Share trading that switched out of London and into the European Union because of Brexit is unlikely to return, even though the EU may now be keener to grant equivalence status to the U.K., according to market participants.
About €6 billion in daily share trades moved out of London on Jan. 1 after the EU issued rules obliging companies based in the bloc to trade shares on EU trading venues. This also applies to some classes of over-the-counter derivatives which must be traded in the EU or on third-country equivalent venues.
British banks and financial services firms previously operated under a passporting system which allowed them to sell their services across the EU. Since the Brexit transition period ended on Dec. 31, 2020, however, those arrangements have ended and U.K. financial firms operating within the EU must do so via their offices that are based on the continent.
Share trading, equivalence
Alasdair Haynes, CEO of the pan-European stock-exchange group Aquis Exchange PLC, said his company had not lost business as a result of the EU's share trading obligation since its operations in the EU had picked up business lost from London.
However, he does not think it likely that a similar agreement between the U.K. and the EU will emerge now.
"The Aquis view is that it is very unlikely that U.K./EU equivalence will be restored — having just got back its trading, why would the EU allow it to leave again?," he said via email. "However, financial services is much more than stock trading, so there's a lot for the City to play for."
Nick Dutton, chief regulatory officer for Europe at stock exchange group Cboe Global Markets Inc., also said share trading that had switched to the EU from London was very unlikely to return. But he said both sides' attitude to the issue had changed since the start of the year.
"In our conversations with EU regulators they see the share trading obligation as a big win. Up until Dec. 31, the U.K. wanted equivalence badly and the EU was more than happy to hold off [granting it] because they saw it as big prize," he said.
But now Dutton said the freedom to diverge is something the U.K. is likely to want to explore.
"The U.K. no longer sees equivalence as an upside, while the EU now sees the importance of binding the U.K. to its standards," he said.
Dutton said the U.K. can use the opportunity of its split from the EU to diverge in its financial regulatory requirements to foster innovation, for instance. He said that there were limits around the types of trading model that could be offered within the EU, following the introduction of Markets in Financial Instruments Directive rules regulating EU financial markets.
"So, for example, the U.K. has already said that it is going to drop some of the European Securities and Markets Authority guidance around periodic auctions (where buyers and sellers enter competitive bids simultaneously) whereas within the EU there is no indication of a rollback on that at the moment," he said.
A source at another leading pan-European financial services firm, who declined to be named while the EU was still considering its stance, said the EU was not being consistent.
"Of course British exchanges should be granted equivalence by the EU — the EU has already granted equivalence to the U.S. and Asian exchanges and the U.K. and EU have traded seamlessly for 40 years. So there is no legitimate reason for the EU to deny equivalence to the U.K. and I think they're beginning to realize it's in their interest to do so. But that doesn't mean it will happen and I think we're fine with that, too," they said.
Bank of England Governor Andrew Bailey has said any deal with the EU on equivalence which saw the U.K. become a "rule taker" would not be worth having. A memorandum of understanding on financial rules is due to be agreed in March between the U.K. and the EU, but it is not expected to be far-reaching.
Meanwhile, the U.K. and Switzerland are expected to conclude a deal on equivalence shortly, allowing each country's shares to be traded on their respective stock exchanges.
The U.K., while it remained part of the EU, followed the EU's decision to withdraw its own equivalence deal with Switzerland in 2019 as part of a wider dispute over dealings between the country and the EU. Now the U.K. can conclude its own financial arrangements.
"Both sides have got a point to prove to the EU over this — there are definite upsides to both sides in getting it done. The only people who won't be happy with this are the Swiss stock exchange who lose their monopoly on Swiss trading," said Cboe Global Markets' Dutton.
The deal should see daily share trades worth more than €1 billion a day return to London.
The U.K. Treasury said in a statement that the government will grant Switzerland share trading obligation equivalence, subject to parliamentary approval, in three weeks' time, and that the Swiss have indicated they will reciprocate.