Brexit and the Share and Derivatives Trading Obligations - Still at Square One!
The European Commission is in the process of reviewing – and where necessary updating – the over 100 sector-specific stakeholder preparedness notices it published during the Article 50 negotiations with the United Kingdom (here). These include its notices relating to banking and payment services, markets in financial instruments, post-trade financial services, credit rating agencies and asset management (the "Notices"). The share and derivatives trading obligations are considered in the notices on markets in financial instruments (the “MIFID Notice”).
The Share and Derivatives Trading Obligations
The Markets in Financial Instruments Regulation 600/2014 (“MiFIR”) sets out requirement relating to the trading of certain shares and derivatives. Specifically, Article 23 of MiFIR requires investment firms to ensure that the trades they undertake in shares admitted to trading on a regulated market, or traded on a trading venue, take place on a regulated market, multilateral trade facility ("MTF"), systematic internaliser, or an equivalent third-country trading venue.
According to a statement published by ESMA on 29 May 2019, in its view, all EU27 shares, i.e. ISINs starting with a country code corresponding to an EU27 Member State and, in addition, shares with an ISIN from Iceland, Liechtenstein and Norway are within the scope of the share trading obligation under EU MiFIR and must therefore be traded on an EU venue.
Article 28 of MiFIR requires in-scope entities to trade a limited range of liquid derivatives on a regulated market, MTF, organized trading facility, or an equivalent third country trading venue. ESMA maintains a public register (here) setting out:
- the classes of derivatives subject to the trading obligation;
- the trading venues on which those derivatives can be traded; and
- the dates on which the obligation takes effect per category of counterparties.
The MiFID Notice
After the end of the transition period on 31 December 2020, the United Kingdom will be a third country as regards the implementation and application of EU law in the EU Member States. This means that in order to continue to use UK trading venues when trading shares and derivatives in scope of the trading obligations, those venues will need to be recognized as equivalent third country trading venues by the European Commission.
According to the MiFID Notice, while the assessment of the UK’s equivalence for the purpose of the share and derivatives trading obligations is ongoing, the assessment has not been finalised. All stakeholders must therefore be informed and ready for a scenario where shares and derivatives subject to the EU trading obligations can no longer be traded in the UK trading venues. In both cases, EU counterparts need to reassess their trading arrangements to ensure continued compliance with their obligations under the MiFID framework.
While COVID-19 has dominated the news over the last months, the updated Notices are a timely reminder that Brexit is fast approaching. Unfortunately, it is still unclear what final form Brexit is likely to take and, as is clear from the Notices, financial service providers need to ensure that they prepare for the worst case scenario of a no-deal Brexit, despite the strenuous efforts being undertaken to avoid this eventuality.
While this briefing has focused on the share and derivatives trading obligations, the outcome of the EU’s on-going equivalence assessments will impact a much broader range of issues. In the context of EMIR, one particular point to note is that in the absence of an equivalence decision, derivatives traded on a UK regulated market will become over-the counter (OTC) derivatives for the purposes of EMIR and subject to all EMIR requirements applicable to OTC derivatives. Further information on this issue is available in the Commission’s notice on post trade financial services, referred to above.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.
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