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Pilot Regime – The kick-off of the tokenization of financial instruments | Allen & Overy LLP

This regulation is part of the measures proposed by the European Commission to ensure that the EU embraces the digital revolution in the financial sector.

Today, as of June 22, 2022, the European Parliament and the May 30, 2022 Council Regulations (EU) 2022/858 on Piloting of Market Infrastructure Based on Distributed Ledger Technology will come into force. I am. Effective. Except for certain provisions, it will be applied from March 23, 2023.


Rule 858 is part of the so-called “digital finance package”. This is a package of measures proposed by the European Commission in September 2020 with the aim of identifying digital finance strategies that ensure that the EU embraces the digital revolution in the financial sector. One of the priorities identified in the strategy is to ensure that the EU financial services regulatory framework responds to innovation and does not interfere with the application of new technologies.

To enable innovation in a way that protects investors while maintaining financial stability, the European Commission has proposed a framework for crypto assets, which will “ crypto assets already managed by EU Financial Services Act. Distinguish as a qualification as a “financial product”. MiFID II, and other crypto assets that are not currently regulated. Therefore, in order to properly address the peculiarities of each category of assets, the Digital Finance Package contains Rule 858 on Enforcement. This is a proposal for “financial instruments” (so-called “tokenized financial instruments”) under MiFID II and market regulation of crypto assets (MiCAR), which was issued and negotiated by DLT, and was previously regulated. It shows a custom-made system for crypto assets (such as cryptocurrencies) that did not exist.

Therefore, Regulation 858 represents the first concrete action in this area and aims to build a pilot of the market infrastructure (DLT market infrastructure) based on distributed ledger technology. Service law. In particular, under certain conditions, the pilot regime temporarily exempts the DLT market infrastructure from the provisions and requirements set out in EU financial services laws such as CSVR (ie European Regulation 2014/909 / EU). .. MiFIR (ie European Regulation 2014/600 / EU) and MiFID II (ie European Directive 2014/65 / EU) may prevent the application of new technologies for trading and settlement of transactions related to financial instruments. Is issued using DLT.

Given the limited experience in trading crypto assets that qualify as financial instruments (DLT financial instruments), in the view of European legislators, the experience gained thanks to the pilot regime is the issuance of DLT financial instruments. Complete development of storage, transactions and payments.

However, it is worth noting that securities records, accounting maintenance, payment system management, financial instrument forms and distribution regimes are regulated by national discordant regulations. That is, the (Italian) law is not directly covered by Rule 858. Therefore, how the pilot system can be implemented in Italy, taking into account the existing civil and corporate legal frameworks that apply to financial instruments, and that Italian legislators follow the examples of other jurisdictions. Consider possible changes to such a regime. See also previous alerts available here.

Pilot regime

Range of pilot regime

The pilot regime shows the requirements related to:

  1. Grants and withdraws specific permits to function as DLT market infrastructure and relevant exemptions from EU financial services law.
  2. Compensatory or corrective actions associated with mandatory, modified, withdrawn, and granted exemptions.
  3. Operation and supervision of DLT market infrastructure.When
  4. The form and modality of cooperation and coordination between the DLT market infrastructure and national authorities and the latter and ESMA.

Types of securities

To protect consumers and investors and instill market integrity, the pilot regime imposes some restrictions on the categories of assets that are allowed to trade and may be settled in the DLT market infrastructure. increase. In particular, Rule 858 envisages limiting the types of financial instruments to equities, fixed income, and collective investment units if certain quantitative limits that differ for each category of DLT financial instruments are met. I am. In any case, the sum of the market values ​​of all DLT financial instruments that are allowed to trade or recorded in the DLT market infrastructure exceeds € 6 billion at the time of entry into a new DLT transaction or the first transaction. Must not be. Financial products.

New status of “DLT Market Infrastructure” and applicable exemptions

A new status of DLT market infrastructure has been created to achieve the objectives of the pilot regime. Under Regulation 858, the DLT market infrastructure is defined as one of the following entities:

  1. The DLT Multilateral Trading Facility (DLT MTF) means a multilateral trading facility that only allows trading of DLT financial instruments.
  2. The DLT Payment System (DLT SS) allows you to settle transactions for DLT financial instruments for payment or delivery, enable initial recording of DLT financial instruments, or provide storage services related to DLT financial instruments. Means a payment system to do.When
  3. DLT Transaction and Payment System (DLT TSS). This means DLTMTF or DLTSS, which is a combination of services performed by DLTMTF or DLTSS.

The above entities may temporarily prevent operators from developing solutions for cryptographic asset transactions and settlement of transactions under certain permits granted by the relevant national competent authority. You may be exempt from some of the specific requirements of federal financial services law. Within the meaning of financial products. In particular, under the pilot regime, the DLT Market Infrastructure may require exemptions from legal provisions (if applicable) specifically related to:

  1. As envisioned by MiFID II, an intermediary obligation to allow private investors direct access to the DLT MTF and to allow private investors to trade on their personal accounts if certain conditions are met.
  2. Specific transaction reporting requirements based on MiFIR if the DLT MTF meets certain conditions.
  3. Settlement requirements set out in Articles 6 and 7 of the CSDR, provided that the DLT SS meets certain requirements. This includes being ready to see the details of trading DLT financial instruments clearly, accurately and in a timely manner.
  4. Certain relevant definitions (including, among other things, “dematerialized forms”, “transfer orders”, and “securities accounts”) and provisions (including rules regarding book entry forms) provided by the CSDR.When
  5. Cash settlement requirements set out in Article 40 of the CSDR, provided that the DLT SS pays on the basis of delivery and payment.

EU passport

Certain permits to function as a DLT market infrastructure are granted by the competent authority of the relevant country and are valid throughout the Union for up to 6 years from the date of issue. In particular, a particular permit shall specify the tax exemption and indemnification measures that each particular DLT market infrastructure benefits and complies with.

This is because the exemptions granted under the pilot system are not firmly pre-determined by European legislators, but are permissible for certain business models and transactions that the relevant DLT market infrastructure is trying to implement. It means that it may be adjusted to the function and characteristics of the DLT financial product and settlement in its DLT market infrastructure.

How A & O Helps

A & O will help you navigate this new regulatory framework, which provides assistance in one of the following areas:

  1. Interaction between regulation 858 and the Italian system applicable to financial instruments.
  2. Possible developments in the pilot regime, including potential initiatives and arrangements that may be adopted to manage the expectations of parliamentarians or regulatory agencies.
  3. The processing of digitization of financial instruments and the definition of digital asset strategies.When
  4. We appreciate the benefits of admission to this regulated sandbox.

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