Catch 22: The share trading obligation
MiFID II refined the definition of OTC trading for equities, making it more difficult for firms to trade away from recognised trading venues or outside of a systematic internaliser (SI). Introduced in 2018, the so-called share trading obligation (STO) effectively wrapped more regulation and transparency around EU share trading. As a consequence, trade flow was pushed towards SIs, reducing off-venue OTC trading.
According to the rules, shares in scope of the MiFID STO, when traded in enough scale by an EU firm, should be traded on an EU venue, EU SI, or recognised third country exchange.
Rolling the clock forward to 2019 and moving the EU border line, today’s Brexit contingency planning is focused on the scenario where no equivalence is granted to UK venues under an October no-deal.
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Understandably, this can get confusing, especially since ESMA has taken a securities identification number (ISIN) based approach in their no-deal planning around the STO.
Excluding GB ISINs was a step in the right direction. This means that, unlike the removal of Swiss equivalence earlier in the summer, it will still be acceptable to trade UK stocks in Europe and the UK. However, as the FCA pointed out in their response, this is a problem when trading shares that have their main market outside the country in which the issuer is incorporated. Therefore, granting of reciprocal equivalence is the better solution all-round.
Even though the EU still intends to maintain open and globally integrated financial markets, the STO conundrum could present conflicting obligations to access liquidity in a firm’s local region despite best execution principles. That’s some catch!