The European Securities and Markets Authority (ESMA) said banks and asset managers based in the European Union should execute most of their share trades inside the bloc in a bid to calm nervous investors post Brexit.
ESMA set out a revised share trading obligation ( STO), that mandates where banks and other users of stock markets must trade EU-listed shares from January if Brussels decides not to allow London’s unfettered access in share trading to continue.
The EU watchdog eased previous guidance enabling investors on the continent to trade sterling-quoted shares of European companies listed in London after the transition period, which is due to end 31 December 2020.
“This move from ESMA is a sure sign that pragmatism is at last overriding politics when it comes to how equity markets will function post the transition period,” says Chris Hollands, head of European and North American sales at TradingScreen. “If share trading were to fragment further to the detriment or marginalisation of London, it is hard to see how this would be in the interests of either the UK or the EU.”
The EU is keen to bolster its own capital market and reduce reliance on London, which is Europe’s financial hub, handling more than a quarter of the €40bn (£36.3bn) daily market.
However, the revised STO will only apply to a small portion of market trading across the Channel. Fewer than 50 EU-listed shares are traded in sterling in London, accounting for less than 1%of total EU trading, according to Esma.
The markets watchdog added that trading in a non-EU currency could introduce a currency risk for EU investors, as the EU seeks to diminish its reliance on London capital.
ESMA said it had done the “maximum possible” to avoid a clash with Britain over where shares must be traded from January.
Britain has yet to set out its own rules on trading of EU-listed shares but admits that the best solution would be for Brussels to extend full access.
In a statement, the UK Financial Conduct Authority said, “We note ESMA’s latest interpretation of the scope of the EU STO, and we will set out our approach in due course.”
Cboe, Turquoise and Aquis have opened hubs in the EU that are ready to offer euro-denominated trading in EU-listed shares to avoid disruption to clients.
Talks between EU negotiator Michel Barnier and British envoy David Frost were due to wrap up earlier this week but the government has now extended discussions until Wednesday in the hopes of seeking compromises over the main sticking points of a trade deal.