Pilot Regime: an experimental regulation at the service of innovation

A European regulatory initiative called Pilot Regime is announced for the beginning of 2023. What is it about?

This is a European Commission proposal to create a transitional regulatory framework designed to test the use of distributed ledger technologies, known as DLT, in market infrastructure. Experiments are scheduled to begin in early 2023 and last for a period of 3 years, renewable once. If the experiment is deemed successful, it is likely to be followed by a definitive regulation.

What changes does it imply for market players?

This is likely to depend very much on the market segments involved. We at AFTI believe that the market, and more specifically trading platforms, should be relatively unaffected. Conversely, we expect much more significant impacts at post-trading level, namely at the level of the CSD, i.e. the Central Securities Depository, and at custodian-account keeper level. Moreover, the pilot regime no longer refers to CSD, but only to DLT SS, the “SS” meaning Settlement System. Indeed, distributed ledger technology now allows the function of the custodian account keeper and the function of settlement/delivery system operator to be completely dissociated in blockchains.

Do you consider that market players are sufficiently prepared for this experiment?

We are fortunate in France that both the French regulator, the AMF, and market operators took an interest in this complicated subject very early on. Societe Generale, with its subsidiary SG Forge, has been involved in numerous actual issues of security tokens. French custodians have also worked extensively with CSD Euroclear France in Central Bank Digital Currency (CBDC) experiments with Banque de France. So yes, we are looking at this pilot regime at the French level and in particular at the Societe Generale group level, armed with a certain level of experience.

Can we conclude that you are optimistic about the start of the Pilot Regime in early 2023?

The advantage of our past experience is that we already have a fairly clear idea of the numerous problems that we will have to resolve as part of this pilot regime and even, in certain cases, of the solutions that we will test. The difficulty of this pilot regime, but also its interest, lies mainly in our capacity to challenge existing market models and to offer more efficient models through these new technologies. For our business lines, it is probably the most important technological and legal challenge since the dematerialisation of securities in the 1980s.

Update:

The 23 March 2023, the European regulation on market infrastructures (trading platforms) and post-trade infrastructures (settlement/delivery systems), or Pilot Regime, came into force. Read more.