The U.K. Financial Conduct Authority warned Wednesday that the European Securities Markets Authority's revised approach to equity trading will not eliminate the risk of market disruption in a no-deal Brexit.
The FCA said applying the EU securities token offering, or STO, rules to all shares issued by firms incorporated in the European Union would still cause disruption to investors, some issuers and market participants, affecting liquidity in both the EU and U.K. due to obligations under Markets in Financial Instruments Regulation.
In the absence of a Brexit agreement between the U.K. and the European Union, ESMA concluded Wednesday to apply a reduced scope of the STO rules under a no-deal Brexit by excluding dual European and U.K. issues from the rules. ESMA said applying STO rules based only on the international securities identification number of the share would likely minimize any risk of disruption.
As a consequence, the EU STO rules would not apply to U.K. issues with main or significant center of market liquidity in the U.K., as it was envisaged in ESMA's previous guidance.
"Should (European) ISINs be included in the scope of the U.K. STO, this would introduce overlapping obligations and the potentially damaging consequences for market participants that ESMA is seeking to address through its revised approach today," ESMA said in a statement Wednesday.
But the FCA warned ESMA should not determine the scope of the STO based on ISIN because it would place restrictions on corporations' access to investors and freedom to choose where corporations seek a listing on a public stock market.
EMSA's revised guidance fails to sufficiently mitigate market disruptions caused by conflicting EU and U.K. STOs, the FCA said, given MIFIR rules already imply overlapping obligations for firms.
"Consistent with our objectives and the principle of best execution, we would want to ensure that markets in these shares currently available to both U.K. and EU investors in London would not be damaged," the FCA said.
The FCA said it plans to engage constructively with ESMA and other European authorities to mitigate these risks. U.K.'s exit form the EU is scheduled to be completed by Oct. 31.