On 29 May 2019 ESMA released a statement clarifying its position on the share trading obligation in a hard Brexit scenario. In its view, all EU27 shares, i.e. ISINs starting with a country code corresponding to an EU27 Member State and, in addition, shares with an ISIN from Iceland, Liechtenstein and Norway are within the scope of the share trading obligation under EU MiFIR and must therefore be traded on an EU venue. Shares with a GB ISIN are outside the scope of the share trading obligation under EU MiFIR and instead must be traded on a UK venue in accordance with UK MiFIR. ESMA has noted that the aim of this approach is to minimise disruption and to avoid overlaps (provided that the UK adopts an approach that does not include EU ISINs under the UK share trading obligation). To date ESMA has identified 14 classes of shares with a GB ISIN to which the share trading obligation under EU MiFIR would not apply and which should therefore be traded on a UK venue.
The FCA responded to the ESMA statement on 29 May 2019, confirming that in its view, a number of shares with EU ISINs have both a listing, as well as their main or only significant centre of market liquidity, on UK markets and the ISIN that a share carries does not and should not determine the scope of the share trading obligation. In its view, applying the EU share trading obligation to all shares issued by firms incorporated in the EU (i.e. to shares with an EU ISIN) would still cause disruption to investors, some issuers and other market participants, leading to fragmentation of markets and liquidity in both the EU and UK. As an alternative, the FCA’s approach is that for a limited period of time after exit, and pending reciprocal equivalence determinations being made, the share trading obligations under UK MiFIR and EU MiFIR should both be applied in order to mitigate disruption whilst longer term solutions are found. The impact of this is that dual listed securities (whether they have an EU ISIN or not) could be traded on either an EU or UK venue in order to satisfy the share trading obligations under EU/UK MiFIR. In the FCA’s view, the best way to ensure long-term open markets and competition is an approach based on reciprocal equivalence.
Insight: The FCA’s response to the ESMA statement is another example of the stronger stance the regulator is taking against ESMA, especially in relation issues of equivalence. The FCA is making clear that the UK has onshored EU MiFIR making the UK one of the most equivalent regimes in the world. The subtext is that the FCA appears to largely dismiss the small concession ESMA has made in relation to the 14 classes of shares with a GB ISIN, and instead argues that the focus should be on the liquidity of the markets and that only a reciprocal equivalence agreement will prevent disruption to the UK and EU market in a hard Brexit scenario. It is not clear if this positioning is part of a larger trend by the UK authorities but the point will need to be kept under close review by firms in the weeks to come.