Revised EU Statement on the Share Trading Obligations in a No-Deal Brexit

Following concerns regarding its March 19, 2019 statement, the European Securities and Markets Authority has published a revised statement on the impact of a no-deal Brexit on the trading obligation for shares where no decision on the U.K.'s equivalence as a third country market has been made. The Markets in Financial Instruments Regulation requires investment firms to conclude transactions in shares admitted to trading on a regulated market or traded on an EU trading venue, i.e. namely regulated markets, multilateral trading facilities, systematic internalisers and equivalent third-country trading venues. The U.K. has adopted this requirement in its onshored MiFID II legislation. Similarly, following its exit from the EU, the new U.K. on-shored share trading obligation would restrict trading of shares in the U.K. to trades on U.K. trading venues unless a third-country equivalence decision was made.

ESMA's original statement advised that the EU share trading obligation would still apply to U.K. shares (i.e. those with ISINs starting with the prefix "GB") that are liquid and are not traded on a "non-systematic, ad-hoc, irregular and infrequent" basis in the EU27. ESMA used 2018 trading data to determine which GB shares are liquid and published a list of ISINs to which the share trading obligation would apply. This generated considerable negative feedback and controversy given that the EU27 holds very few liquid markets for such instruments and that ESMA's measure therefore would have resulted in EU27 businesses being required to trade on illiquid markets with wide spreads and more expensive pricing. In its revised statement, ESMA states that the EU27 share trading obligation would not apply to any shares with GB ISINs.

The U.K. Financial Conduct Authority has published a statement in response to ESMA's revised statement, stating that it disagrees with ESMA's method for determining the scope of the share trading obligation. There are a number of EU27 ISINs that have a U.K. market listing and ESMA's approach restricts the ability of companies to choose a market for their listing as well as restricting their access to investors and liquidity. The FCA considers that reciprocal equivalence is the best way to deal with the overlapping obligations that will occur as a result of the EU27 and U.K. share trading obligations on Brexit. In the absence of such equivalence, the FCA believes that maintaining the status quo for a limited time after the U.K. has left the EU would achieve financial stability and certainty for market participants. The FCA intends to continue assessing its approach to the share trading obligation in the event of a no-deal Brexit. Neither the U.K. nor EU27 regulators seem prepared or motivated unilaterally to grant such an equivalence, given that doing so could lead to liquidity in certain instruments moving to the markets whose regulators have not declared equivalence. Due to the scheduled date for the U.K. to leave the EU changing from March 29, 2019 to October 31, 2019, the FCA and ESMA have time to consider the possible options further.

View ESMA's statement.

View the FCA's statement.

View details of ESMA's March 2019 statement.

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