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The Regulation on a Pilot Regime for market infrastructures based on distributed ledger technology

The Regulation on a Pilot Regime for market infrastructures based on distributed ledger technology

16 January 2025

As part of a series of measures related to digital finance in Europe (Digital Finance Package), Regulation (EU) 2022/858 on a pilot regime for market infrastructures based on distributed ledger technology (Pilot Regime Regulation, or PRR) allows existing or new market infrastructures to use distributed ledger technology (DLT) in a simplified framework for trading or settlement activities of financial instruments. It aims to promote innovation and experimentation within a framework that ensures investor protection, market integrity, and financial stability.

What is the European Pilot Regime Regulation?

The Pilot Regime Regulation covers the issuance, recording, transfer and storage of so-called "tokenised" financial instruments (security tokens or DLT financial instruments). This involves to record a financial instrument in a distributed ledger, and perform the related settlement activities in central bank or commercial bank money, including tokenised, or even electronic money tokens (EMTs).

The Pilot Regime Regulation, which has an initial duration of three years, extendable to six years, lifts certain requirements of the existing regulatory framework for trading and settlement activities involving financial instruments. In this sense, the operation of the Pilot Regime Regulation is based on targeted exemptions that may be granted by national competent authorities from Directives 2014/65/EU of the European Parliament and of the Council of 15 May 2014 (MiFID II) and 98/26/EC of the European Parliament and of the Council of 19 May 1998 (“Settlement Finality”), as well as from Regulation No 600/2014 of the European Parliament and of the Council of 15 May 2014 (MiFIR) and Regulation No 909/ 2014 of the European Parliament and of the Council of 23 July 2014 (CSDR).

What is the scope of the Pilot Regime Regulation?

Players involved

The Pilot Regime Regulation is aimed either at market infrastructures using distributed ledger technology that are already authorised (investment services providers or market operators authorised  to operate a multilateral trading facility, (MTF), as well as central securities depositories (CSDs), or at new entrants wishing to operate such market infrastructures.

It introduces a new category of players, "DLT market infrastructures", which are categorised into three types:

  • DLT multilateral trading facilities (DLT MTFs);
  • DLT settlement systems (DLT SS);
  • DLT Trading and Settlement Systems (DLT TSS).

The DLT TSS is an innovation that allows a single player to provide both the services of a multilateral trading facility and those of a settlement system, which is not permitted in traditional market infrastructures without the exemptions provided under the Pilot Regime Regulation.

Only the types of DLT market infrastructures defined as above are eligible under the Pilot Regime. The main characteristics of each one are described in more detail in the table below (non-exhaustive list of characteristics):

DLT MTF

  • Multilateral trading facility, as defined in the MiFID II Directive, on which only DLT financial instruments are admitted to trading.
  • Statutorily operated by an investment service provider authorised to provide the service of operating a multilateral trading facility or a market operator authorised for this purpose, in accordance with the MiFID II Directive.

DLT SS

  • Securities settlement system, as defined in the CSDR regulation, which settles transactions involving DLT financial instruments against payment or delivery of these instruments.
  • Statutorily operated by a central securities depository authorised in accordance with CSDR regulations.

DLT TSS

  • Combination of a multilateral trading facility, as defined in the MiFID II Directive, and a securities settlement system, as defined in the CSDR Regulation, on which DLT financial instruments are traded and where these transactions are settled.
  • Statutorily operated:
    • (i) either by an investment service provider authorised to provide the service of operating a multilateral trading facility or a market operator authorised for this purpose, in accordance with the MiFID II Directive,
    • (ii) or by a central securities depository authorised in accordance with the CSDR Regulation.

Eligible financial instruments and issuance limits

Under the Pilot Regime Regulation, a DLT financial instrument is defined as "a financial instrument that is issued, recorded, transferred and stored using distributed ledger technology".

Article 3 of the Pilot Regime Regulation restricts the application to three types of tokenised financial instruments:  

  • shares;
  • bonds, other forms of securitised debt, including depositary receipts in respect of such securities, or money market instruments, excluding those that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved;
  • units in collective investment undertakings (UCITS) covered by Article 25(4)(a)(iv) of Directive 2014/65/EU.

