18.IV.1.3.9 Hard Brexit-scenario

The United Kingdom (UK) left the EU on 31 January 2020. A transition period is in place until 31 December 2020 (extension is possible by up to two years). During this period, MiFID II continues to apply to the UK.1 The EU and the UK currently negotiate the details of their future relationship. In case of a so-called hard Brexit (i.e. the UK leaves without a withdrawal agreement) two issues arise.

First, a Hard Brexit results in data problems for the MiFID II equity pre-trade and post-trade transparency regime. The Financial Conduct Authority (FCA), being the NCA of the UK, will stop sending reference data and calculation/estimation results to ESMA in case of a hard Brexit. In effect, no new UK-related data will be received and process by ESMA nor published on the ESMA website.2 ESMA indicates that this situation will affect the functioning of FIRDS, FITRS, the DVC Database, as well as the data for the SI calculations.3 In addition, to the collection and publication of data, one must realize that the MiFID II transparency calculations are based on trading activity in ‘EU’ Member States, which no longer involves the UK. ESMA has explained it will gradually phase out the UK data over time in case of a Hard Brexit. For example, the double volume cap will remain part of ESMA’s calculations for a period of twelve months, but its impact will gradually decrease as time passes. ESMA says this is not a perfect solution, but that it believes this to be the least disruptive and most certain for the market ‘in a situation which does not allow for perfect solutions’.4

Second, a Hard Brexit results in problems for the MiFID II share trading-obligation. If a share is subject to the MiFID II share trading-obligation, an investment firm needs to ensure the share transaction is performed on an RM, MTF, SI, or equivalent third-country trading venue. After Brexit the UK classifies as a third country from an EU perspective. This means that UK trading venues need to be deemed equivalent by the Commission in order to be an eligible platform for the MiFID II share trading-obligation, which has not (yet) happened until this point in time. Without equivalence, EU investment firms can in principle not undertake the share transaction on a UK trading venue.5 ‘In principle’, since it is possible for a UK trading venue to rely on an exception to the share trading obligation, being the case where the share is traded on a ‘non-systematic, ad-hoc, and irregular and infrequent basis’.6 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, among other things, that:

The approach of ESMA tries to find a balance between the goals of the MiFID II share-trading obligation – including concentrating trading on highly transparent venues – and the relation with third countries, more specifically where the main pool of liquidity is in the third country, including the UK. ESMA aims to exclude third-country shares from the MiFID II share trading-obligation. Phrased differently, ESMA wants more equity pre-trade transparency under MiFID II, but only for EU situations. The main question then is: what is an ‘EU situation’? As noted above, ESMA proposes to identify third country shares based on an ISIN-approach. ESMA adds that shares that fall within the scope of the application of the MiFID II share trading-obligation trading on third-country trading venues should be permitted to be traded in the national currency of the concerned third country.9 The approach of ESMA reflects the aim to keep the EU markets competitive by not being too strict on non-EU situations. There is an important exception to the foregoing. ESMA takes the view that dual-listed shares (e.g. listed in the EU and the UK) are an EU situation. The view of ESMA is contentious, because an inclusion of dual-listed shares could still harm the attractiveness of the EU equity markets.10