DLT Trading Facilities
New Financial Infrastructure
A new financial market infrastructure has been created, DLT trading facility (DLT-Handelssystem), for securities held in distributed electronic registers.
A DLT trading facility is defined as a commercially operated institution for multilateral trading – simultaneous exchange of bids based on non-discretionary rules – of DLT securities that also meets one or more of the following (distinguishing it from a trading venue):
- Admits natural persons and legal entities;
- Provides central custody of DLT securities;
- Clears and settles transactions in DLT securities.
DLT securities encompass: ledger-based securities, as well as other uncertificated securities held in distributed electronic register with power of disposal for creditors only (as is the case with ledger-based securities).
Along with DLT securities, payment tokens, utility tokens, and other asset tokens could also be traded on the DLT trading facility. However, a DLT trading facility license is not required to trade payment and utility tokens.
Per proposed accompanying ordinance, the following, however, would NOT be admitted by a DLT trading facility:
- derivatives structured as DLT securities; and
- DLT securities and assets such as privacy coins that could significantly complicate AML implementation requirements or could affect the stability and integrity of the financial system
Compared to a trading venue (stock exchange and multilateral trading facility), a DLT trading facility (1) widens admission access and (2) is entrusted additional operations without the need for a separate license.
First, in addition to financial intermediaries, individuals (natural persons) and non-regulated legal entities may be admitted as participants for direct access (i.e. direct trading) to a DLT trading facility (without the need for a broker or a bank) on the condition they participate in their own name and for their own account.
For foreign residents, the DLT trading facility will need to provide relevant information and documents if required by FINMA, which local participants must provide FINMA.
Second, a DLT trading facility may provide custody (i.e. safekeeping of tokens), clearing and settlement services for DLT securities without additional licences, except central clearing of DLT securities (unless occurs simultaneous with trading).
As a financial market infrastructure, a DLT trading facility requires FINMA authorisation and is subject to many of the same requirements of trading venues. Likewise, a DLT trading facility will need to issue regulations on admission, exclusion, and duties of participants in line with equal treatment, and on admission of DLT securities (and other assets) to trading, including the prospectus requirement, and monitor compliance with such regulations.
Anyone who operates an organised trading facility requires authorisation and may request it also as a DLT trading facility.
Deemed a financial intermediary, DLT trading facilities are to be supervised directly by FINMA (no SRO affiliation) for AML compliance. If the DLT trading facility also provides central custody, clearing or settlement services, it is deemed to be systemically important.
Per proposed accompanying ordinance, the minimum capital requirements are as follows:
- For regular DLT trading facilities not providing custody, settlement, and/or clearing services: CHF 1 million (same as trading venues)
- For regular DLT trading facilities also providing custody, settlement and/or clearing services: CHF 5 million
- FINMA may increase capital requirement by 50% in justified cases
Small DLT Trading Facilities
DLT trading facilities that pose low risk, small DLT trading facilities, enjoy reduced requirements for reasons of proportionality and the protective purpose of the Financial Market Infrastructure Act.
Per proposed accompanying ordinance, a small DLT trading facility meets all below:
- Max. CHF 250 million / year in trading volume
- Max. CHF 100 million / year in custody volume
- Max. CHF 250 million / year in settlement volume
- No loans given
Reduced minimum capital for small DLT trading facilities: CHF 500’000.
Additionally, small DLT trading facilities are subject to a number of other reduced requirements such as:
- Capital adequacy and liquidity requirements for central securities depositories are inapplicable
- Business continuity requirements can be met via taking over by another licensee
- Internal audit not required
- Only a majority of members of the management, supervision, and control may not be members of business management
- Independent appeal body not required
- A non-independent body can carry out self-regulation