European Union rules that stop its traders using London stock exchanges to trade EU shares risk damaging equity markets if they are not reversed, said Andrew Bailey, CEO of the Financial Conduct Authority.
The share trading obligations require EU-registered investors to trade about 6,200 stocks of companies headquartered in the EU only on EU venues or equivalent trading venues.
There is currently no deal between the U.K. and the EU on equivalence — whereby the EU grants recognition to another country's regulatory regime — so if the U.K. quits the EU without a deal Oct. 31, the deadline for its departure, then the EU rules restricting where shares would be traded would come into effect.
Equivalence is the answer
Bailey said the result would be that that market liquidity would be damaged and that the answer to the problem would be for the U.K. and the EU to come to a deal over regulatory equivalence.
"Surely the answer to this is an equivalence agreement between the U.K. and the EU? Absolutely, and the onshored U.K. framework [of EU rules incorporated into U.K. law] will be the most equivalent in the world to the EU's. The U.K. authorities would do this, and take the issue away. The EU have said to date they will not do that," said Bailey.
He said a similar implementation of U.K. share trading obligations would cover a large number of EU shares traded in the U.K. but because of the EU's rules the bloc's investors would not be able to access liquidity on EU shares listed in London.
Bailey said the FCA was ready to talk to EU regulators ahead of any changes brought on by a no-deal Brexit but a decision on how to proceed was required.
"You do not need to guess that our preference would be to emphasize open markets, free trade, and the principle of best execution being achieved by markets not by regulators, where we can. We would like to think that the EU would follow the same approach but we need to find a way through this together that does not create barriers and distortions on either side," he said.
No clarity on clearing yet
Bailey also said there was a need to renew the EU's permit that allows EU investors and banks to access U.K.-based clearing houses in a no-deal Brexit. This permission runs out in March next year and clearing houses must notify clients that they can no longer do business with them by the end of this year if no further agreement is forthcoming.
"This process would need to begin by the end of this year, and would impose significant costs on EU firms as well as potentially straining market capacity. Further action may therefore be necessary to prevent this. Ultimately, the best solution is for the EU to grant permanent recognition to U.K. central counterparty clearing houses," he said.
He also said that although the U.K. had taken steps to allow firms to service existing uncleared derivatives between U.K. and EU counterparties, the EU had not taken reciprocal action and uncertainty remained about the scope of current and potential legislation.
