Distributed ledgers and securities markets

2 Sept 2016 – In its response to the ESMA Discussion Paper on distributed ledger technology (DLT) in securities markets, ECSDA stresses the importance of sound governance and oversight.

European CSDs support the efforts of securities regulators to pro-actively monitor technological developments in securities markets and to consider the implications for post trade regulation. ECSDA believes that regulators should look at the full potential of DLT to improve the way securities markets operate. Regulations like the CSDR and EMIR are a mix of institutional and functional approaches and market players using DLT will not always “fit” within the existing regulatory framework. Nonetheless, it is important ensure that, if DLT is applied to perform regulated services or functions, this is done under existing regulatory requirements. There is otherwise a risk of creating unregulated areas in post trade that could bring about a new form of systemic risk.

CSDs and other financial market infrastructures (FMIs) are expected to maintain a central role in securities markets and will be key actors in ensuring a smooth and successful implementation of DLT in post trade. The contribution of FMIs will be especially important to guarantee an effective and sound governance framework around DLT as well as real-time monitoring of critical functions and activities. FMIs can also leverage the efficiencies of DLT to improve their operational processes, in particular as regards record keeping and reconciliation processes. Provided that a level playing field is maintained vis-à-vis DLT players performing post trade functions not currently captured by EU regulatory requirements, this could help achieve greater investor protection.

Holding securities in a DLT environment is not directly comparable to an environment where the notary and registration functions are performed by CSDs. These functions are essential to maintain the integrity of the issue. Given the decentralised nature of DLT networks, there is no legal entity bearing responsibility for reconciling individual holdings with the number of total assets having been issued, and for managing any potential discrepancies. Assessing the implications of decentralised models for investor protection will thus be an important task for regulators.

Moreover, in a securities settlement environment, the enforceability of asset transfers performed through a DLT system seems a key regulatory issue. In particular, the fact that DLT is used to settle a transaction should not interfere with the applicable issuance and account maintenance rules at national and EU levels. Further DLT capability to process high volumes of transactions should also be verified in terms of reliability and efficiency of processes.

The work performed by ESMA to date is extremely helpful in monitoring developments and assessing potential regulatory challenges and solutions. The next stage of the reflection will require a broad policy discussion, both at global and EU levels. Apart from the regulatory challenges identified in ESMA’s consultation, other legal aspects will need to be addressed by national and EU legislators. At EU level, ESMA, the European Commission, the ECB and relevant stakeholder groups, can play a key role in formulating and aligning views on the future regulatory environment supporting DLT. At global level, we expect IOSCO and the CPMI to play a leading role in coordinating regional approaches and in issuing early regulatory guidance.

Download the full ECSDA response to the ESMA Discussion paper on DLT