Following backlash to its original proposals, the European Securities and Markets Authority (Esma) has revised the scope of the EU share trading obligation (STO), which essentially requires firms to ensure shares are traded on a regulated market.
Esma’s original proposals were published on 19 March, and the FCA said they made clear that the EU’s STO will apply to all shares traded on EU27 trading venues that are shares of firms incorporated in the EU (with EU ISINs) and of companies incorporated in the UK (with GB ISINs) where these companies’ shares are ‘liquid’ in the EU.
The FCA added this meant EU banks, funds and asset managers would not be able to trade these British or European ISIN shares in the UK, even where the UK is the home listing of the British or EU company.
In an announcement on Wednesday, Esma revised its proposals, saying the STO will be based only on the ISIN of the share which would be more likely to minimise market disruption. Consequently, it said the EU-27 STO would not be applied to the 14 British ISINs included in its previous guidance.
It said this will enable EU banks and investment firms to trade all UK shares in the UK, where the primary centre of liquidity exists for most participants.
However, the FCA said applying the EU STO to all shares issued by firms incorporated in the EU would still cause disruption to investors, some issuers and other market participants, leading to “fragmentation of markets and liquidity in both the EU and UK”.
The watchdog argued that several shares with European ISINs have both a listing, as well as their main or only significant centre of market liquidity, on UK markets. It added, therefore, that 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.”
The FCA said the risk of disruption from potentially conflicting EU-27 and UK STOs is not mitigated by the revised Esma approach given that article 23 of the onshored Mifir implies overlapping obligations for firms.
“Consistent with our objectives and the principle of best execution, we would want to ensure that markets in these shares currently available to both UK and EU investors in London would not be damaged,” it said.
The FCA said reciprocal equivalence – treating UK and EU regulations as equal until the disruption is eased – remains the best way of dealing with overlapping share trading obligations.
“The UK has onshored the same regime, making us one of the most equivalent countries in the world,” it added.