Brexit: MiFID Share trading obligation – Should the EU investors be worried?

November 30, 2020

The European Union’s MiFID directives set clear rules on the share trading obligations a broker has when trading across Europe. As Brexit approaches, will these rules count against the EU? This post looks at the rules and asks some interesting questions about the future.

The MiFID share trading obligation (STO) is concerned with where trading can take place. For trading in Europe, all shares in scope of the STO should be traded on an EU venue where possible, or a recognised third-country venue. The rule was originally designed to bring share execution onto regulated venues and move away from Over the Counter trading.

Post-Brexit, it remains to be seen whether the European Commission will grant stock market equivalence to the UK. If it doesn’t, for Europe trading strategies will need to be adjusted to exclude UK venues when trading EU ISINs listed in EUR or any other EEA currency.

Meanwhile in the UK, the Financial Conduct Authority (FCA) has said that after Brexit UK firms can continue to access EU venues without restriction, as long as the venue has the relevant regulatory permissions. However, a UK broker acting for a European client might have to restrict execution venue access where an EU STO is applicable.

This week, ESMA has upheld the Derivatives Trading Obligation (DTO).

ESMA acknowledges the challenges but considers that EU counterparties can meet their obligations under the DTO by trading on EU trading venues or eligible trading venues in third countries.

If the European Commission does grant stock market equivalence to the UK, restricting access to pools of liquidity for EU investors could be avoided. With December approaching, are all the conditions met for recognition by the EU? European investors may find liquidity in some stocks harder to access in the future. Nothing has been granted nor promised yet.