ESMA consults on distributed ledger technology
The European Securities and Markets Authority (ESMA) today published a call for evidence on distributed ledger technology (DLT). The call for evidence seeks input from stakeholders on the use of DLT for trading and settlement and on the need for amending the regulatory technical standards (RTS) on regulatory reporting and transparency requirements.
The DLT Pilot aims at developing the trading and settlement for ‘tokenised’ securities, i.e. digital representations of traditional securities and enabling market participants as well as EU regulators to gain experience on new opportunities and issues raised by DLT while ensuring financial stability, investor protection and market integrity. Co-legislators reached a political agreement on the DLT Pilot on 24 November 2021.
The Regulation on a pilot regime for market infrastructures based on DLT (DLT Pilot) requires ESMA to assess whether the RTS developed under MiFIR relative to certain pre-and post-trade transparency and data reporting requirements need to be amended in order to be effectively applied to securities issued, traded and recorded on DLT.
The areas covered in the call include:
- RTS 1 (equity transparency);
- RTS 2 (non-equity transparency);
- RTS 3 (double volume cap and provision of data); and
- RTS on data reporting requirements – i.e. RTS 22 (transaction reporting), RTS 23 (reference data), RTS 24 (order record keeping), and RTS 25 (clock synchronisation).
In addition, in relation to the transaction reporting exemption, the call for evidence seeks stakeholders’ views on possible effective ways to allow regulators’ access to information on:
- financial instruments’ reference data; and
- transparency data
Crypto assets are one of the major applications of blockchain technology in finance. However, provisions in existing EU legislation may inhibit the use of DLT. The DLT Pilot aims at creating an EU framework that enables markets in crypto assets, which qualify as financial instruments (i.e., tokenised financial assets) and the wider use of DLT in financial services.
The use of DLT for trading and settlement is new, and in consequence both market participants as well as NCAs and ESMA’s have a lack of experience as regards to DLT MI (market infrastructure) and on potential challenges for operating DLT MIs. ESMA considers it important to have a thorough understanding of the usage of DLT for trading and settlement and, in consequence, on the application of the transparency and data reporting requirements by DLT Mis.
ESMA is currently reaching out to stakeholders that are potentially interested in operating a DLT MI to prepare for its future tasks under the DLT Pilot. These exchanges serve to better understand the use of DLT for trading and settlement and to identify potential challenges in relation to listing, trading and settlement using DLT.
More specifically, the information gathered on the operation of DLT MIs assists ESMA in assessing whether amendments to the technical standards on data reporting and transparency are necessary for the successful implementation of the DLT Pilot as well as to prepare for the further tasks allocated to ESMA under the Regulation (opinions, Guidelines, regular reporting tasks).
The list of questions includes (among other things):
- Q. Please indicate whether you/your organisation is planning to operate a DLT MI under the DLT Pilot and provide some high-level explanation of the business model.
- Q. What are the key elements supporting the increased use of DLT in the field of financial services? What are the main obstacles, including in the technical standards, for the development and up-take of DLT-based solutions (listing, trading and settlement)? Do you plan to operate a restricted (permissioned) or unrestricted (permissionless) distributed ledger?
- Q. Would you consider operating a DLT MTF? Would you consider operating a DLT SS without operating at the same time a DLT MTF (i.e. combined infrastructure DLT TSS)? If yes, under which conditions?
- Q. Please provide an overview of how DLT securities trade in the current market structure (incl. what types of trading system are used, the relevance of secondary market trading)? Do you see any challenges with the current market structure following the application of the DLT Pilot?
The aim is to ensure more efficient, secure, and cost-effective management of the data stored on DLTs while preserving its quality, usability and comparability.
Stakeholders are invited to provide comments by 4 March 2022.
Based on the feedback received, ESMA will consider whether amendments to the RTS are necessary. If amendments are necessary, ESMA will consult on its proposal before submitting the final draft RTS to the European Commission for adoption. The DLT Pilot is expected to apply in early 2023.