At a time when the future relationship between the EU and the UK is increasingly unclear there has been (some) positive news from from the European Securities and Markets Authority (ESMA) in respect of the share trading obligation (STO).

UK shares, regardless of the level of liquidity that they have on European venues, will no longer be subject to the EU STO. EU firms will be able to purchase these shares on any venue where they consider they can obtain best execution.

Background

As discussed in an earlier article, ESMA had previously determined that, on a hard Brexit, the STO would apply to all shares with EU ISINs (EU Shares) and 14 shares with GB ISINs where it deemed there was sufficient liquidity on European markets (liquid GB shares) but not to any other GB shares (non-liquid GB shares).

The original ESMA guidance was immediately seen as problematic for firms. EU firms argued this would create significant damage to share trading of liquid GB shares and EU shares. For many of these shares the primary pool of liquidity is on a UK venue (such as the London Stock Exchange (LSE)) rather than a European market. This meant that EU firms would be required to execute on an EU venue even where a better price could be obtained on a UK venue. This prevented firms from obtaining best execution for their clients and it also put them at a disadvantage to non-European fund managers. For instance a US manager would be able to trade an EU share or liquid GB share on either the UK or EU market.

Amended guidance

As a result of the significant market response to the original ESMA guidance, ESMA has today provided updated guidance that no liquid GB shares will be subject to the STO. However, all EU shares will still be subject to the STO and therefore execution must happen on an EU venue. As a result, a European firm can:

  • trade both liquid GB shares and non-liquid shares on any venue it chooses (subject to its other regulatory obligations such as best execution); and
  • only trade EU shares on an EU venue regardless of where liquidity or best price may be achieved.

Whilst this is a positive step and reduces the chance of an overlapping UK STO and EU STO, this still leaves a number of issues for EU shares. As the FCA notes in its response that whilst this is welcome, simply because a share has an EU ISIN does not mean its main pool of liquidity is in the EU. As an example many European companies choose to list on the LSE but remain domiciled in the EU. These shares will still be subject to the STO and mean that EU firms will be required to execute trades on an EU venue in respect of these EU Shares. In some cases there may not be any liquidity on an EU venue thus making it essentially impossible to trade an EU Share.

What is promising in relation to all of this is that ESMA has acknowledged the potential for market disruption and has taken steps to mitigate the issues raised. Without an equivalence decision, it is fair to say that the ESMA position today is probably the best possible outcome given the legal constraints imposed under the MiFID/MiFIR legislative package in respect of the application of the STO. However, the elephant in the room remains that the UK, even on a hard Brexit, will probably be more equivalent than any other jurisdiction that has been deemed equivalent (and indeed more so than some remaining EU jurisdictions) given the steps taken to onshore MiFID/MiFIR. The most effective solution for UK and European firms is that both the UK and EU recognise each other as equivalent on Brexit and prevent these STO issues arising.

What should you do next?

As we noted previously, the solution is a political one rather than any steps that individual firms can take. An equivalence decision or a wider Brexit deal would essentially prevent the potential market disruption caused by the STO from occurring. Firms, however, should review any mitigation planning they have undertaken and determine whether the new rules allow them to disapply or amend any aspects of that policy.