EU governments will attempt to address the risk that shares in European companies will be locked out of trading in London post-Brexit, which would pose problems for stocks with dual listings in the City.
Officials will meet on Monday to try to find ways around the rules governing dual-listed companies. The issue centres on an EU rule, known as the “share trading obligation”, or STO, that limits the right of EU investors to trade shares on exchanges outside the bloc once a particular share has been admitted to trading within the EU.
Unless the UK is granted regulatory permissions by Brussels, the rule could pose problems for dual-listing of EU shares after the end of Britain’s transition period when the country leaves the single market.
Dual-listed stocks are those admitted for trading on multiple exchanges — prominent companies listed in both the EU and the UK include Bank of Ireland and British Airways’ owner International Airlines Group.
Up to 500 stocks could be caught by the dual-listing rules, according to previous estimates, but the numbers would be much lower if regulators applied a threshold for only the most actively traded shares.
The issue has sparked concerns among industry and some EU governments that companies could be locked out of the deep, liquid, pools of capital offered by London. The bloc experienced similar problems when the European Commission allowed regulatory permissions for Swiss trading venues to lapse last year, because of disagreements between Brussels and Bern over the two sides’ broader future relationship.
The matter is set to be discussed at a video meeting of EU27 national diplomats on Monday.
A leaked diplomatic note from Germany, in its capacity as the current EU presidency country, confirms that some EU capitals want to explore a regulatory solution now, despite the European Commission’s view that doing so would send the wrong signal to London at a critical moment in the two sides’ future relationship talks.
Brussels views the issue of post-Brexit ties with the City as a source of leverage in the EU-UK negotiations, which continue this week.
The German presidency note, dated September 24, says governments are considering whether to piggyback a legal solution into an otherwise unrelated draft law that Brussels proposed earlier this year, seizing the opportunity created by the fact that the draft reopens the bloc’s market regulations.
The commission is urging governments to wait for a more holistic review of EU financial trading rules that is planned for 2021, arguing that market regulators could take temporary measures for the time being.
The commission believes legal action to relax the STO would be “untimely due to the implications such an amendment could have on the talks on the future relationship between the UK and the EU”, the report says.
The German EU presidency declined to comment on the leaked document, but confirmed that Monday’s meeting was going ahead. The commission declined to comment.
People briefed on the talks said that a considerable number of EU governments, including Ireland, Nordic countries and the Netherlands, believe a case could be made to act now to ward off the risk to dual-listed shares.
Diplomats at Monday’s meeting will consider two potential technical solutions that could be incorporated into the draft law that is on the table.
One has been proposed by the European Securities and Markets Authority, an EU agency based in Paris. Its approach would grant some leeway for non-EU trading of stocks that do not have an official identification number, known as an ISIN, that labels them as being from the EU. Its plan would also grant flexibility to stocks not denominated in euros.
Ireland has tabled an alternative workaround, based on redefining what counts as an EU stock. EU diplomats said that the Esma approach was attracting more support, while the German presidency report says governments are “divided” over whether and how to proceed.
Europe operates the world’s most integrated cross-border share trading marketplace. An asset manager in Paris can ask a London bank to buy a Spanish stock in Madrid, and sell it in Dublin.
European fund managers are still hopeful that the EU will opt to recognise UK exchanges as equivalent, which would sidestep such problems with Britain.
“We expect equivalence for share trading to be maintained even if there are changes at the edges of UK regulation because the EU wants to avoid market fragmentation,” said a spokesperson for the BVI, the German fund association, whose members hold €3.4tn in assets.