On 19 March 2019, the European Securities and Markets Authority (ESMA) published a statement on the impact of a no-deal Brexit on the trading obligation for shares under Article 23 of MiFIR.

Article 23 of MiFIR requires investment firms to conclude transactions in shares admitted to trading on a regulated market (RM) or traded on an EU trading venue on: (i) RMs, (ii) multilateral trading facilities, (iii) systematic internalisers; or (iv) third-country trading venues assessed as equivalent by the European Commission.

The statement reviews previous ESMA guidance on the trading obligation for shares which was published on 13 November 2017. ESMA states that such guidance did not take into account the possible complications arising from a no-deal Brexit. Given the strong ties and interconnections between the UK and the EU27 financial markets, it cannot reasonably be assumed that all shares admitted to trading on a UK regulated market are traded on a non-systematic, ad-hoc, irregular and infrequent basis in the EU27 and are therefore out of the scope of the trading obligation.

The statement goes on to provide that for shares traded in the EU, Iceland, Liechtenstein, Norway and the UK, ESMA assumes that:

  • 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 trading obligation; and
  • GB shares i.e. ISINs starting with the prefix “GB” are traded on a “non-systematic, ad hoc, irregular and infrequent” basis in the EU27, unless those shares qualify as liquid in the EU27.

ESMA has also published a list of ISINs that, following the above approach, would be subject to the trading obligation for shares. The list has been compiled based on data for the calendar year 2018.

With respect to GB and EU27 shares that were or will be newly admitted to trading or traded for the first time on an EU27 trading venue after 1 January 2019, ESMA is of the view that the trading obligation should be applied to them based on the ISIN country code as described above.

ESMA will consider whether to review the above approach at the latest 12 months after the no-deal Brexit date.

The FCA has published its response to ESMA’s statement.

The FCA acknowledges that clarifying the application of share trading obligations in the event of a no-deal Brexit will help to provide certainty, but takes the stance that only a comprehensive and coordinated approach can provide the necessary certainty to market actors. Without this approach, it will not be possible to address the issues of conflicting obligations applying to the same instruments. Where this is the case, firms may be limited to trading certain shares only in either the UK or the EU or in some cases be caught by overlapping obligations.

The FCA continues, explaining the onshoring of EU legislation in preparation for a no-deal Brexit means that the UK will, as well as the EU, have a share trading obligation. Applying the same approach as ESMA to the scope of the UK share trading obligation would, based on current trading data, mean there would be a large degree of overlap between the UK and EU obligations. To avoid market disruption, the FCA calls for further constructive dialogue with ESMA.