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.
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 with regard to UK trading venues. In practice 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.
Shares traded on a non-systematic basis in the EU 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, post-Brexit shares admitted to trading on a UK regulated market could benefit from this exemption, provided that they are not sufficiently liquid in the EU market.
The Statement clarifies the concept of “non-systematic, ad-hoc, irregular and infrequent” in the context of Brexit. More specifically, after exit day the following will apply:
- EU shares will remain subject to the trading obligation under MiFIR. These are shares with an International Securities Identification Number (ISIN) from an EU Member State or Norway, Iceland and Liechtenstein. According to the Statement, these 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.
- UK shares are shares with an ISIN starting with ‘GB’. In general, UK shares are deemed to have their main pool of liquidity in the UK market, which means that they are traded on a “non-systematic, ad hoc, irregular and infrequent” basis in the EU. Therefore, the MiFIR trading obligation will not apply to UK shares, unless they qualify as ‘liquid’ in the EU. This assessment will be based on trading in the EU only and will be made on the basis of 2018 trading volumes excluding UK data. The Statement notes that according to current ESMA data a number of UK shares qualify as ‘liquid’.
The Statement has a great significance for shares that are heavily traded on several EU venues, particularly dual listed stocks which are listed in the UK and on a trading venue in another EU state. The implications of the Statement could have the impact of potentially forcing trading on such shares into the EU and out of the UK over time.
The Statement also notes that this approach reflects ESMA’s temporary position and aims to avoid cliff-edge risks arising from a no-deal Brexit. ESMA will review its approach in light of market developments after a possible no-deal Brexit.