The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, published its report on the distributed ledger technology pilot regime (DLT Pilot). In the report, ESMA provides guidance on certain technical elements and makes recommendations on compensatory measures on supervisory data to ensure a consistent application by DLT market infrastructures from the start of the regime.
The report presents ESMA’s proposed way forward and includes the feedback received following the Call for Evidence launched in January and a workshop organized in March 2022. ESMA concludes that there is no need to amend the RTS on transparency and data reporting requirements before the DLT Pilot starts applying in March 2023.
Short selling
With regards to short selling, ESMA sought feedback on the necessity to amend one of the technical fields to account for the specificities of DLT transactions, and in particular on whether short selling is possible at all on a DLT market infrastructure (MI).
The majority of respondents believe that the field covering the short selling flag should not be amended. However, seven respondents argued that short selling would not be technically possible in a DLT MTF (multilateral trading facility) environment because the transfer of assets can occur only in case it is effectively owned.
ESMA recommended for the removal of this information from the transaction reporting considering that the definition of a short sell in the short selling regulation and its application within MiFIR transaction reporting cannot be reconciled. In the case where an exemption from transaction reporting is granted, the obligation for the DLT MIs to obtain the information required in the short selling field could be waived.
Background
The DLT Pilot Regime is part of the Digital Finance Package introduced by the European Commission in 2020 to further enable and support the potential of digital finance while mitigating associated potential risks. The regulation on a pilot regime for market infrastructures based on the DLT Pilot aims at developing the trading and settlement for DLT financial instruments.
The DLT Pilot requires ESMA to assess whether the RTS developed under MiFIR relative to certain pre- and post-trade transparency and data reporting requirements need to be amended to be effectively applied also to securities issued, traded, and recorded on DLT.