How Does the DLT Pilot Regime Relate to Transaction Reporting?

The Distributed Ledger Technology (DLT) Pilot Regime, established under Regulation (EU) 2022/858, is designed to integrate DLT into the EU’s financial markets. This regime allows for the creation of a new category of DLT-based market infrastructures by eligible firms, comprising DLT multilateral trading facilities (DLT MTFs), DLT settlement systems (DLT SSs) and DLT trading and settlement systems (DLT TSS) with specific regulatory exemptions.

• • • DLT MTFs: an MTF that only admits to trading financial assets recorded using DLT
    • DLT SS: a settlement system that facilitates the settlement of transactions involving DLT financial instruments
    • DLT TSS: a hybrid system that combines the functions of both a DLT MTF and a DLT SS, allowing firms to conduct both trading and settlement of DLT financial instruments

The DLT Pilot Regime is designed to foster innovation in trading and settlement processes and does not replace the existing transaction reporting requirements mandated by regulations such as the European Market Infrastructure Regulation (EMIR), Markets in Financial Instruments Regulation (MiFIR) and Central Securities Depositories Regulation (CSDR).

Challenges in Transaction Reporting Under the DLT Pilot Regime

The DLT Pilot Regime is an innovative and important step forward for the European Union as it serves to future-proof the financial infrastructure for the rise in popularity of DLT and crypto-assets. This presents several key challenges for the existing reporting frameworks:

Data Extraction and Reporting Complexities

The existing transaction reporting systems are designed for the traditional centralised reporting infrastructure, but DLT is based on decentralised networks. This difference can make extracting and authorising data more complex. The European Securities and Markets Authority (ESMA) published a study in October 2023 that outlines the unique transaction structures and data storage methods of each DLT and highlights the need for complex extraction processes to ensure regulatory compliance.

Potential Exemptions Under MiFIR

Article 4 of the DLT Pilot Regime Regulation allows for certain exemptions for DLT MTFs from MiFIR transaction reporting requirements. The regulation mandates that even with these exemptions, DLT MTFs must maintain comprehensive transaction records and provide direct and immediate access to this data for NCAs. These exemptions do not eliminate the need for regulatory oversight but aim to encourage accessible and verifiable transaction records instead of the traditional reporting obligations where suitable.

Lack of Standardised Reporting Mechanisms for DLT

ESMA has identified a gap between native transaction data fields in DLTs and fields required under the Regulatory Technical Standard (RTS) 22 under MiFIR. This discrepancy can cause inconsistencies for data aggregation and regulatory analysis, emphasising the need for standardised reporting that aligns DLT transaction data with traditional reporting requirements.

Opportunities and Benefits for Transaction Reporting under the DLT Pilot Regime

There are many opportunities and benefits possible from incorporating DLT into traditional reporting requirements:

• • • Enhanced Transparency: The inherent features of DLT are well-designed for regulatory oversight, such as immutability and auditability. Transaction histories are tamper-proof and regulators can always access data in real-time
    • Streamlined Reporting: DLT brings certain automation capabilities within fully developed DLT ecosystems that can reduce redundancies and limit the need for manual interventions. Achieving this efficiency depends on the seamless integration of DLT with legacy systems and addressing interoperability challenges to ensure accurate and complete data submissions
    • Regulatory Evolution: Insights from the DLT Pilot Regime can inform future regulatory adaptations within the EU, ensuring that regulatory frameworks can evolve at the same rate as financial technology. ESMA emphasises the importance of continuous dialogue between regulators and industry participants to utilise the unique aspects of DLT while preserving market integrity and oversight

The DLT Pilot Regime represents an innovative development in financial market innovation, but it does not replace traditional transaction reporting obligations. While certain exemptions are available, this regime introduces new challenges in data extraction, regulatory oversight and system integration but there are currently no exemptions for transaction reporting purposes and firms cannot report using DLT.

To navigate the complexities of transaction reporting, firms need robust compliance solutions that seamlessly integrate with both traditional regulations and emerging DLT infrastructures.

Novatus En:ACT is the market-leading SaaS platform, built in conjunction with a major global banking group, to ensure you meet your G20 regulatory reporting obligations in an accurate, timely and complete manner.