Regulation of the European Parliament and of the Council on a pilot scheme for market infrastructures based on decentralized registry technology.
Before starting, it is important to be clear about two concepts:
- First of all, we should know that cryptoassets are one of the main applications of blockchain technology in finance.
- Secondly, what we should understand by DRT and DTR and MNS. Thus, when we speak of TRD or decentralized registration technology we refer to a class of technologies that allow the decentralized registration of encrypted data (article 2.1) of the Regulation) while when we speak of MNS or multilateral trading system, they are those systems that, operated by an investment services firm or by a management company of an official secondary market, must have as their exclusive corporate purpose the management of a system that allows to bring together, according to its non-discretionary rules, the various buying and selling interests in financial instruments of multiple third parties.
Currently, DRT is used to a limited extent in financial services, focusing its application on market infrastructures. This being the case, what have been the policy options for cryptoassets that the Commission has considered to promote their use and ensure their security and support for innovation?
Non-legislative measures providing guidance on the applicability of the EU financial services framework to cryptoassets that are considered instruments. This option could clarify when cryptoassets could be considered financial instruments.
Special amendments in the EU framework for financial services. This option could provide a high degree of legal certainty on how EU financial services legislation is implemented.
3. Pilot scheme involving the creation of a market infrastructure based on the TRD. This option could offer investment services firms and market players the possibility to test the use of the TRD on a larger scale.
According to the first recital of the Communication, the Communication aims to ensure that Union legislation adapts to the digital age and contributes to a future-proof economy that enables the use of innovative technologies by establishing requirements for multilateral trading systems and securities settlement systems using decentralized registry technologies.
However, what are the limitations on marketable securities admitted to trading or settled by a market infrastructure based on the TRD?
Only those that meet these requirements:
Shares whose issuer has a market capitalization or an interim market capitalization of less than 200 million euros; or
2. Convertible, guaranteed, corporate or other public bonds with an issue volume of less than 500 million euros.
Requirements and exemptions relating to TRD-based MTFs. A TRD-based MTF shall be subject to all requirements applicable to an MTF except if:
- You have applied for a waiver and it has been granted.
- It complies with the obligations established in articles 2, 4 and 6 of the project.
Additional requirements applicable to market infrastructures based on the TRD:
- The lead agencies of the TRD-based market infrastructure will establish a clear and detailed model describing how they intend to carry out their services and activities, including a description of critical personnel, technical aspects and the use of TRD.
- Rules will be established for the operation of the DRT to be managed, including rules for accessing decentralized registry technology, resolution of potential conflicts of interest and risk management.
- Establish a clear, detailed and available transition strategy for the cessation of operations of a given market infrastructure based on the TRD or settlement thereof.
What happens if an investment services company requests an exemption? Well, it must propose compensatory measures to achieve the objectives pursued and must guarantee certain minimum requirements, among them, justifying the exemption.
Applications for specific authorization to operate a multilateral trading system based on the TRD shall be accompanied by:
1. The information required in the application.
2. The business model, MTF rules based on the TRD and related legal provisions.
3. The operation of its exclusive TRD.
4. General provisions on computer and cybernetic matters.
5. Description of custody arrangements for marketable securities based on the customers' TRD.
6. Transition strategy.
7. The exemption requested and its justification.
Before deciding, the competent authority shall provide all relevant information on the MTF based on the TRD, an explanation of the requested exemptions, their justifications and possible countervailing measures proposed. Within three months of receipt of the notification, ESMA shall submit to the competent authority a non-binding opinion on the application and make any recommendations. The competent authority shall refuse the applicant the authorization to operate an MTF based on the TRD if there are reasons to believe:
That the applicant fails to adequately address and mitigate significant risks to investor protection, market integrity or financial stability; or 2.
2. That the specific authorization to operate a TRD-based MTF under this Regulation and the requested exemptions are intended to circumvent legal or regulatory requirements.
The specific TRD authorization shall be valid throughout the Union for a maximum of six years from the date of the specific authorization. However, such authorization may be revoked if:
- A defect has been detected in the operation of the DRT or in the services and activities provided by the agency.
- The conditions associated with the exemptions granted by the competent authority have not been complied with.
- They do not meet the established conditions.
- Provide misleading information.
Regarding inter-agency cooperation, they will be obliged to cooperate with the competent authorities and to notify any modification of the model, unauthorized access test by the agencies, failure, loss or cyber-attack, and any corrective measures to the model may be required. Every six months from the date of the specific authorization, the governing body of a market infrastructure based on the TRD shall submit a report to the competent authority and ESMA.
Regarding its monitoring, within five years after the entry into force of the regulation, ESMA must submit to the Commission a report on the operation of the market infrastructures based on the TRD, the number of systems, the type of exemptions, the procedures that have been carried out, the risks and incidents, including a cost-benefit analysis proposing the extension, modification, permanence or termination of the regulation.
