Firms must prepare for a lack of equivalence of trading venues between the UK and the European Union being used as a political tool, warned Kay Swinburne former MEP and current vice chair of financial services at KPMG.
“There are significant hurdles still to clear [regarding Brexit],” said Swinburne at the InvestOps conference in London this week. “So, some outstanding questions: what will happen to CCP equivalence for the UK into the EU 27? Will UK trading venues be deemed equivalent day one post-Brexit? Or will the shared trading obligation be applied by the EU in a punitive way despite the inevitable fragmentation that will follow, which will lead to split liquidity?”
“Given the recent experience of the Swiss government, where on June 30 the EU decided not to grant equivalence to their trading venues, I think this will remain problematic and will be used politically by the EU 27 in an attempt to move as much liquidity as possible short-term into the EU 27 jurisdiction regardless of costs to users, in particular corporate clients.”
The shared trading obligation (STO) requires Markets in Financial Instruments Directive (Mifid) firms to trade certain shares only on EU venues, systematic internalisers or equivalent third country trading venues.
On September 16 chief executive officer at the UK’s Financial Conduct Authority’s (FCA) Andrew Bailey said in a statement that the Swiss example was a “very salutary reminder that equivalence can be lost, but beyond that some of the commentary somewhat mispresents the read-across, because in the Swiss case the issue is trading of Swiss shares (which has migrated to Switzerland) whereas in the UK we are talking about the trading of non-UK shares.”
Bailey stated that although the FCA could choose to use powers to minimise the overlap of STOs, it could not “fully mitigate the damage done by the STOs.”
But Swinburne warned of how clearing has become a “huge political hot potato” and “with the advent of Emir 2.2, which has a strong location policy embedded within it, I suspect any extension to that date will be agreed only at the last minutes, and for a short period alone.”
The lack of promised passports for non-EU funds and managers under the Alternative Investment Fund Managers Directive (AIFMD) is also causing concern, according to Swinburne, and they may never materialise after the UK leaves the bloc.
“When the AIFMD was being negotiated through the EU institutions certain member states were very vocal in their opposition to passporting for non-EU entities,” she said. “And with the UK not being at the table, I suspect these original voices may dominate, and these provisions may be withdrawn as part of the pending review.”
However, in the immediate future post-Brexit regulations will be aligned between the UK and EU with identical rules across financial markets, according to Swinburne.
“On Mifid and Emir specifically, both of those regulations have already been onshored to the UK statute book in full and so in theory firms operating in the UK should see little change from where they have already been,” she said.