Mind the Gap- UK to ditch MiFID 2 STO

The Regulatory gap between the UK and the EU underwent some widening yesterday with the Chancellor’s indication that the UK will drop the share trading obligation (STO) and double volume cap (DVC). The somewhat stealthy announcement formed part of Rishi Sunak’s speech at the opening of UK FinTech Week. The short speech focussed on various proposals to facilitate digital finance, the most notable being the creation of an HMT and BoE taskforce to explore a possible UK central bank digital currency and the launch of a BoE “omnibus” account providing settlement and payment infrastructure to market innovators. The speech concludes with reference to forthcoming capital market regime consultations, including “including proposals to delete the share trading obligation and double volume cap”.

The STO and DVC are both mechanisms to force share trading to “lit”, transparent venues. Under Art. 23 MiFIR, the STO stipulates that EU investment firms are only permitted to trade shares on an EU trading venue or third-country equivalent; the onshored UK version applies the same restrictions in respect of the UK. Under Art 5 of MiFIR, the DVC limits “dark” trading under the Art 4 price waiver to a certain proportion of total trading in an equity. Dark trading in an equity is suspended if, over a six month period, it exceeds 8% of total trading or 4% on a single trading venue.

Both measures have proved controversial; in the absence of an EU grant of equivalence, the EU STO has prevented EU firms from accessing London-based liquidity on the 14 dual-listed stocks, and the rise of minimally-transparent, but MiFIR-compliant, periodic auctions has diminished the DVC’s illuminating intent.

 The UK intention to delete both mechanisms will come as no surprise. The FCA applied its powers to temporarily suspend the STO in November 2020, while ESMA effectively decided that it was beneath its notice. Similarly, in respect of the DVC, on 4 March 2021 the FCA extended its temporary disapplication to all equities. The UK absence of both rules is unlikely to be much-lamented, even against some stiff competition, these particular rules have proved to be both burdensome and minimally effective in achieving their broader intentions.

The more interesting question is to what extent their signalled demise represents a tacit UK acceptance that equivalence will not be granted. Despite the March 2021 MOU “agreement to try and make an agreement”, the EU’s insistence on granular Regulatory identity as a pre-condition for equivalence marks each and every UK divergence as a step  away from that goal. The UK may justifiably point to other EU equivalence decisions, such as that in respect of the US, which have been broadly outcome-based. However, the pre-Brexit leaching of London-based liquidity puts time firmly on the EU’s side. The UK response is likely to be further deregulation.

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