These instruments are subject to issuance or recording limits that are clearly defined in the regulation:

Eligible instrumentsCeilings per instrument (at the time of admission or recording)Ceilings for all instruments traded or recorded on a DLT market infrastructure
Shares< 500 M€
  • Total market value < €6bn at the time of admission
  • Total market value < €9bn post-admission, beyond, transition strategy
Bonds< €1bn
UCITS< 500 M€

The total market value of DLT financial instruments under the Pilot Regime Regulation must not exceed €6 billion at the time of their admission to trading or recording on a DLT market infrastructure. Thereafter, if the total market value of the DLT financial instruments reaches €9 billion, the operator of the market infrastructure must activate its transition strategy (see "Transition strategy" section) and transfer the financial instruments to traditional market infrastructures that fall outside the scope of the Pilot Regime Regulation.

Individual issuance or recording limits are estimated at the time of admission or recording:

  1. Regarding the issuer's market capitalisation (or, failing that, its indicative market capitalisation) regarding shares;
  2. Per series and with regard to the volume for bond issues; and
  3. Regarding the market value of the assets under management in the case of UCITS.

What are the main measures of the Pilot Regime Regulation?

The Pilot Regime Regulation sets out common requirements for all DLT market infrastructures, and specific obligations and exemptions for each type of infrastructure.

Common requirements for DLT market infrastructures

Application for permission and notification obligations

Before setting up a DLT market infrastructure, applicants must submit a request for a specific permission to operate with the Autorité des marchés financiers (AMF) or the Autorité de contrôle prudentiel et de résolution (ACPR).

Specific permissions and exemptions are granted for a maximum period of six years from the date on which the specific permission was granted, and are valid only for the duration of the regime.

In addition, after obtaining a permission to operate, DLT market infrastructures are required to notify the regulator of:

  • any material change to their business plan, including changes in relation to critical staff, DLT market infrastructure rules and legal terms;
  • any evidence of unauthorised access, material malfunctioning, loss, cyber-attack or other cyber threats, fraud, theft or other serious malpractice suffered by the DLT market infrastructure operator;
  • any material change in the information provided to the national competent authority;
  • any technical or operational difficulties in performing the activities or providing the services subject to the specific  permission, including difficulties related to the development or use of distributed ledger technology and DLT financial instruments;
  • any risks affecting investor protection, market integrity, or financial stability which had not been anticipated in the application requesting the specific permission, or which had not been anticipated at the time when the specific permission was granted.

A table indicating the different national competent authorities in France and their respective roles with regards to the process is available at the bottom of the page.

Transition strategy.

Participants in the Pilot Regime Regulation must establish a clear and detailed transition strategy, which must be made available to the public on their website. This strategy aims to allow traditional market participants to carry over operations carried out under the Pilot Regime in certain specific cases.

The strategy must be ready for deployment in the event of:

  • an exit from the Pilot Regime;
  • when the thresholds set out in the Pilot Regime Regulation are exceeded;
  • a reduction in activity or withdrawal of permission;
  • a withdrawal or discontinuation of an exemption granted under the Pilot Regime Regulation.

The transition strategy should set out how members, participants, issuers and clients of the DLT market infrastructure will be treated in these circumstances, and detail the measures to ensure client protection.

Specific measures and exemptions for each type of DLT market infrastructure

Concerning DLT multilateral trading facilities (DLT MTF)

DLT MTFs are subject to the requirements applicable to a multilateral trading facility under the provisions of the MiFID II Directive and the MIFIR Regulation.

However, Article 4 of the Pilot Regime Regulation provides that the DLT MTF may be exempted by the national competent authority from certain requirements of the MiFID II Directive and the MiFIR Regulation. The Pilot Regime Regulation makes these exemptions conditional on the fulfilment of various conditions and compliance with possible compensatory measures.

The exemptions applicable to DLT MTFs are described in the table below:

Purpose of the exemption

Condition of exemption

Admission of system members

(article 53 of MiFID II)

The DLT MTF may admit as members or participants natural and legal persons other than those indicated in Article 53 of MiFID II, provided that they:

  • Are of sufficiently good repute;
  • Have a sufficient level of aptitude, competence and experience in the trading and operation of DLTs;
  • Have given their informed consent to their status as members or participants;
  • Have been informed of the potential risks associated with their activity.

 Transaction reporting

(Article 26 of MiFIR)

  • The DLT MTF may be exempted from transaction reporting requirements pursuant to Article 26 of the MIFIR Regulation.
  • The DLT MTF is always required to keep relevant details of all transactions executed through its systems.

