"No-deal" Brexit and the MiFIR STO

?No-deal? Brexit is something that has been widely discussed in the press over the past week. From a financial services perspective there are practical considerations of a ?no-deal? Brexit on how markets operate - including how it could significantly increase costs and transaction times in some shares for customers, such as EU-based pension funds and asset managers.

Under Article 23 of the Markets in Financial Instruments Regulation (MiFIR), transactions in shares that meet certain criteria must be concluded on an European Securities and Markets Authority (ESMA) approved trading venue - an independently operated venue that facilitates transactions on a non-discretionary basis. This is commonly referred to as the share trading obligation (STO). This requirement was introduced to try and ensure transparency and fair pricing for all those operating in a market.

As the market currently stands, the UK hosts a number of these independently operated trading venues. These provide deep and liquid markets to customers across the EU; often deeper and more liquid than in the domestic marketplace. This typically means more competitive pricing options and faster transaction times, particularly when a buyer or seller is seeking to acquire or dispose of a large holding of a share. In the event of a ?no-deal? Brexit the UK would be outside the EU. In the absence of affirmative recognition by the EU, the UK venues would no longer be allowed to be the platform for trades in shares covered by Article 23 of EU MiFIR.  

This would mean EU customers would need to carry out any share transactions with an EU27 member state and EEA (Iceland, Liechtenstein and Norway) International Securities Identification Numbers (ISINs) only on an ESMA approved trading venue, even if that venue was not the most liquid market - potentially increasing costs and transaction times (and so increasing the risk of exposure to adverse market movements) for some shares for EU-based customers.

There was a step in the right direction on 29 May when ESMA released a statement refining its approach to the STO in a ?no-deal? scenario. In this statement ESMA advises that no shares with a GB ISIN will be subject to the EU27 share trading obligation in the event of a ?no-deal? Brexit. At the same time ESMA confirmed that all EU27 member states and EEA ISINs will be within the scope of the STO.

Both the clarification of the proposed approach and the tone of the statement, including confirmation that ESMA is doing the maximum possible to minimise disruption and to avoid overlaps, are positive signs. However, there remain concerns about the impact on EU27 and EEA shares that are actively traded on UK-based trading venues, which may be the most deep and liquid markets in those shares. An example of such a share is Ryanair. Other impacted shares are included in the UK's FTSE 100 and FTSE 250 indices such as IAG, Tui and Smurfit Kappa. Shares included in these indices are often among the most heavily traded, due to the growing importance of funds and are located in jurisdictions across the globe that invest in popular market indices.

Under onshored MiFIR legislation, the UK will also be required to implement the STO, which is still under consideration. Depending on how this is implemented there may be greater uncertainty for firms and their customers if, for example, an UK and an EU firm are counterparties to a share trade and were met with mutually incompatible trading obligations. The FCA released a helpful statement in response to the ESMA statement on 29 May, clarifying it also seeks to minimise disruption. The statement sets out that it sees reciprocal equivalence as the best approach to resolving this issue.

As with so many things Brexit-related, this is an evolving issue. There is still much more to be done to avoid disruption, increased costs and transaction times in certain shares in the event of a ?no-deal? Brexit. However, the helpful statements by the responsible EU and UK authorities are an encouraging sign in this area. These demonstrate that in the worst-case scenario of a ?no-deal? Brexit actions are being taken that help address some of the practical issues for financial services.