The EU Share Trading Obligation (STO) Post-Brexit – Fragmenting Markets

ESMA has published a statement confirming its guidance on the application of the STO following the end of the Brexit transition period, subject to one clarification; the STO will not apply to shares with an EEA ISIN traded on a UK trading venue in UK pound sterling (GBP) at the end of the transition period.  However, as ESMA’s commentary notes, very few shares are likely to be in scope of this clarification.

What is the STO?

The STO is set out under Article 23 of the Markets in Financial Instruments Regulation1 and applies to shares admitted to trading on a regulated market, or traded on a trading venue (“STO Shares”). 

An investment firm that wishes to trade in STO Shares must ensure that the relevant trade takes place on a regulated market, multilateral trade facility, systematic internaliser, or an equivalent third-country trading venue.  While there are certain exemptions from the STO, in particular for share trading that is non-systematic, ad hoc, irregular and infrequent, this exemption is generally considered limited in scope and difficult to rely on.

What impact will Brexit have on the Share Trading Obligation?

Once the transition period ends on 31 December 2020, UK trading venues will become third-country trading venues. Similarly, EEA venues will become third-country venues under UK law. Consequently, unless something changes over the next two months, EU investment firms will no longer be able to trade STO shares on UK venues, and UK investment firms will no longer be able to trade shares subject to the UK’s “onshored STO” on EEA venues.

Where shares are listed in both the UK and the EU, the EEA listed share will have to be traded on an EEA trading venue (such as Euronext Dublin), while the UK listed share will have to be traded on a UK trading venue (such as the London Stock Exchange).  This could result in fragmented liquidity for such shares, as well as preventing investment firms from achieving best execution for their clients.

What is ESMA’s Approach?

ESMA’s approach to the STO is set out in a statement published on 26 October 2020, (the “October Statement”)(here), which follows on from an earlier statement published on 29 May 2019, in which ESMA provided guidance on the impact of a no-deal Brexit on the STO in the absence of an equivalence decision in respect of UK trading venues. See our earlier briefing (here).

In the October Statement, ESMA states that the potential adverse effects of the application of the STO after the end of the transition period are expected to be the same as in the no-deal Brexit scenario considered in May 2019, in the absence of a European Commission equivalence decision in respect of UK trading venues. Accordingly, ESMA confirms its earlier guidance that 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 STO and must therefore be traded on an EU venue.  GB ISINs will be outside the scope of the STO.

Shares with EEA ISINs traded in the UK in GBP

Importantly, the October Statement also addresses the specific situation of shares with an EEA ISIN which are mainly traded on UK trading venues in GBP. EU wide data available to ESMA shows that such shares are limited in number (less than 50) and account for a small proportion of the EU total trading activity (less than 1%) and that:

“It can therefore be reasonably assumed that the trading of shares with an EEA ISIN on a UK trading venue in GBP by EU investment firms occurs on a non-systematic, ad-hoc, irregular and infrequent basis. Therefore, it is expected that those trades will not be subject to the EU STO, in accordance with Article 23 of MiFIR”.


While ESMA’s revised guidance as to the scope of the STO is welcome, it is worth noting that the scope of the UK’s “onshored” STO after the end of the transition period remains unclear at this stage, with the FCA expected to set out its position in due course.

Further, although the ESMA clarification provides some relief from the potential for fragmented liquidity for the limited category of shares confirmed to be out of scope for STO, the absence of any white smoke on equivalence arrangements for UK trading venues will adversely affect liquidity for many of those remaining in scope.

  1. Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012.

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.