The World Federation of Exchanges (“WFE”), the global industry group for exchanges and CCPs, has today responded to a significant European Securities and Markets Authority (ESMA) consultation on the EU trading and transparency rules for equity instruments. The WFE proposes refining the regime, such that it ‘follows the liquidity’.
Specifically, the WFE supports ESMA’s proposal that the share trading obligation (or STO, in MiFIR Article 23, which requires shares to be traded on an EU venue unless otherwise exempted) be revised to simply exclude ‘third-country’ (non-EU) shares. This will have the advantage of respecting and supporting price formation in these shares, together with EU investors’ access to liquidity in them. It will also reduce the number of exceptions to the rules that supervisors and market participants currently have to process.
Trading third-country shares on third-country markets is of great importance to the European financial market value chain. Capital flows in either direction between the EU and third countries support European businesses and investors, and contribute to the efficient allocation of capital.
To exclude third-country shares from the STO and appropriately achieve the policy objective, the WFE recommends instituting a system in which ESMA distinguishes between EU/EEA and third-country shares by using International Securities Identification Numbers (ISINs). This will represent an improvement on the current processes of granting equivalence in certain instances and relying on supervisory guidance in others. In order to make this approach operable, two sorts of special cases must be addressed:
Dual-listed securities, for which the WFE advocates the flexibility to permit trading by EU investment firms on either listing venue; and
Securities where EU entities have chosen a non-EU exchange venue as their sole listing, which should in principle be treated as third country shares for the purposes of the STO. By the same token, the shares of non-EU issuers listing on EU markets should be included in the list of EU/EEA shares.
Nandini Sukumar, Chief Executive Officer, WFE said: “The uncertainty arising from MiFIR Article 23 continues to be a concern for third-country venues and EU participants in those markets, therefore we support proposals that this regulation excludes third-country shares. The WFE looks forward to participating in the rest of the Commission’s MiFID II/MiFIR Review process, with a view to supporting the development of capital markets and avoiding the costs associated with fragmenting pools of liquidity.”