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Pilot Regime - The kick-off of the tokenization of financial instruments

The Regulation is part of the measures proposed by the European Commission aimed at ensuring that the EU embraces the digital revolution in the financial sector.

As of today, 22 June 2022, the Regulation (EU) 2022/858 of the European Parliament and of the Council of 30 May 2022 on a pilot regime (the Pilot Regime) for market infrastructures based on distributed ledger technology (Regulation 858) enters into force. Except for certain specific provisions, it will be applicable from 23 March 2023.


Regulation 858 is part of the so-called “Digital Finance Package”, a package of measures proposed by the European Commission in September 2020 with an aim to identify a digital finance strategy ensuring that the EU embraces the digital revolution in the financial sector. One of the strategy’s identified priority areas is ensuring that the EU financial service regulatory framework is innovation-friendly and does not pose obstacles to the application of new technologies.

To allow for innovation in a way that preserves financial stability while protecting investors, the European Commission proposes a framework for crypto-assets, differentiating between those crypto-assets being already governed by the EU financial service legislation, as qualifying as “financial instruments” under MiFID  II, and other crypto-assets currently unregulated. Thus, to properly address the specificities of each category of assets, the Digital Finance Package includes Regulation 858, which is about entering into force and covers only those crypto-assets that, although being issued and negotiated on DLT, fall within the definition of “financial instruments” under MiFID II (so-called “tokenized financial instruments”) and a proposal on Regulation on Markets in Crypto-assets (MiCAR), setting forth a bespoke regime for previously unregulated crypto-assets (such as crypto-currencies).

Therefore, Regulation 858 represents the first concrete action within this area and it aims at creating the Pilot Regime for market infrastructures based on distributed ledger technology (DLT market infrastructures), whereby enabling such entities to benefit from exemptions from some specific requirements of the Union financial services legislation. In particular, upon certain conditions, the Pilot Regime allows the DLT market infrastructures to be temporarily exempted from those provisions and requirements laid down in the EU’s financial services legislation, such as the CSDR (i.e. European Regulation no. 2014/909/EU), the MiFIR (i.e. European Regulation no. 2014/600/EU) and the MiFID II (i.e. European Directive no. 2014/65/EU), that might prevent the application of new technologies for the trading and settlement of transactions related to financial instruments issued using DLT.

Given the limited experience as regards the trading in crypto-assets qualifying as financial instruments (DLT financial instruments), in the European legislator’s view, the experience gained thanks to the Pilot Regime should help in identifying the targeted adjustments to European financial services legislation to enable full development of the issuance, safekeeping, trading and settlement of the DLT financial instruments.

This having been said, it is worth noting that the recording of securities, the maintenance of accounts and the management of settlement systems, as well as the regime of form and circulation of financial instruments, which are regulated by non-harmonized provisions of national (i.e. Italian) law are not directly covered by Regulation 858. As such, it must be carefully considered how the Pilot Regime can be implemented in Italy taking into account the existing civil and corporate legal framework applicable to the financial instruments and whether and how the Italian legislator will consider possible changes to such regime following the example of other jurisdictions. See also our previous alert available here.

The Pilot Regime

Scope of the Pilot Regime

The Pilot Regime sets forth the requirements pertaining to:

  1. granting and withdrawing the specific permission to operate as a DLT market infrastructure and any relevant exemptions from the EU’s financial service legislation;
  2. mandating, modifying and withdrawing the conditions as well as the compensatory or corrective measures attached to the exemptions granted;
  3. operating and supervising the DLT market infrastructures; and
  4. the form and modalities of cooperation and coordination between the DLT market infrastructures and the national competent authorities and the latter with the ESMA.

Types of securities

To instill consumer and investor protection as well as market integrity, the Pilot Regime imposes some limitations on the categories of assets which may be admitted to trading and settled in the DLT market infrastructures. In particular, Regulation 858 envisages that the types of financial instruments shall be limited to shares, bonds and units in collective investment undertakings, provided that certain quantitative limits, varying depending on each category of DLT financial instruments, are fulfilled. In any event, the aggregate market value of all the DLT financial instruments that are admitted to trading or that are recorded on a DLT market infrastructure shall not exceed EUR 6 billion at the moment of admission to trading, or initial trading, of a new DLT financial instrument.

The new status of “DLT market infrastructures” and applicable exemptions

To meet the objectives of the Pilot Regime, the new status of DLT market infrastructures has been created. Under Regulation 858, DLT market infrastructures are defined as any of the following entities:

  1. DLT multilateral trading facility (DLT MTF), meaning a multilateral trading facility that only admits to trading DLT financial instruments;
  2. DLT settlement system (DLT SS), meaning a settlement system that settles transactions in DLT financial instruments against payment or against delivery and that allows the initial recording of DLT financial instruments or allows the provision of safekeeping services in relation to DLT financial instruments; and
  3. DLT trading and settlement system (DLT TSS), meaning a DLT MTF or a DLT SS that combines services performed by a DLT MTF and a DLT SS.

The above entities, upon specific permission granted by the relevant national competent authority, may be temporarily exempted from some of the specific requirements of the Union financial services legislation that could otherwise prevent operators from developing solutions for trading and settlement of transactions in crypto-assets falling within the meaning of financial instruments. In particular, under the Pilot Regime, the DLT market infrastructures may request to be exempted from those provisions of law (when applicable) pertaining to, inter alia:

  1. the obligation of intermediation, as envisaged under MiFID II, in order to provide direct access to DLT MTFs for retail investors and to enable them to deal on their own account, provided that such retail investors meet certain conditions;
  2. certain transaction reporting requirements under MiFIR, provided that the DLT MTF fulfils certain conditions;
  3. the settlement requirements set out by Articles 6 and 7 of the CSDR, provided that the DLT SS meets certain requirements, including having in place arrangements to ensure a clear, accurate and timely confirmation of the details of the transactions in DLT financial instruments;
  4. certain relevant definitions (including inter alia the definition of ‘dematerialized form’, ‘transfer order’ and ‘securities account’) and provisions (including the rules concerning the book-entry form) provided in the CSDR; and
  5. the cash settlement requirements provided for in Article 40 of the CSDR, provided that the DLT SS settles on the basis of delivery versus payment.

The EU-passport

The specific permission to operate as a DLT market infrastructure is granted by the relevant national competent authority and is valid throughout the Union for a period of up to six years from the date of issuance. Inter alia, the specific permission shall specify the exemptions and the compensatory measures the specific DLT market infrastructures shall respectively benefit from and be compliant with.

This means that the exemptions granted under the Pilot Regime are not firmly pre-determined by the European legislators but may be tailored on the specific business model the relevant DLT market infrastructure intends to implement and the features and characteristics of the DLT financial instruments admissible to trading and settlement on that DLT market infrastructure.

How A&O can help

A&O can help you in navigating this new emerging regulatory framework providing assistance in any of the following fields:

  1. interactions between Regulation 858 and the Italian regime applicable to financial instruments;
  2. any possible developments of the Pilot Regime, including any potential initiatives you may adopt and arrangements you may implement to manage legislators’ or regulators’ expectations;
  3. processing of digitalization of your financial instruments as well as in the definition of your digital asset strategy; and
  4. assessing the benefits deriving from the admission to this regulatory sandbox.

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