Rebecca Healey, head of market structure & strategy, EMEA at Liquidnet, has warned that European asset managers have real concerns on retaining access to liquidity following guidance on how investment firms in region should implement the share trading obligation under MiFID II in a no-deal Brexit.

The MiFID II regulations, which went live in the European Union at the start of last year, require shares listed on venues in the region to be traded on regulated markets or on third-country venues deemed equivalent by the EU Commission. If the UK leaves the EU without a deal there will be no equivalence and EU asset managers providing MiFID II services will not be able to access UK venues, including systematic internalisers.

“For European asset managers in particular, this represents real concerns on retaining access to liquidity,” wrote Healy. “Many European firms are in the process of repapering with their counterparties in the UK and Europe to ensure that they have continued access to liquidity in the relevant jurisdiction, an exercise which is both time consuming and costly.”

Yesterday the European Securities and Markets Authority published long-awaited guidance on the share trading obligation and said it will extend to UK-listed shares deemed to be “liquid” in the EU. Esma listed the 14 stocks affected which include BP, Royal Dutch Shell and Vodafone Group.

? ESMA publishes statement on the application of the share trading obligation #MiFIDII in a no-deal #Brexit without an equivalence decision for the UK

? https://t.co/2J89yOE0x3

ℹ️ Provides additional clarity & certainty to market participants on application of TO for shares pic.twitter.com/OvRsyX4p9a

— ESMA (@ESMAComms) March 19, 2019

Nick Burchett, UK equities manager at Cavendish Asset Management, said in an email to Markets Media: “In the event of a hard Brexit and Esma getting its wish for UK stocks to be traded inside the EU, all this will do is further fragment equity trading across Europe. This is slightly ironic given that fact that the whole point of Esma’s creation of MiFID II was to increase transparency across markets. But how on earth does having numerous stocks listed across multiple different locations help with transparency ?”

Chris Cummings, chief executive of the Investment Association, said in a statement that the guidance falls short of the broad equivalence the market needs in order to avoid fragmentation and a reduction in market liquidity.

“This does not represent a good outcome for our industry, or for savers and investors whose money we manage,” he added. “In the event of a no-deal exit, the solution outlined today may leave firms unable to efficiently trade in the market and at the very least will lead to significant operational issues for firms executing orders.’

Analysis

Anish Puarr, European market structure analyst at Rosenblatt Securities, tweeted that  the broker had analysed the 14 stocks with GB ISINs that will be subject to the MiFID II share-trading obligation in the event of a no-deal Brexit or lack of equivalence.

Only three of these issues had >50% market share on EU venues in 2018. Hard to believe that some of the EU versions of these stocks are deemed "liquid" enough to prevent EU firms trading them in the UK.

— Anish Puaar (@AnishRBLT) March 20, 2019

Esma said in a statement 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, the absence of any clarification by Esma would by default lead to the application of the MiFIR trading obligation to every share traded in the EU27,” added Esma. “Esma’s approach seeks to limit potential market disruption while also ensuring Article 23 MiFIR is adequately and consistently applied across the EU.”

Esma stressed that the guidance should only be applied in case of a no-deal Brexit occurring next week on 29 March.

FCA

The UK Financial Conduct Authority said in a statement that the onshoring of EU legislation in preparation for Brexit means that the UK will have a share trading obligation that, based on current trading data, would mean there would be a large degree of overlap between the UK and EU obligations.

FCA response on ESMA guidance on impact on TO in case of no deal brexit , https://t.co/qXw2ekH5gg

— FIA EPTA (@FIAEPTA) March 19, 2019

“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,”added the UK regulator. “We therefore urge further dialogue on this issue in order to minimise risks of disruption in the interests of orderly markets. The FCA stands ready to engage constructively with Esma and other European authorities to achieve this.”

Healy continued that the guidance opens the possibility to a new ISIN, a type of securities identifier.

“The latest political response to Brexit negotiations may yet deliver what policy makers least expect, regrettably it looks as if end investors may bear the brunt of how future liquidity formation plays out in practice,” she added. “One to watch as Brexit negotiations continue.”

Christian Voigt, senior regulatory adviser at Fidessa, said in a blog that 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.

Some point out it provides clarity & certainty, I think it is an unfortunate contorted contraption. https://t.co/1panCmCMzL https://t.co/XMEAoYsuD6

— Christian Voigt (@_christianvoigt) March 20, 2019

“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,” he added. “Esma’s new regime is poorly suited for a smooth day-to day-operation of markets. For example, what will happen after the EU revokes the equivalence decision with Switzerland in a couple of months? This is not what principle-based regulation looks like.”