Concerning DLT settlement systems (DLT SS)

DLT SSs  are subject to the requirements applicable to a central securities depository under the provisions of the CSDR Regulation. However, article 5 of the Pilot Regime Regulation provides that DLT SSs  may be exempted from the application of certain provisions of the CSDR Regulation. The Pilot Regime Regulation makes these exemptions conditional on the fulfilment of various conditions and compliance with any compensatory measures.

The main exemptions applicable to DLT SS are described in the table below (non-exhaustive list):

Purpose of the exemption

Conditions

Definition of the dematerialised form of financial instruments, i.e. their existence in a book entry form.

(Article 2, paragraph 1, point 4) of CSDR).

  • Demonstrate that the use of a traditional securities account or book-entry form is incompatible with the use of DLT.
  • Propose certain compensatory measures to achieve the objectives pursued by the provisions for which an exemption is requested.

Definition of order transfer within the meaning of the Directive “Settlement Finality”

(Article 2, paragraph 1, point 9 of CSDR)

  • Demonstrate that the use of a traditional securities account or book-entry form is incompatible with the use of DLT.
  • Propose certain compensatory measures to achieve the objectives pursued by the provisions for which an exemption is requested.

Definition of a securities account

(Article 2, paragraph 1, point 28) CSDR)

  • Demonstrate that the use of a traditional securities account or book-entry form is incompatible with the use of DLT.
  • Propose certain compensatory measures to achieve the objectives pursued by the provisions for which an exemption is requested.

Book entry form obligation

(Article 3 of CSDR)

  • Demonstrate that the use of a traditional securities account or book-entry form is incompatible with the use of DLT.
  • Propose certain compensatory measures to achieve the objectives pursued by the provisions for which an exemption is requested.

Issue integrity requirements, including the obligation to take appropriate accounting reconciliation measures

(Article 37 of CSDR)

  • Demonstrate that the use of a traditional securities account or book-entry form is incompatible with the use of DLT.
  • Propose certain compensatory measures to achieve the objectives pursued by the provisions for which an exemption is requested.

Obligation to segregate participants' securities from those of other participants and from the assets of the central securities depository (asset segregation)

(Article 38 of CSDR)

  • Demonstrate that the use of a traditional securities account or book-entry form is incompatible with the use of DLT.
  • Propose certain compensatory measures to achieve the objectives pursued by the provisions for which an exemption is requested.

Admission of participants to the system

(Article 2, paragraph 1, point 19) of CSDR)

  • In order to be authorised to admit as participants natural and legal persons other than those referred to in the CSDR Regulation, the DLT SS must ensure in particular that these persons have a sufficiently good repute and level of experience and knowledge of the post-trade and the operation of DLT technology.

Obligations relating to the outsourcing of the central securities depository's core services

(Article 19 of CSDR) 

  • Prove that the application of this article is incompatible with the use of the DLT operated. 

Rules governing the conduct of activities by central securities depositories

(Articles 33 to 35 of CSDR) 
 

  • Propose compensatory measures to meet the objectives of these articles 
  • Ensure, as a minimum, that participation criteria are publicised and that the prices and fees charged for the settlement services provided are publicised.

Obligation regarding the finality of settlements

(Article 39 of CSDR) 

  • Propose compensatory measures to meet the objectives of the article.
  • Ensure compliance with certain criteria, such as the settlement of transactions in near real time or no later than the second working day following the conclusion of the transaction.

Obligation to settle in cash

(Article 40 of CSDR)

  • The DLT SS must ensure delivery against payment.

Right of access between central securities depositories

(Articles 50, 51 and 53 of CSDR) 

  • Demonstrate that the use of the DLT is incompatible with the existing systems of other central securities depositories or other market infrastructures or that granting such access would entail disproportionate costs given the size of the DLT SS.

Concerning DLT trading and settlement systems (DLT TSS)

The Pilot Regime Regulation distinguishes between two types of DLT TSS, namely those operated by investment services providers authorised to operate a multilateral trading facility or market operators authorised to do so, and those operated by authorised central securities depositories.

DLT TSS operated by MTFs

  • These infrastructures are subject to the requirements applicable to an MTF under the MiFID II Directive.
  • Possibility of benefiting from all the exemptions that DLT MTFs can apply for.
  • These infrastructures are also subject to the provisions of the CSDR and can benefit from:
    • exemptions that DLT SS can apply for;
    • additional exemptions on certain provisions of the CSDR regulation.

