ESMA adjusts share trading obligation plans for no-deal Brexit to ease industry concerns

European regulatory watchdog revises approach to STO for 14 UK stocks after FCA raises alarm over liquidity and market fragmentation under a no-deal scenario.

The European Securities and Markets Authority (ESMA) has revised its proposal to the share trading obligation (STO) after market participants expressed concerns that UK stocks would be traded on European venues.

ESMA has revised its proposal for the STO regime published on 19 March which stated that 14 of the UK’s biggest stocks would have to trade on venues inside the EU, which included Vodafone, Coca-Cola, BP, Rio Tinto and GlaxoSmithKline, should the UK leave the European Union in a no-deal scenario.

In a statement released on 29 March, ESMA confirmed that it would not be applying the STO restrictions to the 14 GB ISINs (International Securities Identification Number) included in its previous guidance to “further mitigate potential adverse effects of the application of the STO, within the constraints of the extraordinary circumstances of a no-deal Brexit”.

The UK’s Financial Conduct Authority (FCA) was quick to express concern over ESMA’s March announcement, which would result in European banks and buy-side firms not being able to trade the listed UK shares, despite some of them being listed in the country, or EU stocks on UK-based trading venues.

The European regulator acknowledged “concerns expressed by some stakeholders about the guidance” in its revised proposal.

“After careful consideration, and in coordination with the [European Commission], ESMA has concluded that an approach to the STO based only on the ISIN of the share would be more likely to minimise any such risk of disruption in the interest of orderly markets. As a consequence, the EU27 STO would not be applied to the 14 GB ISINs included in its previous guidance,” ESMA’s statement said.

ESMA confirmed that stocks with an ISIN corresponding to a member nation of the European Union, in addition to those from Iceland, Liechtenstein and Norway (as EEA ISINs) will be included under the STO, while British ISINs will fall outside the EU27 STO scope.

In response to ESMA’s announcement, the FCA was “encouraged” by the revised proposal and the steps taken to ensure access to liquidity is maintained for UK-based shares. However, the regulator warned that the STO regime will “still cause disruption to investors, some issuers and other market participants”, that would lead to market and liquidity fragmentation across the UK and the EU.

“A number of shares with EU-27 ISINs have both a listing, as well as their main or only significant centre of market liquidity, on UK markets. In our view, the ISIN that a share carries does not and should not determine the scope of the STO. Some shares have their main or only centre of market liquidity outside the country in which the issuer is incorporated. This approach would place restrictions on a company’s access to investors and freedom to choose where they seek a listing on a public stock market,” said a statement issued by the FCA, also on 29 March.

The FCA statement continued that the “risk of disruption from potentially conflicting EU27 and UK STOs” was not adequately mitigated by ESMA’s revised proposal “given that article 23 of the onshored MIFIR implies overlapping obligations for firms.”

ESMA said that it remains “mindful” of the impact a no-deal Brexit would cause across the European financial markets and that revisions of its approach up to 12 months after the date of the UK’s departure from the European bloc was an option.

“There is still a high level of uncertainty as to the final timing and conditions of Brexit. Should these change or should there be developments on the application of the STO in the UK, ESMA will assess whether its approach needs to be adjusted and will inform the public accordingly,” ESMA concluded.