What the EU’s DLT Pilot Regime means for Capital Markets

23 March 2023

EU leaders have already recognized the power in strengthening our abilities to move and transact securely across the region. This has been proven via the main goals of the Capital Markets Union (CMU), which aims to get investment and savings flowing across all member states for the benefit of citizens, businesses, and investors. Bankers, issuers, and technology companies are continuing to innovate in the development of technology to improve how capital markets operate.

The EU has identified inefficiencies within capital markets where distributed ledger technology (DLT) could be applied.  The EU’s DLT Pilot Regime addresses barriers to adoption within MiFIR and Central Securities Depositories Regulation (CSDR).

March 23 is the start to understanding how DLT can benefit European capital markets and be incorporated into regulations. The regime acts as a regulatory framework, enabling firms to trade digital securities, and explore the benefits in issuance, settlement, and lifecycle management.

Capitalizing on regulation

A fundamental idea of the regime is to facilitate the development of DLT market infrastructure for digital securities, which will help inform EU regulators on beneficial changes to the regulatory framework. Implementation of future-proof regulation to safeguard capital requirements compatible with DLT would enable a more open, scalable, and secure financial system.

The regime will also move along the implantation of required safeguards to shape stronger capital market activities. These safeguards will include capital requirements, custody of assets, a mandatory complaint holder procedure available to investors, and rights of the investor against the issuer.  The current pilot regime’s DLT transaction screening service (TSS) model can incentivise investment firms and market operators to provide settlement services in relation to securities traded on trading venues. This is a significant opportunity for new players to compete on settlement services, fostering healthy competition to drive stronger ROI.

Harnessing DLT specific to securities and settlement systems has been embraced elsewhere. We can learn from the Depository Trust and Clearing Corporation (DTCC) – successfully spearheading into Web3 with the implementation of ‘Project Ion’ that has leveraged DLT for settlement whilst still upholding its rigorous resilience and safety standards. Championing a regulated Web3 design DLT, Project Ion has proven it supports critical scalability. It has already recorded 160,000 transactions on a peak day and will be able to support settlement timeframes including T+1, T+0.

The future of financial markets

By 24 March 2026, the European Securities Market Authorities (ESMA) will have enough information to provide a comprehensive report to the European Commission, containing an assessment of the DLT Pilot Regime. This will include a key cost-benefit analysis on whether the regime should remain permanently to shape the future of the EU’s economy.  

Areas within the financial services are already taking great strides towards a digital economy. For example, the UK also aiming to have a “Financial Market Infrastructure Sandbox” in place by 2023. If the regime is successful and expands in scope and scale, it will enable new market structures to be developed. This will allow for more efficient capital allocation and data transparency across the global economy.

The regime provides huge opportunity for the industry. However, given the current macroeconomic market challenges remain. To drive a stronger global economy by leveraging the regime and DLT, institutions must collaborate across their ecosystems, tapping into firms and individuals with regulated market and technological expertise.

  • Marcus van Abbé

    Capital Markets Business Development Director EMEA
  • Tamsin Richendoller-Hill

    Market Analysis & Communications