In the interests of avoiding uncertainty with market participants, ESMA released a statement on the 19th March regarding the trading obligation for shares (under Article 23 of MiFID) in the event of a no-deal Brexit.
Under Article 23 investment firms must conclude transactions in shares admitted to trading on a regulated market (RM) or traded on an EU trading venue on:
(ii) multilateral trading facilities,
(iii) systematic internalisers or
(iv) third-country trading venues assessed as equivalent by the EC.
But the requirement is not applicable to transactions in shares which are traded in the EU on a non-systematic, ad-hoc, irregular and infrequent basis.
The guidance published on 13 November 2017, stated that the commission was preparing “equivalence decisions for the non-EU jurisdictions whose shares are traded systematically and frequently in the EU” but at the time had “no evidence that the EU trading in shares admitted to trading in that third country’s regulated markets can be considered as systematic, regular and frequent”. However, this guidance did not account for a possible no-deal Brexit . Since there is significant trading between the EU and the UK, these trades cannot be considered to be traded on a “non-systematic, ad-hoc, irregular and infrequent basis in the EU27 and are therefore out of the scope of the trading obligation.”
Under a no-deal Brexit ESMA will assume the following: 1
- EU27 shares are deemed to have their main pool of liquidity in the EU27 and are therefore traded in a systematic, deliberate, regular and frequent way in the EU27;
- GB shares are deemed to have their main pool of liquidity in the UK and are therefore traded in a non-systematic, ad-hoc, irregular and infrequent way in the EU27;
- however, GB shares that qualify as liquid based on trading in the EU27 only, on the basis of 2018 trading volumes excluding UK data, cannot be considered to be traded in a non-systematic, ad-hoc, irregular and infrequent way in the EU27 and are subject to the EU27 trading obligation.
ESMA will be publishing a list of ISINs that are subject to the trading obligation for shares. This list is to clarify the application of the trading obligation for shares with an EU27 or GB ISIN.
Since there is still ongoing uncertainty regarding Brexit; ESMA will review their approach at least twelve months after any no-deal Brexit date.
In a response statement from the FCA, they acknowledge the efforts of ESMA to provide clarity on STOs however they “believe that only a comprehensive and coordinated approach can provide the necessary certainty to market actors.” The FCA is concerned that firms “may be limited to trading certain shares only in either the UK or the EU or in some cases be caught by overlapping obligations” and “this has the potential to cause disruption to market participants and issuers of shares based in both the UK and the EU”.2
The FCA has urged further dialogue with ESMA on the issue in order to minimise issues over access to liquidity and client best execution.