ESMA report proposes amendments to DLT pilot regime for permanent adoption

The European Securities and Markets Authority (ESMA) has published a report, accompanied by a press release, on the functioning and review of the Distributed Ledger Technology (DLT) pilot regime. The DLT pilot regime allows certain DLT market infrastructures to operate with exemptions from some EU financial services legislation. The regime has so far received limited uptake, with only three authorised infrastructures and minimal live trading activity. The report identifies operational and legal challenges, such as interoperability issues and restricted access to central bank money and refers to industry feedback, that the thresholds for financial instruments that may be admitted to trading or recorded on DLT market infrastructures may be too restrictive.

The report sets out a series of recommendations on the future direction of the pilot regime, including: (i) short-term measures such as introducing flexibility and proportionality through tiered and/or adjustable thresholds which would be tailored to each entity's specific risk profile, and enhancing the investor protection provisions under the exemption framework for retail participation; and (ii) long-term measures such as removing regulatory thresholds once a DLT market infrastructure reaches a pre-set level of activity, establishing a pathway toward a permanent DLT regulatory framework beyond the pilot regime and clarifying the regulatory treatment of DLT trading and settlement systems.

The European Commission is expected to present its own report to the European Parliament and Council of the EU within three months of receiving ESMA's report, which may cause the DLT pilot regime to be extended, amended or converted into a permanent regulation. ESMA has indicated its readiness to provide a follow-up report should the regime be extended.

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