The impact of the Pilot Regime on market players
The Pilot Regime comes into force in a few days’ time on Thursday, 23 March.
Can you briefly remind us of the purpose of this new regulation?
It's a European regulation on market infrastructures (trading platforms) and post-trade infrastructures (settlement/delivery systems) which also makes it possible to authorise infrastructures that integrate both market and post-trade activities for the first time.
The European legislator’s intention is to review the regulations applicable to them so that they can maximise the benefits of the new “distributed ledger technology” (DLT). In any case, given the principle of technological neutrality in EU legislation, the goal is for new infrastructures based on this new technology not to be penalised by existing regulations.
As the legislator wishes to allow market players to test this technology, the Pilot Regime is presented as a temporary regulatory framework based on a predefined list of potential exemptions from existing regulations, mainly MiFID1and CSDR2. These exemptions are expected to last for three years but could possibly be extended by another three years. At the end of this trial period, the legislator will decide either to perpetuate, amend or repeal these temporary provisions.
Who are the main market players affected by this Pilot Regime?
The players primarily affected by the Pilot Regime are market and/or post-trade infrastructures looking to benefit from the exemptions provided for. They will need to identify and then justify to the regulator the exemptions that they consider necessary to adapt and optimise their processing with DLT. But these new DLT infrastructures will of course only work if other players seek out their services, assuming that issuers decide to issue security tokens3 and that investors want to invest in this digital asset class.
With that in mind, communication between these different players appears to be fundamental to the success of the Pilot Regime. Infrastructures need to know the expectations of issuers and investors and, conversely, issuers and investors need to know the additional features and/or benefits that these new infrastructures can provide them through DLT. Insofar as investments are to be made by the various players, it is also important that they be able to justify these investments internally and, in particular, to estimate the return on investment during and after the Pilot Regime. There are currently discussions among certain market authorities and professional associations to determine how to optimise these investments, e.g. by capitalising on all or part of current value chains, where possible.
What about SGSS, particularly in its role as custodian?
As a provider of services to investors as well as issuers, we are clearly at the forefront of this digital revolution. We see the new DLT infrastructures primarily as new technical platforms for issuing, circulating and depositing financial instruments, which are definitely based on a different technology, but which are not supposed to change the legal and economic nature of financial instruments. It is expected, however, that DLT will greatly simplify the maintenance and monitoring of issuance accounts for issuers and custody accounts for investors. That said, this optimisation will not be achieved by simply replacing the current securities accounts with distributed ledgers. It will likely require a fundamental overhaul of certain aspects of our operational models. We believe this is the only way significant gains can be made with this new technology. The Societe Generale group is actively working on this internally and alongside the various market associations to ensure that the Pilot Regime is a success for our clients and us, both in France and throughout Europe.
Alain Rocher, Head of Knowledge Management, Strategy and Market Infrastructure - Societe Generale Securities Services
1MiFID: Markets in Financial Instruments Directive
2 CSDR: Central Securities Depositories Regulation
3 Security tokens: securities registered in distributed ledgers