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As previously highlighted by our colleagues (see here), the European Commission’s Market Integration Package is designed to update Europe’s financial services market for the 21^st century.

Central to this are changes to the DLT Pilot Regime (Regulation (EU) 2022/858), the Central Securities Depository Regulation (Regulation (EU) 909/2014), as well as the proposal of a new Settlement Finality Regulation.

This article discusses some of the existing issues with the DLT Pilot Regime, how the EU Market Integration Package addresses these and how the package will enable the use of tokenisation.

The Issues with the DLT Pilot Regime

ESMA previously highlighted a number of issues to the European Commission that were preventing greater uptake of the DLT Pilot Regime. These included;

• The inability to use solutions to allow for cash settlement without traditional cash. The DLT Pilot Regime only allowed settlement with e-money tokens (as defined under MiCAR) where such e-money tokens had been issued by a credit institution, and not by an e-money institution;
• DLT multilateral trading operators had no avenue for securing services from a central securities depository due to technological and operational complexities; and
• There was concern that the DLT Pilot Regime may be wound up in the near term, potentially dissuading potential applicants due to the high cost and time required to become authorised under the DLT Pilot Regime.

Solutions under the Market Integration Package

• Modernising the CSD Regulation and CSD Services
  The CSD Regulation is proposed to be amended to allow CSD services to be provided through DLT. It does so by extending the traditional definitions of “book-entry”, “cash”, and “securities accounts”, while also defining “distributed ledger technology” and “e-money token”.DLT is specifically called out with regard to outsourcing under the CSD Regulation, which is intended to cover the risks a CSD should consider when utilising DLT technology in outsourcing. Additionally, a new framework has been provided that would enable settlement of the cash leg of a securities transaction, under certain conditions, with specific e-money tokens authorised under MiCAR.
• Amendments to the DLT Pilot Regime
  A significant portion of the proposal is dedicated to the proposed amendments to the DLT Pilot Regime. These amendments include (but are not limited to):
  • Expanded scope: The definition of infrastructure has been changed to refer to trading venues, to account for entities that can operate both a multilateral trading system and an organised trading facility. The types of financial instruments that are included have also been expanded.
  • Aggregated Limits: Financial instrument specific limits are replaced by a total maximum aggregated market value of €100 billion for all DLT financial instruments that can be admitted to trading or recorded on DLT market infrastructure.
  • New Simplified Regime: A DLT settlement and/or trading and settlement system operator that services DLT financial instruments with a total aggregate value of €10 billion can benefit from a light regulatory framework proportionate to their size and risk.
  • Commercial Bank Money & EMTs: Operators of a DLT settlement system can designate credit institutions for the settlement of payments in commercial bank money if they satisfy the prudential and capital requirements of the CSD Regulation. For e-money tokens, most banking ancillary services involving e-money tokens should be provided by the same type of credit institutions. Lastly, payments made through central bank monies can include monies in tokenised form or using e-money tokens.
  • CSD Services: New articles regulate two core services—notary and central maintenance—and introduce a DLT-based settlement model using account keepers with access to central bank money.
  • Expiry: The DLT Pilot Regime will be cemented as a permanent framework, as the previous time limits on the duration of authorisations will no longer apply.

• The Settlement Finality Regulation (SFR)
  The wording under the SFR has been drafted to be technology neutral, with the express objective of including DLT-based settlement systems (including tokenised forms of cash or securities), and to allow for DLT-based systems to be designated as market infrastructure under both the DLT Pilot Regime and the SFR, where the system is compliant with both – with ESMA and the EBA being tasked with preparing further rules on how to assess settlement finality in DLT systems. Where collateral over financial instruments is recorded on a DLT-based system, the applicable conflict of laws rule will determine the collateral taker’s rights by reference to the law of the Member State in which the DLT system is located. Where the system has no identifiable location, the applicable law will instead be the law governing the DLT system itself. To reflect this approach, it is proposed that the Financial Collateral Directive be amended to bring tokenised assets within its scope expressly.

Next Steps

The proposal must still pass through the EU legislative process, making adoption before mid-2026 unlikely. A more realistic timeline is late 2026. Meanwhile, market participants are already innovating with DLT solutions, creating a dynamic environment as regulation catches up with practice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.