on a report by the Haut Comité Juridique de la Place Financière de Paris (HCJP) published on 27 November 2020, the draft regulation on a pilot project led to the relaunch of the HCJP’s work on this issue. Legislative and regulatory changes to the law on listed securities on distributed ledger technology are expected in the coming months to allow for the implementation of this system. Draft legislative and regulatory texts should be subjected to extensive consultation with financial players on the Parisian market.

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