The European Parliament’s Committee on Economic and Monetary Affairs (ECON) adopted on Tuesday 13 July (47 votes in favour, 4 against, 8 abstentions) the draft report (see EUROPE 12677/12) prepared by Johan Van Overtveldt (ECR, Belgium) on the pilot scheme for market infrastructures based on distributed ledger technology, or DLT.
Negotiations on this text were indeed more consensual than on the rest of the package of legislation on digital finance (see EUROPE 12741/15), which will not be put to the vote until later. The Council of the EU also chose to separate this text from the rest of the package and adopted its position on it at the end of June (see EUROPE 12750/14).
Proposed for issuers that already fall within the scope of existing EU legislation, the pilot regime is aimed at market infrastructures that want to attempt trading and settling transactions in the form of crypto-assets (see EUROPE 12567/2).
It will be designed as a “sandbox” that will allow temporary derogations from existing rules so that regulators can gain experience in using DLT—the technology that underpins crypto-assets.
All the compromises reached between the political groups and seen by EUROPE were adopted. The final text provides that the regime should respect the key principle of ‘same activities, same risks, same rules’, be technology-neutral, and introduce only targeted adjustments to EU law.
With regard to the thresholds for participating in the pilot scheme, the political groups have agreed on a threshold of €200 million for shares; €500 million for certain types of bonds, including covered bonds and sovereign bonds; and €500 million for units of exchange traded funds and units of mutual funds invested in stocks or bonds.
Operators of a DLT securities settlement system (DLT SSS) could, according to the text, may admit new financial instruments until the total market value of DLT financial instruments registered in the DLT SSS reaches €5 billion.
“The European Parliament has found the right balance between innovation and financial stability. The pilot scheme will be open to a wider range of instruments, without weakening market and post-trade rules and without diluting the responsibility of financial firms”, said French MEP Stéphanie Yon-Courtin, the Renew Europe group’s negotiator on the text, in a written reaction sent to EUROPE.
Enhanced role for ESMA
Parliament also proposes that it should be the European Securities and Markets Authority (ESMA) that grants and withdraws an authorisation for a DLT market infrastructure to operate under this regime, whereas the European Commission proposed that it should be the national competent authority, on the advice of ESMA.
In particular, ESMA could refuse an authorisation if there are objective reasons to believe that significant risks to investor protection, market integrity, or financial stability are not adequately addressed and mitigated by the applicant or if the authorisation is being sought to circumvent regulatory requirements.
Increased responsibility for operators
The Parliament text strengthens the liability of operators running a DLT market infrastructure. In particular, it specifies that they remain at all times fully responsible for the services and activities they carry out.
In addition, the operators of a DLT market infrastructure should be held liable for any loss of their clients’ funds, collateral and financial instruments, or means of access to such assets, resulting from hacking, fraud, cyber-attacks, negligence, for example, or other serious malfunctions up to an amount not exceeding the market value of the lost assets.
They should also be required, according to the text, to put in place provisions to ensure investor protection and to provide them with grievance mechanisms and compensation procedures in the event of damage suffered as a result of serious malfunctioning or cessation of activities due to certain circumstances.
Evaluation of the pilot scheme
The text provides that ESMA should submit a preliminary report to the Commission 3 years after the entry into force of the Regulation, and a final report no later than 5 years afterwards, on the functioning of the pilot scheme, any risks to investor protection and financial stability posed by the use of DLT technology, and the potential implications of an increase in the maximum thresholds; this report should include a recommendation on whether or not to continue the pilot scheme.
Within 3 months of the submission of these reports, the Commission should then decide whether to extend the pilot scheme in time, extend its scope, make it permanent by making appropriate changes to the EU legislative framework, or eliminate it. (Original version in French by Marion Fontana)