DLT TSS operated by CSDs

  • These infrastructures must comply with the provisions of the CSDR Regulation, with the exception of those exempted under the Pilot Regime Regulation for DLT SS.
  • These infrastructures must also comply with the requirements applicable to an MTF under MiFID II Directive, with the exception of:
    • requirements that can be subject to an exemption for DLT TSS;
    • additional exemptions from certain provisions of MiF II Directive.

What is the French legal framework for DLT financial instruments and intermediation in relation to the Pilot Regime Regulation?

French legal framework for DLT financial instruments admitted to trading on a DLT market infrastructure under the Pilot Regime Regulation

Security tokens or DLT financial instruments admitted to trading on a DLT market infrastructure under the Pilot Regime Regulation may be registered in two ways:

  1. as a “registered financial instrument” registered in a blockchain under the conditions set out in the 2017 blockchain decree. The DLT market infrastructure is then mandated by the issuer to maintain the register of DLT financial instruments as a DLT settlement system (DLT SS) or DLT trading and settlement system (DLT TSS); or
  2. as a “bearer financial security” registered in a  blockchain under the conditions set out in the Pilot Regime Regulation.

In any case, the DLT market infrastructure (DLT SS or DLT TSS) is not required to undergo authorisation for the purposes of carrying out the custody record keeping functions in its role of registering securities on the DLT.

France’s Framework for the intermediation of financial securities admitted to trading on a DLT market infrastructure under the Pilot Regime Regulation

Under French law, intermediation for financial securities admitted to trading on a DLT market infrastructure under the Pilot Regime Regulation is only an option offered to owners of financial securities, and is not an obligation. The French Monetary and Financial Code provides that an owner of bearer financial securities may instruct a custody account keeper, or a DLT market infrastructure, to process events concerning these securities, and to hold the means of access to its securities, including in the form of private cryptographic keys.

Similarly, in the case of securities registered on a blockchain and for which the DLT market infrastructure has been mandated by the issuer to maintain the DLT register of financial instruments, the owner of the securities may entrust an intermediary with the same tasks.

In both cases, the intermediary acts as an administrator and is not responsible for the safekeeping of the financial instruments. Therefore, in the event of loss of the financial instruments, the DLT market infrastructure is liable under the conditions set out in the Pilot Regime Regulation and the French Monetary and Financial Code.

The AMF General Regulation sets out in detail the conditions for this intermediation and in particular the obligations with which intermediaries must comply.

In particular, the intermediary must comply with the following requirements:

  1. it takes all due care to facilitate the exercise of the rights attached to these financial securities;
  2. when it offers to hold the means of access to financial securities, including by means of private cryptographic keys, it complies in particular with the following obligations:
    1. it maintains a register of positions of the financial securities being administered;
    2. it takes all due care to ensure that it holds the means of access to financial securities;
    3. it may not use the means of access to financial securities without the express consent of their owner;
    4. when the administration of the financial securities ends, in particular in the event of a change of administrator, it transfers control of the means of access to another administrator or to the owner;
  3. it ensures at all times that the position it holds in the name of the owner of the financial securities linked to the means of access entrusted to it by the owner corresponds to the registration of these securities made, in the name of the owner or on its behalf, by the DLT market infrastructure; and
  4. in IT matters, it establishes and maintains operational systems and procedures to safeguard the security, integrity and confidentiality of information, including the means of access to securities.

Insofar as the financial securities are not held with the intermediary, the intermediation activity for financial securities admitted to trading on a DLT market infrastructure does not constitute a service of safekeeping of financial instruments, but constitutes a service of administration of financial instruments within the meaning of Directive (EU) No 2014/65, which is a related service that may be carried over to another Member State (i.e. that can be “passported”) in connection with an investment service. As a result, due to the absence of “financial securities’ safekeeping” by the intermediary, the administrator's liability will be limited. On the other hand, insofar as it holds the means of access to the securities, the administrator of financial securities will be liable for damages caused in the event of loss or unavailability of the means of access to the financial securities, except in cases of force majeure events. Moreover, in such circumstances, the administrator must assist the owner of the securities or the DLT market infrastructure in mitigating the consequences of such loss or unavailability.

An AMF Instruction (DOC-2024-07) has been issued to complement this framework, which is set out in detail in the AMF General Regulation, which provides further details on (i) the mandate model to be entered into between an owner and an administrator as applicable to financial securities registered in a distributed ledger admitted to trading on a DLT market infrastructure; (ii) the scope of the administration service for financial securities registered in a distributed ledger admitted to trading on a DLT market infrastructure; and (iii) the administrators' IT arrangements.

