ESMA sparks concern with share trading Brexit plans

Major UK stocks including Vodafone and Coca-Cola would have to be traded within the EU in ‘no-deal’ Brexit scenario under the share trading obligation.

Market participants across Europe will be forced to trade several major UK stocks on European venues if the UK leaves the EU without a deal later this month, sparking huge concern from the UK’s financial regulator.

The European Securities and Markets Authority (ESMA) published a statement on changes to the share trading obligation under a ‘no-deal’ Brexit scenario, confirming that 14 of the UK’s biggest stocks would have to trade on venues inside the EU. The major UK stocks listed by ESMA include Vodafone, Coca-Cola, BP, Rio Tinto and GlaxoSmithKline.

ESMA stated that in the event of a ‘no-deal’ Brexit and in the absence of an equivalence decision handed to the UK by the EU, the share trading obligation will apply to all shares traded on EU trading venues, and UK shares that are considered liquid in the EU. The move means that European banks and buy-side firms will not be able to trade the listed UK shares, despite some of them being listed in the country, or EU stocks on UK-based trading venues.

ESMA’s clarification has sparked major concerns from the UK’s Financial Conduct Authority (FCA), which warned the changes could see widespread disruption to trading across Europe. With ESMA’s approach, the FCA added that it will be impossible to avoid conflicting obligations applying to the same instruments, as the UK will have a separate share trading obligation upon its departure from the European Union.

“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,” the FCA warned. “This has the potential to cause disruption to market participants and issuers of shares based in both the UK and the EU, in terms of access to liquidity and could result in detriment for client best execution. We therefore urge further dialogue on this issue in order to minimise risks of disruption in the interests of orderly markets.”

ESMA concluded that if the timing and conditions of Brexit change, it will adjust its approach and inform the market of any changes as soon as possible. At the same time, the FCA has urged ESMA to engage with it constructively on changes to the share trading obligation to minimise potential disruption to trading.

Senior regulatory adviser at Fidessa, Christian Voigt, summarised the market’s despair at the move, stating that: “Doubtless market participants had hoped for a more practical approach and are disappointed in a new regime that prevents EU27 investment firms from trading stocks such as Vodafone in London after a no-deal Brexit. While arguing what the regulator could have done, we shouldn’t forget that it is all caused by a political decision not to grant equivalence. ESMA’s new regime is poorly suited for a smooth day-to day-operation of markets.”