Clifford Chance
A first look: a proposed new legal regime for DLT securities in Spain
Spain's capital markets are on the cusp of a major breakthrough with new changes that will facilitate the issuance of securities using distributed ledger technology systems (DLT).
Spain's long-awaited draft bill for a new Securities Markets and Financial Services Act (the Draft Bill) was made public last month and it includes new provisions regarding the representation of negotiable securities (valores negociables) by means of DLT (DLT Securities).
Context
While bonds have already been issued using DLT in Spain, the general market sentiment has been that Spain needs to develop legal provisions specifically governing DLT Securities to give certainty to market participants, in much the same way that France, Luxembourg and Germany have done in recent years.
The development of a market for DLT Securities has been the focus of much attention in the wider European capital markets industry, with the European Union leading efforts to facilitate the use of DLT in the financial markets, including under the new EU Pilot Regime for DLT market infrastructures. However, so far there has been an uneven development of legal regimes for DLT Securities across Europe. The Draft Bill is an opportunity for Spain to avoid being left behind in this area of growing importance.
The Draft Bill also seeks to prepare the Spanish legal system for the application of the EU Pilot Regime, which will come into effect on 23 March 2023 and is expected to boost the European digital capital markets through the development of DLT-based market infrastructures such as trading venues and settlement systems.
The proposed Spanish legal regime for DLT Securities
The Draft Bill specifically includes financial instruments issued using DLT among the financial instruments within its scope (following the amendment made by the EU Pilot Regime to MiFID II) and sets out a proposal for a legal regime for DLT Securities. However, the Draft Bill regulates DLT Securities in a very broad way, leaving most of the implementation details still to be confirmed in secondary legislation.(this is similar to the approach taken for the regulation of negotiable securities represented by means of book-entries (anotaciones en cuenta)). Only the essential and basic terms of the legal regime are established such as legal concepts of creation, issuance and transfer of DLT Securities, protection for good faith acquirers of DLT Securities, title to DLT Securities and creation of in rem security over DLT Securities and provisions for breaches of the regime. The Draft Bill does stress that the regime would only apply if permitted by any specific legal regime applicable to the issuer and to the relevant negotiable securities.
The Draft Bill also sets out certain characteristics for the registry systems of DLT Securities (DLT Registry Systems), in the same way that other jurisdictions such as France have done. In accordance with the Draft Bill, integrity and immutability of DLT Registry Systems should be guaranteed and DLT Registry Systems should allow for the identification, either directly or indirectly, of the securities and of the holders of those securities, and allow such holders to have access to the information on their securities and the transactions executed by them. Furthermore, DLT Registry Systems should have mechanisms in place to provide evidence of the title over the securities registered (this is a similar requirement to that for book-entry registry systems to issue certificates evidencing title (certificados de legitimación) upon request, although, subject to the details to be established in secondary legislation, compliance may differ). The Draft Bill also requires issuers of DLT Securities to have an activity continuation plan and a contingency plan.
While the specific requirements to be met by the entities managing DLT Registry Systems will be set out in secondary legislation, the current wording of the Draft Bill implies that only investment services companies, credit entities and central securities depositories can manage DLT Registry Systems.
The formal legal procedural regime contained in the Draft Bill for the creation of DLT Securities in a DLT Registry System is very similar to that for the creation of negotiable securities represented by means of book-entries already existing under the current Spanish Securities Market Act, which requires an issue document (document de emisión) identifying the relevant securities to be deposited with the managing entity of the system (and if the securities are listed, also with the managing body of the relevant trading venue). Under the Draft Bill, the issue document corresponding to DLT Securities, besides containing information on the relevant securities, should also include sufficient information on the relevant DLT Registry System (including information on how it operates and on its governance) and on the activity continuation and contingency plans of the issuer.
What next?
Interest in digital capital markets in Europe has been steadily increasing and the combination of developments in individual member states and at the European level are important steps towards providing the legal certainty that is required for the market to flourish. The long-awaited establishment of a legal regime in Spain governing DLT Securities proposed by the Draft Bill is a step in the right direction, and may, depending on the speed with which it is approved, also make it possible to take advantage of the EU Pilot Regime (although additional amendments to Spanish laws may be necessary to take full advantage of it). [See our article: The EU Pilot Regime: accelerating the development of a digital capital market in Europe] However, the Draft Bill is still at the very early stages of the Spanish legislative process and, although it is now subject to the urgent legislative process, its approval and ultimately introduction of the new regime governing DLT Securities is likely to take some time.
Within the Spanish legal legislative process, the Draft Bill is still subject to amendments and, therefore, the final text, if ultimately approved, may differ from what has been made public. Importantly, given most of the legal regime is left for implementation via secondary legislation, many features of the Spanish legal regime governing DLT Securities are still to be finalised. However, the Draft Bill still gives an overview of what the Spanish legal regime governing DLT Securities might look like and overall it is a very welcome development.
Want more on DLT Securities?
The EU Pilot Regime: accelerating the development of a digital capital market in Europe