5.V.1.3.4 Case of Brexit

A referendum was held on Thursday 23 June 2016 in which a small majority of UK voters decided to leave the EU (Brexit).1 The UK has left the EU on 31 January 2020. The transition period will end on 31 December 2020.2 Non-equivalence of the UK would have substantial implications for both the EU27 and UK markets, since UK venues would no longer be eligible under the MiFID II share trading-obligation (i.e. the UK venues would be non-equivalent third country trading venues).3 ESMA has considered the impact of Brexit without a withdrawal agreement on the MiFID II share trading-obligation/in the absence of a UK equivalence decision by the Commission a couple of times. ESMA guidance states that:

The view of ESMA is based on ISINs, being the code for where the issuing firm is incorporated. The ISIN approach is complemented by a currency approach in order to address the situation of the small number of EU issuers whose shares are mainly traded on UK trading venues in GBP.6

As a result of the ESMA guidance, unlike the removal of Swiss equivalence in June 2019, it would still be possible to trade UK shares in the EEA and the UK after Brexit.7 However, the ISIN-approach of ESMA is only effective if the UK also uses an ISIN approach. If the UK would (1) introduce a share trading-obligation that (2) includes EEA ISINs, there would be overlap between the MiFID II and UK share trading-obligation.8

The FCA noted that the ESMA guidance ‘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’.9 The FCA indicates that a number of EU27 ISINs have both (1) a listing, as well as (2) their main or only significant centre of market liquidity, on UK markets. The FCA therefore does not consider an ISIN approach to be suitable. In view of the FCA, some shares have their main or only centre of market liquidity outside the country in which the issuer is incorporated. The ISIN approach ‘would in effect place restrictions on a company’s access to investors and freedom to choose where they seek a listing on a public stock market’.10 In sum, the scope of the MiFID II share trading-obligation is complex in relation to third countries, in particular in relation to the UK. Given the importance for the MiFID II equity pre-trade (and post-trade) transparency regime, the scope of the share trading-obligation is part of the MiFID II Review. For an examination of the MiFID II Review, reference is made to section VII below.