ESMA mulls applying tick size regime on third countries as Brexit looms

Third country instruments may have to comply with tick size regime as ESMA looks to protect venues inside the European Union.

Countries outside of the European Union could be forced to comply with the tick size regime under MiFID II as the EU markets watchdog seeks to protect venues in Europe as the shadow of Brexit grows larger.

The European Securities and Markets Authority (ESMA) has released a consultation on the proposed rule changes which would see tick sizes apply to third country instruments that will surge following the UK’s departure from the European Union.

Despite difficulty in accurately assessing the number of shares that would be considered third country instruments post-Brexit, ESMA said estimated it could be up to 18% of the shares currently traded on authorised platforms.

“These specific cases where EU trading venues might be subject to minimum tick sizes larger than those applicable on non-EU venues may have the unintended result of putting EU trading venues at a competitive disadvantage,” said Steven Maijoor, chair of ESMA.

“This might result in scarcer and shallower liquidity being available on EU trading venues which can be detrimental to those trading on those venues. This timely consultation looks to address these cases and contributes to orderly financial markets.”

The tick size regime under MiFID II has been a cause of controversy this year, after exchanges argued that firms operating systematic internalisers (SIs) have a competitive advantage as they do not have to comply with the rules.

ESMA decided to enforce the tick size regime on SIs following an industry-wide debate on the issue which saw exchange giants such as Cboe Global Markets and the London Stock Exchange Group claim SIs could offer price improvements.

Those who currently operate SIs, including Virtu Financial, argued against the changes imposed by ESMA and instead urged the regulator to explore the escalating costs imposed by exchanges.

The industry has until 7 September this year to provide feedback on ESMA’s decision to enforce the tick size regime on third country instruments. Once comments are analysed, the amendment will be submitted to the European Commission for endorsement.