With the risk of the UK crashing out of the EU without a deal eliminated, Feb 1st will mean the start of a transition period of 11 months where everything more or less remains the same. With the exception of voting rights and a seat at the EU table. The UK will still need to follow EU laws where implemented and that means (among other things) that MiFID II will still be in effect.
At the end of the transition phase, we will see one of three possible outcomes:
- A UK/EU deal is struck and comes into force
- The transitions period ends without a deal in place
- The transition period is extended while a deal is negotiated
The likelihood of these outcomes will be different depending on who you ask, but given the recent track record of UK/EU negotiations, it is not hard to imagine we will end up in an extended transition period.
Regardless, this is relatively good news to capital market as the uncertainty of a no deal Brexit is more or less off the table. The EU is too small a market to compete with the global markets of US and Asia, so for the UK to be isolated by the EU makes little sense other than for political grandstand.
From an equity markets perspective, the most important part is to eliminate some of the technicalities that MiFID II, or more specifically Article 23 of MiFIR regarding the share trading obligation (STO), which is imposed on MiFID-licensed investment firms, is bringing to the mix. ESMA has made it clear that shares with a GB-ISIN will be exempt from the STO, while shares with an EU-ISIN will be in scope. That will alleviate the biggest concern about the STO, which was that dual ISIN (GB and EU) shares (including the “big 14”) would have to be traded on a EU-venue.
However, there are still a number of shares with EU-ISINs that have both a listing, as well as their main or only significant centre of market liquidity, on UK markets. This will no doubt cause further fragmentation and complexity. There is obviously still the possibility of amicable separation where the EU will consider UK markets as an equivalent and thus make it ok for EU investment firms to trade there and live up to the STO.
The more long term impacts of Brexit will be potential divergence of regulation as ESMA is expected to revise some of the regulatory framework that haven’t had the intended impact on the markets. It remains to be seen if these revisions will be coordinated with the FCA, or if the UK will make unilateral adjustments.
It may also be tempting for the UK to relax some of the restrictions to attract more activity. Margin requirements hampering CFDs or OTC derivatives trading for example or other regulation increasing the cost of entry in the market. Drifting too far from the EU could potentially torpedo any deal of equivalence and we would be back to square one.
One thing is clear, tomorrow there will be no answers on this and the closer we are to July and the cut-off date for any transition period extension, we can expect further debate and political turbulence.