EU Markets Integration & Supervision Package: Key Proposals

2025 was the year marked by mounting speculations about a potential expansion of ESMA supervisory powers that should eventually lead to the introduction of direct supervisory powers with respect to a wider group of financial institutions in the EU for ESMA. Whilst this is hardly a new topic (some have been calling for the creation of the EU SEC for years), the most recent debate was sparked by the peer-review of the supervisory practice of one national competent authority (NCA) in one newly regulated field – markets in crypto-assets. Following this, three NCAs have urged the EU lawmakers to expand the ESMA supervisory remit over all crypto-asset service providers (CASPs) authorised under the MiCA-Regulation.

By seeing diverging national supervisory practices exercised by different NCAs across 27 different Member States as one of the key impediments to the proper functioning of the single market for financial services, the Commission has decided not only to follow the advice of the above-mentioned NCAs with respect to CASPs, but to fundamentally reshape the role that the ESMA shall play in the financial services industry in the future.

To that end, the Commission is proposing targeted amendments to the ESMA Regulation that shall drastically expand its supervisory remit and introduce direct supervisory powers with respect to a number of regulated entities operating in the EU.

In accordance with the proposal, ESMA shall become directly responsible for the supervision of the following regulated entities:

• Significant trading venues (with significant cross border activity, that exceed newly set thresholds);
• Significant central counterparties (CCPs);
• Significant central securities depositories (CSDs);
• Pan-European Market Operators (see chapter 5 below for more on this);
• All CASPs authorised under the MiCA-Regulation

For the purposes of exercising this new direct supervisory competence, ESMA shall be equipped with new investigation and enforcement powers which shall include power to conduct on-site inspections, take supervisory measures and impose fines (same as any NCA at the moment).

In addition to the direct supervisory powers, ESMA’s coordination role with respect to NCAs shall be recalibrated as well: ESMA shall get more involved in the supervision of the passporting of UCITS and AIFs across the Single Market by acting as a central point for notifications and thereby preventing diverging actions at the NCA level that could hinder seamless distribution of EU investment funds. Further, ESMA shall also start playing a more active role in the coordination of the oversight of large cross-border asset management group companies.

Whereas the justification for the introduction of direct supervisory powers with respect to large financial entities with a significant cross-border activity within the EU is seen by many as a reasonable move, that shall primarily streamline day-to-day business for large players, the proposed direct supervisory powers for all CASPs (irrespective of their size and market activity) appears as a bit disproportionate. Many are also (quite legitimately) questioning whether ESMA will have sufficient resources for all these new supervisory duties, conscious of its current shape and form.

Nonetheless, it appears that despite all differences in views, the question is not whether ESMA shall play more active role in the facilitation of smoother functioning of the EU single market for financial services, than rather – how.

For the fintech industry, by far the most important proposal is the proposed reform of the DLT Pilot Regime which went live on 23 March 2023, and which has to date managed to achieve rather disappointing results. Against this backdrop, three NCAs have called for the reform of the framework that would ensure its wider adoption and a long-awaited (and still not achieved) success.

By far the most criticized part of the DLT pilot regime was its rather narrow scope and relatively low thresholds that have hindered the Commission’s initial efforts to achieve some reasonable scale with this initiative. Against this backdrop, with the newest proposal, the Commission is looking to expand the scope of the DLT Pilot Regime and quite significantly amend the thresholds in the following way:

• Maximum aggregated market volume for all DLT instruments traded on a DLT trading venue will be increased, from EUR 6 billion to EUR 100 billion;
•  Product specific thresholds, shall removed altogether;
• In addition to multilateral trading venues (MTFs), organised trading facilities (OTFs) shall also be eligible to qualify as DLT trading venues and their operators will be permitted to participate in the DLT Pilot Regime;

In addition to the above-mentioned changes, CASPs authorised under the MiCA-Regulation to operate a crypto-asset trading platform will be permitted to apply to operate a DLT market infrastructure. Whilst they will be required to ensure continuous compliance with regulatory requirements in some new areas of the financial services regulation, primarily post-trading rules under the MiFID II/MiFIR framework and the Central Securities Depository Regulation (CSDR), they will (as all other DLT market infrastructure operators) benefit from targeted exemptions enabling utilization of DLT in the securities trading space.

This proposed expansion of the DLT Pilot Regime, opens an entirely new service avenue (as well as a new revenue stream) for CASPs that are arguably better positioned to deal with DLT specific issues than some incumbent financial institutions. Nonetheless, diving into an entirely new area, that securities trading will inevitably be for many CASPs, will not be without its challenges, and it will be interesting to follow which CASPs will be the early movers that will break the ice and move into the DLT securities trading space first.

The proposed reform also includes the introduction of a simplified authorisation regime for small operators of DLT trading and security settlement systems (TSS) and DLT settlement systems (SS). Firms operating DLT TSS and DLT SS with the aggregate market value of DLT financial instruments of less than EUR 10 billion shall become able to operate within a simplified authorisation framework, exempting them from mandatory compliance with some regulatory requirements. Whilst the applicants to the simplified regime would still be required to hold an underlying authorisation to be eligible to participate in the DLPT Pilot Regime (such as a CASP or a MiFID II investment firm licence) they are planned to be subject to a specified subset of provisions of the CSDR that shall achieve more proportionate and principles-based approach to the regulation of small-scale provision of CSD services.

