With the approach of 1 January 2021 and the hope of reaching an effective Brexit deal seemingly moving away, there is continued ambiguity regarding the future of financial services across Europe. How is the obligation to trade shares (“STO”) Operating in practice in a post-Brexit world is no exception to this state of uncertainty.
The current STO
According to Article 23 of the Financial Instruments Markets Regulation (“MiFIR“), EU investment firms are only allowed to trade shares in an EU trading venue (ie regulated markets and multilateral trading facilities), an EU systemic internaliser (“I”), Or an equivalent trading venue in third countries, where such shares are admitted to trading on an EU trading venue.
In the absence of a solution, when the Brexit transition period ends on 31 December 2021, the EU version of the STO will oblige EU investment firms to execute such stock transactions in EU headquarters and EU ISPs, which will then exclude trading venues and IS in the UK. The opposite would also be true in the onshored UK version of the STO.
A significant volume of share trading, listed on EU headquarters, currently takes place at UK trading venues, although the UK is not necessarily the jurisdiction where the main listing took place, not even where the issuer is registered. This means that in a post-transition world, without a solution to the STO problem, EU investment firms will be forced to trade in EU markets which, for some stocks, will have lower liquidity and, therefore, a potentially much less efficient price. training processes that do not currently happen when these same companies have access to liquidity funds in the UK.
Ultimately, this could result in worse outcomes for the underlying clients of these investment firms (including pension funds and retail investors). Therefore, the market hoped that an agreement would appear that would minimize disruptions from 1 January 2021 and maintain access to all UK and EU companies to all companies, regardless of jurisdiction in what are authorized.
The European position
On 26 October 2021, the European Securities and Markets Authority (“ESMA”) He issued a statement[1] indicating that, in the absence of a decision on the European Commission’s equivalence with respect to the United Kingdom, we will see the same consequences as that of a Brexit without an agreement. ESMA referred to its previous statement of 29 May 2020, which confirmed that the EEA shares with international securities identification numbers (“ISIN”), Starting with the EEA country codes, will remain within the competence of the EU STO, while UK actions with GB ISIN will not. In other words, from ESMA’s perspective, the application of the STO depends solely on the jurisdiction where the issuer’s shares are registered.
At the time of writing, the European Commission has not published an equivalence decision in favor of the United Kingdom in relation to the STO. Consequently, ESMA’s EMA-ISIN approach remains the EU’s current position.
The position of the United Kingdom
The FCA issued a statement on November 4, 2021[2] (“the FCA statement“) That would use its temporary transitional power (“TTP”) To minimize the impact on UK investment firms, enabling them to continue to seek the best pricing results for themselves and their clients at all EU and UK trading and IS sites. The FCA disagrees with ESMA’s position that the ISIN and / or the currency of a share should determine the applicability of the STO.
On December 2, 2021, the FCA issued a draft transitional direction[3] and explanatory note[4], which codifies the FCA statement and reiterates the FCA’s commitment to mitigating disruptions.
It is important to note that the FCA Declaration did not grant UK equivalence to EU negotiating positions. Rather, he clarified that UK licensed companies will not be forced to run on a UK venue if a better price can be obtained on an EU venue. Practically the result of this will be the same as if equivalence had been granted, but the nuance of language speaks pertinently of the politicized power game we have seen dominate this and other discussions about the future relationship between the UK and the UK. EU.
The FCA argues that mutual equivalence between the UK and the EU “it should be easy to agree and remains the best way to deal with overlapping OSTs”. To this end, we understand that the FCA has not ruled out granting equivalence and remains open to discussions with ESMA on how best to minimize disruptions.
Comment
The FCA’s approach is not surprising given its views on market stability and the desire to minimize market disruptions related to Brexit. Unfortunately, if ESMA’s stance remains as it is, we will see fragmented liquidity groups in the UK and the EU, which does not take into account the current high trading volumes in London of instruments registered across the EU.
The sudden restriction on the number of places where an instrument can be executed ignores the fact that trading across Europe (including the UK) has been open and relatively fluid for a significant period of time. Historically, the best price and the best place in the whole EU has always been available to investment companies. In the absence of an agreement that resembles some level of mutual equivalence, at least in the short term, we are likely to see worse pricing results for companies and investment clients across the EU (and potentially in the UK). .
The EU’s position seems to ignore the realities of adverse prices that will cause fragmentation in the short term or, as is more likely to be the case, is a deliberate strategy to create a “strong Europe” for EU stock trading. long-term, despite the short-term negative implications. These short-term effects are likely to be non-competitive prices available for EU-wide registered shares, which EU pension funds, investment funds and investors cannot generally be satisfied with.
Whether the EU will grant some sort of last-minute effective equivalence on this issue remains an unanswered question at this time, but the signs are not promising.
Although so far the UK FCA has taken the lead in trying to minimize disruptions in this space, it should not be forgotten that the option of explicitly granting equivalence in STO context was at his disposal, but was not unilaterally exercised by the FCA. It is therefore worth noting that the FCA Declaration mentioned the will to debate “Whether MiFID II calibrations, designed for a pan-European market in 28 countries, remain appropriate for the UK if our current equivalence is not recognized.” This suggests that a divergence from European standards would be easily considered if ESMA does not take steps to comply with them in the middle. Some have rightly labeled these words as “threat”[5], as they reflect a stronger stance than we expected from the UK regulator.
[1] https://www.esma.europa.eu/press-news/esma-news/esma-sets-out-final-position-share-trading-obligation-0
[2] https://www.fca.org.uk/news/statements/fca-statement-share-trading-obligation
[3] https://www.fca.org.uk/publication/handbook/draft-transitional-direction-sto.pdf
[4] https://www.fca.org.uk/publication/handbook/draft-transitional-direction-sto-explanatory-note.pdf
[5] https://www.ft.com/content/365672d0-3bbb-46eb-93f7-68c72293f709