Enhancing energy derivatives trading: assessing the need to update the European DLT Pilot Regime Regulation

Abstract In recent years, start-ups have increasingly explored the application of distributed ledger technology (DLT) in energy markets, leveraging their capabilities for distributed energy generation, wholesale energy trading, transactions between charge point operators and electric vehicle owners, the leasing of residential storage devices, and the trading of energy-related cryptocurrencies. However, despite the potential benefits of DLT and smart contracts, their use in energy derivatives trading remains underdeveloped. Given the complex margining processes, record-keeping requirements, and regulatory reporting obligations associated with energy derivatives, DLT could offer significant advantages by enhancing automation, improving efficiency, and reducing costs. This article argues that the European Union’s DLT Pilot Regime Regulation—designed to foster the growth of secondary market infrastructures for digital securities and to provide regulators with insights into necessary adjustments to the existing framework—could be expanded to include energy derivatives. While the current regime facilitates experimentation with blockchain technology for shares, bonds, and undertakings for collective investments in transferable securities, extending its scope to energy derivatives would facilitate financial market participants to explore new technological solutions within a controlled regulatory environment. A regulatory sandbox for energy derivatives could drive innovation by allowing firms to test novel business models and trading mechanisms without the immediate burden of full regulatory compliance. This approach would not only promote efficiency, speed, and cost reduction but also provide valuable insights for regulators seeking to modernize financial market infrastructure in the energy sector.