The ability of the regulated financial institutions in the EU to use a license issued in one EU Member State for the purposes of provision of their services across the EU 27, was by far one of the greatest achievements of the EU Single Market for financial services so far (commonly known as the EU passport for financial services). It does not however function in a frictionless way, and the Commission sees some room for improvement, that shall be achieved through the targeted amendments of the existing sectoral legislation.

Currently, investment firms operating trading venues in multiple EU Member States are required to obtain a license for the trading venue operation from the NCAs in each EU Member State of their operation (for each trading venue separately). This administrative burden, which draws with itself operational and financial challenges, hinders scalability opportunities for international trading venue operators.

With the aim of bridging this gap in the EU passporting framework, the Commission is proposing introduction of the Pan-European Market Operator (PEMO) license which shall allow for the operation of several trading venues in several EU Member States based on a single license. Given that ESMA is supposed to be the direct supervisor for PEMO license holders, both post-authorisation relationship vis-à-vis regulatory authorities shall be centralised and (ideally) simplified relative to the current environment.

Despite the great success that the UCITS and the AIFMD framework have managed to achieve in recent years, the Commission sees a few remaining obstacles that may hinder further development of a true single market for investment funds in the EU. With this in mind, the Commission has proposed targeted amendments to the UCITS-Directive, the AIFMD and the new Cross-Border Distribution of Funds Regulation that shall simplify cross-border operation of EU fund managers.

First, the Commission is proposing simplification of the passporting framework for UCITS management companies and AIFMs that shall be able to complete the marketing notification procedure for funds under their management as part of the authorisation procedure (instead of waiting to get authorised and then initiating the notification procedure in the second step). As part of the proposed amendments, the host NCAs will also be explicitly prohibited from imposing any additional requirements that could hinder cross-border marketing and distribution of UCITS and EU-AIFs incl. by requiring a local presence.

The authorisation requirements shall also be further harmonised through level 2 legislation that will specify all information that must be submitted to NCAs for the purposes of authorisation, leaving national lawmakers and NCAs little room for deviations from the EU standard. The proposed amendments to cross-distribution rules shall also permit automatic pre-marketing across the entire EU for all AIFMs.

Passporting notification procedures for UCITS management companies and AIFMs shall also be streamlined in accordance with the proposal, with the reduction in timeframe within which NCAs are required to process passporting notifications – 15 days instead of 1 month under the existing framework. In case of the passporting based on the freedom of establishment (cross-border operation through a local branch) processing time shall be reduced from 2 months to 1 month.

Last but not least, conscious of the fact that all UCITS distributed to retail investors in the EU are required to prepare the Key Information Document (KID) in accordance with the PRIIPs Regulation, the Commission is finally proposing removal of the obligation for UCITS management companies to prepare UCITS Key Investor Information Document (UCITS KIID).

The package also aims to achieve a noteworthy reform of the key rules concerning securities settlement process in the EU, through targeted amendments of the CSDR framework and the replacement of the Settlement Finality Directive with a directly applicable Regulation.

The proposed amendments to the key terms under the CSDR (incl. “book-entry”, “cash” and “securities account”), which were identified in the past as potential impediments to the adoption of DLT in the securities settlement space, shall enable CSDs to provide settlement services using DLT. A new category of significant CSDs will be introduced for whose supervision ESMA will be directly responsible. Further, the Commission proposes introduction of the new concept of “CSD hubs” which is intended to capture CSDs providing services in several EU Member States and those processing high volumes of settlement transactions. Whereas CSD hubs will be required to establish links with other CSD hubs, other CSDs that are not deemed as CSD hubs shall be required to establish reciprocal links with at least one CSD hub.

The SFD Regulation on the other hand, aims to ensure a greater level of harmonisation across the EU through (amongst other): (i) clearer conflict-of-law provisions that shall allow more uniform interpretation at the EU Member State level; (ii) harmonisation of the list of eligible financial instruments and eligible participants with the aim of achieving the same level of protection across the Single Market.

Further, targeted amendments to the key definitions contained in the existing Settlement Finality Directive (like “system”, “participant” and “institution”) shall make the framework compatible with DLT so that DLT-based systems can benefit from settlement finality protections.

The publication of the Commission’s package represents a very important step showing the clear determination of the EU executive arm to make changes to the existing financial services regulatory framework with the aim of achieving further integration of the EU Single Market for financial services. Nonetheless, it represents the very first step on this journey: the proposals are yet to go through the EU legislative making process (known as trialogues) involving the assessment and (most likely as always) redrafting of the original proposals as they go through the European Parliament and the Council.

Once adopted, and entered into force, the new rules that the package aims to create will become directly applicable after a 12-24 month transitional period that the market participants will have to prepare for the new regime(s). Therefore, a direct effect of these new rules on the daily business of market participants is not expected before mid-2027 / mid-2029 depending on the length of the transitional period.