On 19 March 2019, the European Securities and Markets Authority (ESMA) published a public Statement on the impact of a no-deal Brexit on the trading obligation for shares under the Markets in Financial Instruments Regulation (MiFIR) (Statement). The Statement clarifies how the relevant requirements will apply to UK-listed shares if the UK leaves the EU without a deal. However, as discussed in our relevant commentary, this Statement could be problematic, particularly for dual-listed stocks which are listed in the UK and on a trading venue in another EU Member State as it could potentially force trading on these shares into the EU and out of the UK. In light of concerns expressed by some stakeholders, ESMA published a revised statement on 29 May 2019 (Revised Statement). Nevertheless, as highlighted in the response of the UK Financial Conduct Authority (FCA), ESMA’s approach could “still cause disruption to investors, some issuers and other market participants, leading to fragmentation of markets and liquidity in both the EU and UK.

MiFIR trading obligation for shares

Shares that are listed on an EU regulated market or are traded on an EU trading venue are subject to certain trading obligations under MiFIR. In particular, Article 23 of MiFIR requires investment firms to ensure the trades they undertake in shares admitted on an EU Regulated Market (RM) or traded on a trading venue take place on an EU RM, Multilateral Trading Facility or systematic internaliser or an equivalent third country trading venue, unless they are “non-systematic, ad hoc, irregular and infrequent” or are carried out between eligible and/or professional counterparties and do not contribute to the price discovery process.

In the event of a ‘no-deal’ Brexit, UK trading venues will be considered as ‘third-country trading venues’ for the purposes of the MiFIR regime. However to date, the EU Commission has not issued an equivalence decision on UK trading venues. This means that after exit day investment firms may not be able to use UK trading venues to meet their trading obligations for shares under MiFIR.

Trading obligation for shares post-Brexit

The Article 23 trading obligation does not apply to shares that are traded in the EU on a non-systematic, ad-hoc, irregular and infrequent basis. Therefore, in principle post-Brexit shares admitted to trading on a UK regulated market could benefit from this exemption.

The original Statement clarified the concept of ‘non-systematic, ad-hoc, irregular and infrequent’ by distinguishing shares on the basis of their International Securities Identification Number (ISIN). ‘EU shares’ are shares with an ISIN from an EU Member State or Norway, Iceland and Liechtenstein, while ‘UK shares’ are shares with an ISIN starting with ‘GB’. EU shares are deemed to have their main pool of liquidity in the EU, which means that they are traded in a systematic, deliberate, regular and frequent way in the EU. As a result, they are in scope of the MiFIR trading obligation. On the contrary, UK shares, which are considered to have their main pool of liquidity in the UK market, are as a rule traded on a “non-systematic, ad hoc, irregular and infrequent” basis in the EU. Therefore, the original Statement provided that the MiFIR trading obligation would not apply to UK shares, unless they qualified as ‘liquid’ in the EU.

The Revised Statement replaces the above with a simpler approach, which is only based on the ISIN of the share. As a result:

  • EU shares are within the scope of the MiFIR trading obligation.
  • GB shares are outside the scope of the MiFIR trading obligation.

The aim is to minimise disruption by a potential overlap between EU and UK rules around trading obligations for shares. In particular, ESMA has identified 14 GB shares that would otherwise have been caught by the MiFIR trading obligation based on the original Statement.

Remaining issues

However, the Revised Statement does not solve the fundamental issues for dual-listed shares post-Brexit. In its response the FCA highlights that ESMA’s approach could still be problematic for shares with an EU ISIN, which are however dual-listed in the EU and the UK and their main – or even only – pool of liquidity is in the UK. In the FCA’s view the ISIN of a share, which is determined by the place of incorporation of the issuer, does not and should not determine the scope of the trading obligation. According to the FCA, this approach would restrict access to capital for issuers as well as the freedom to choose the trading venue for listing.

According to the FCA, the only realistic solution and the ‘best way’ to address the issue of overlapping share trading obligations remains ‘reciprocal equivalence’. It also noted that, given that the UK has onshored the MiFIR regime, its regulatory framework is one of the most equivalent in the world. Alternatively, agreeing on a transitional period for the relevant obligations with ESMA would also be a temporary viable option.

The FCA is expected to clarify its approach regarding the trading obligation for shares soon.