5.VII.3.2.1 ESMA key proposals and observations

The MiFID II share trading-obligation is complex in relation to third country shares (see also section VI above). Third country shares are shares with the main pool of liquidity located outside the EU, but also traded in the EU. Along similar lines, ESMA observes challenges with the MIFID II share trading obligation in relation to third country shares. ESMA identifies three challenges, being (1) a lack of liquidity in third country shares on EU venues; (2) a burdensome equivalence regime of the MiFID II share trading-obligation; and (3) overlap with equivalent trading obligations applicable in other third countries with respect to third country shares.1 Many EU venues offer trading in third country shares, although in practice those shares have very limited liquidity (challenge 1). EU venues do so, in particular for retail investors who execute small positions in third country trading venues and therefore do not need access to deep pools of liquidity.2 A strict reading of the MiFID II share trading obligation would (a) require an EU investment firm to trade the third country share on an EU RM, MTF, or SI (i.e. EU venues not being the main pool of liquidity) in case there is (b) no equivalence decision from the Commission for a third country trading venue (with the main pool of liquidity). A lacking equivalence decision is likely due to the burdensome process for the Commission (challenge 2).3 Last, but not least, the MiFID II share trading-obligation can overlap with third country share trading obligations (challenge 3).4 To overcome these challenges, ESMA proposes the following:

In sum, ESMA proposes an approach based on (1) ISINs and (2) permitting national currencies of third-country trading venues. The ESMA proposal is the consequence of the ESMA consultation process, including feedback from the respondents. The ISIN-approach has the advantage of being simple, but is not perfect. More specifically, ESMA observed during the consultation process that an ISIN approach fails to take into account that some non-EU ISINs are primarily or only traded in the EU (and therefore should be subject to the share trading-obligation), while some EU ISINs barely trade on EU venues (even though those instruments are available for trading on EU venues). At the same time, ESMA observes that this only concerns a limited number of ISIN and overall the ISIN approach achieves good results in the majority of cases.6 In other words, ISINs are not always, but often, a good indicator of the main pool of liquidity. Respondents to the ESMA consultation expressed broad support for using ISINs as a main criterion, but were divided when it came to fine-tuning the ISIN approach7 (e.g. whether or not to complement the approach with whether the issuer has actively sought to have its shares admitted to trading on a venue in a third country).8 Taking all these points into consideration and realizing that it is difficult to find a solution that addresses all concerns, ESMA believes that an ISIN-approach to determine the MiFID II share trading-obligation is the best option. ESMA proposes to rely on the first two letters of the ISIN (e.g. ‘GB’ (Great Britain) or ‘NL’ (Netherlands)).9 The ISIN-approach would mean that so-called dual-listed shares (e.g. listed in the EU and the UK) are an EU situation. The ESMA view is contentious, because an inclusion of dual-listed shares could harm the competitiveness of the EU equity markets.10

The second proposal of ESMA is to permit shares with an EU ISIN to be traded on a third-country trading venue in the national currency of the concerned third country. Only a few respondents to the ESMA consultation supported the national currency approach.11 The ESMA proposal appears to be some sort of compromise for potential consequences of a too strict ISIN-approach, such as an inclusion of dual-listed shares within the MiFID II share trading-obligation. ESMA disagrees with the majority view of the respondents. ESMA responds in the MiFID II Review Report by stating that the rationale of permitting national currency trading on third-country trading venues is to allow EU market participants to access additional pools of liquidity, while limiting any unfair competition with EU RMs, MTFs, and SIs.12 ESMA believes that a potential for regulatory arbitrage is limited. ESMA argues that by permitting to trade in the national currency of the third country currency risks for EU investors are increased. ESMA believes that due to these currency risks the risks of regulatory arbitrage are not significant. ESMA makes clear that EU ISINs traded on a third-country trading venue in the third-country currency continue to fall within the MiFID II share trading-obligation.13