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The FCA is encouraged that ESMA has taken steps to reduce the disruption that would be caused by the previously announced scope of the EU STO. According to ESMA, the revised approach proposed today would mean that EU banks and investment firms will be able to trade all UK shares in the UK, where for most the primary centre of liquidity exists.
However, applying the EU STO to all shares issued by firms incorporated in the EU (EU ISINs) 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. A number of shares with EU-27 ISINs have both a listing, as well as their main or only significant centre of market liquidity, on UK markets. In our view, 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.
We consider that the risk of disruption from potentially conflicting EU27 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.
The FCA believes in open markets and competition between trading venues and that reciprocal equivalence – which reflects the reality – 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.
In the absence of reciprocal equivalence, applying both UK and EU STOs in a way that maintains the status quo for a limited period of time after exit remains an alternative way of mitigating disruption whilst longer term solutions are found. The FCA stands ready to use the extra time available due to the delay to the UK’s withdrawal to engage constructively with ESMA and other European authorities to achieve either of these outcomes.
In addition, absent a determination of equivalence, the FCA will engage with market participants and trading venues about the steps that may be needed to protect the integrity of markets in the UK and to ensure that participants in the UK can continue to achieve high standards of execution for their clients, including when trading EU-27 shares, and that the MiFID II calibrations, which were designed for a pan European market of 28 countries, remain appropriate in a fragmented market.
The FCA will continue to consider its approach to the implementation of any STO that is needed in a hard exit. We will set out our approach if it is clear that there will be a no-deal exit, including our expectations of how firms can comply with applicable requirements.