Capital Markets Caught In Another Headwind From EU

  • Feb 23, 2019 GMT
  • Team Kalkine
Capital Markets Caught In Another Headwind From EU

Brussel is planning to restrict trading in companies listed both in the London Stock Exchange and in any other bourse in the European Union if the British government does not reach to a deal regarding its relationship with EU once it leaves the bloc. In the event of hard Brexit, as the scenario of no-deal is called, fund managers and retail investors based on the mainland continent may no longer be able to buy and sell London-listed shares at the end of next month.

Trading in leading global companies like Ryanair, British Airways owner IAG and Unilever will be impacted by the restriction imposed by the EU on dual-listing. Currently, EU-based investors can trade shares only on exchanges recognised by it, and the supranational organisation does not intend to extend this status to London in case of hard Brexit. 

European investors are only allowed to trade stocks on foreign exchanges that EU regulators have regarded as "equivalent", implying they should have rules on customer protection and other regulations identical to those followed in the EU. The European Commission makes the decision regarding extension of this status, in consultation with European Securities and Markets Authority (ESMA).

The planned stipulation will force EU-based asset managers to trade the stocks of the affected companies in European exchanges that are generally less liquid and competitive in comparison to London, which could mean less competitive prices and inefficient capital distribution. According to German Investments Funds Association, retail investors have shares worth almost £40 billion tied up in companies with a London-based dual-listing. Assessments vary on the number of companies that can get entangled due to the ruling; some estimates put it at about 500, though the number is much lower if low volume stocks are eliminated.

Speculations are rife that in the case of hard Brexit, companies may discontinue their listing in European exchanges and keep the one in London. It is mainly because the London Stock Exchange is typically a bigger and more liquid market, with a better international appeal. This has prompted the institutional investors to lobby the European Securities and Markets Authority to find a way to grant London an "equivalent" status.

The stand-off is the latest of the series of issues that have kept investors on toes and has dominated the UK markets since the 2016 referendum. Investors' worries are further accentuated by the dogged impasse the UK and the EU has seemed to reach, especially considering that less than forty days are left before the UK leaves the bloc without any deal in place.

The decision has been influenced by political considerations as ESMA is under political pressure to resist granting London-listed shares equal billing in the event of a hard Brexit. ESMA, in a statement, acknowledged the issue at hand and added it is "currently looking into it". Some UK-based trading platforms are preparing themselves for the worst scenarios and plan to open hubs in the EU by March 29.

It should be noted that the constraint put forth by the EU does not put any restrictions on single-listed companies, and EU fund managers would still be able to access stocks that are only listed in London.

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