ESMA has published a list of over 6,200 companies whose shares are subject to the 'share trading obligation' (STO) set out in the Markets in Financial Infrastructures Regulation (MiFIR), alongside a statement on how the STO would work in a 'no deal' scenario without any decision as to UK equivalence by the European Commission.
The STO applies to banks, funds and asset managers regulated by the EU's recast Markets in Financial Infrastructures Directive (MiFID II) ('investment firms'). They are required to trade shares deemed to have sufficient EU trading liquidity on EU exchanges, or on third country trading venues assessed as equivalent.
ESMA said that its guidance was intended to "limit potential market disruption while also ensuring article 23 MiFIR is adequately and consistently applied across the EU". However, the UK's Financial Conduct Authority (FCA) criticised ESMA's approach as potentially disruptive.
"The onshoring of EU legislation in preparation for Brexit means that the UK will, as well as the EU, have an STO," the FCA said in a statement.
"Applying the same approach as ESMA to the scope of the UK STO would, based on current trading data, mean there would be a large degree of overlap between the UK and EU obligations. 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," it said.
Financial regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law.com, said that ESMA's position would be "a blow" for UK trading exchanges and market participants as well as UK-listed companies.
"Back in December 2018 the London Stock Exchange stated that it was 'hopeful that, in the event of a hard Brexit, it would be immediately declared equivalent for the purposes of MiFID II, including the share trading obligation under MiFIR article 23," she said. "The UK has been adopting legislation so that the share trading obligations are very similar to those within the EU bloc."
"The announcement from ESMA, so close to the current Brexit exit date, stating that EU investment firms will need to trade on EU trading venues shares of firms incorporated in the EU and of companies incorporated in the UK where there is sufficient liquidity on EU trading - some 6,200 firms - is a blow not only for UK trading venues but also, potentially, the market participants and the issuers of those shares," she said.
"ESMA's stated intention of providing clarity and certainty, while true, does perhaps not take sufficiently into account the impact of a sudden switch or switching off of trading venues. The swift and concerned response from the FCA that this has the potential to cause disruption for EU and UK market participants and issuers of shares possibly impacting on market liquidity and best execution, underlines how serious ESMA's stance is. It is not clear how ESMA's approach is in the best interests of all those affected. The probability of UK trading venues not being found equivalent in the relatively near future seems unlikely and therefore to purposefully create potential instability is surprising," she said.
In a statement ESMA said that it "recognises that its approach may lead to an overlap of trading obligations for a number of shares and potentially a greater level of fragmentation of trading should the UK apply an identical approach". However, it said that, by default, the MiFIR STO would apply to every share traded in the EU by a MiFID II-regulated investment firm, not just those that meet the liquidity requirements.
ESMA will review its planned approach "should the timing and conditions of Brexit change". If the no-deal provisions take effect, these will be reviewed within 12 months of the date of the UK's departure from the EU "in light of possible market developments".