How do I apply for permission under the Pilot Regime Regulation?

Support for the application

On 8 March 2023, the European Securities and Markets Authority (ESMA) published guidelines on standard forms, formats and templates to apply for permission to operate a DLT market infrastructure.  National competent authorities may be contacted to provide any additional information on the elements required to support such an application.

Any information provided as part of an application for permission to operate a DLT market infrastructure and/or an application for exemption from the application of certain obligations to European texts must be transmitted on a durable medium, i.e. any instrument that makes it possible to store information in a way that allows it to be referred to for a period of time appropriate for its intended use and that allows identical reproduction of the information stored.

Applications may be drafted in French or English, though it is preferable to draft them in English to facilitate their transmission to the other European authorities concerned.

Applicants without prior authorisation

Applicants who do not already have authorisation as a credit institution providing investment services, an investment firm, a market operator, or as a central securities depository, must simultaneously submit such authorisations:

  1. for investment firms, credit institutions providing investment services, and credit and investment institutions, to the ACPR's Fintech Innovation Unit (fintech-innovation [at] acpr.banque-france.fr (fintech-innovation[at]acpr[dot]banque-france[dot]fr)), which will then direct applicants to the ACPR's Authorisation Directorate.
  2. for market operators and central securities depositories, applications should be submitted with the Autorité des marchés financiers (innovation [at] amf-france.org (innovation[at]amf-france[dot]org)).

Entities already authorised seeking to benefit from the Pilot Regime Regulation

Entities that are already authorised and wish to benefit from the Pilot Regime Regulation must obtain prior approval from the competent authorities. Depending on the type of permission sought, these authorities are the ACPR or the AMF, subject to obtaining an opinion from the Banque de France. Entities applying for the benefit of the Pilot Regime Regulation are invited to follow the following procedure:

  1. Contact as applicable, the secretariat of the ACPR's Authorisation Directorate, in the case of credit institution providing investment services , credit and investment institutions and investment firms, or the AMF's market intermediary and infrastructure supervision Division in the case of market operators and central securities depositories (infrastructures [at] amf-france.org (infrastructures[at]amf-france[dot]org)), with a view to arrange a meeting to present their project and examine the provisional timetable for completion; and then
  2. Complete and submit, as applicable, to the ACPR's authorisation portal, or to the AMF (infrastructures [at] amf-france.org (infrastructures[at]amf-france[dot]org)) the file corresponding to the permission applied for, with all the supporting documents, including the application form set out in the annex to the European Securities and Markets Authority's guidelines on standard forms, formats and templates to apply for permission to operate a DLT market infrastructure.

Timetable for application of the Pilot Regime Regulations

The Pilot Regime Regulation came into application on 23 March 2023. The regime will run for a period of 3 years, renewable or extendable to 6 years total. In a letter to ESMA dated May 2024, the European Commission publicly stated that the regime would not have an expiry date.

Contacts

The table below lists the relevant contacts, depending on the specifics presented by each case:

DLT Settlement systems (SS)

 Central securities depository
Entry point for presenting projects

AMF: 
infrastructures [at] amf-france.org (infrastructures[at]amf-france[dot]org)

Submission of applications

AMF: 
infrastructures [at] amf-france.org (infrastructures[at]amf-france[dot]org)

DLT Trading and settlement systems (TSS)

 Central securities depositoryInvestment services providerMarket company
Entry point for presenting projects

AMF:
infrastructures [at] amf-france.org (infrastructures[at]amf-france[dot]org)

ACPR:
contactautorisations [at] acpr.banque-france.fr (Secretariat of the Authorisation Department)
AMF:
infrastructures [at] amf-france.org (infrastructures[at]amf-france[dot]org)
Submission of applications

AMF:
infrastructures [at] amf-france.org (infrastructures[at]amf-france[dot]org)

ACPR:
Autorisations portal
AMF:
infrastructures [at] amf-france.org (infrastructures[at]amf-france[dot]org)

DLT Mutlilateral trading facilities (MTF)

 Investment services providerMarket company
Entry point for presenting projectsACPR:
contactautorisations [at] acpr.banque-france.fr (Secretariat of the Authorisation Department)

AMF:
infrastructures [at] amf-france.org (infrastructures[at]amf-france[dot]org)

Submission of applicationsACPR:
Autorisations portal

AMF:
infrastructures [at] amf-france.org (infrastructures[at]amf-france[dot]org)