Senior officials at the European Securities and Markets Authority have warned of the risks to financial stability if the UK leaves the European Union without a deal being agreed.
Steven Maijoor, chair of Esma, told the World Federation of Exchanges annual meeting 2018 in Athens this week that preparing for Brexit is one of the regulator’s priorities as the UK plays an important role in EU financial markets. Esma has estimated that about 40% of trading in equities issued in the rest of the European Union currently takes place on UK trading venues.
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Maijoor highlighted three areas of work - ensuring the consistent application of regulatory and supervisory standards to the relocation of activities, entities and functions from the UK to the EU27; improving the third country arrangements in securities markets legislation; and preparing for the risk that no deal has been agreed when the UK leaves at the end of March next year.
Third country arrangements
He continued that the prospect of a very large financial market moving out of the EU, while remaining interconnected with the EU financial markets, has triggered a reconsideration of third country arrangements. As a result, there needs to be a comprehensive and harmonised EU regime for third-country trading venues.
“MiFID II leaves substantial national discretion with very diverse regimes currently in places,” he added. “A harmonised third country regime would contribute to a level playing field between EU and non-EU trading venues and mitigate risks related to orderly markets, investor protection and ultimately stability.”
The regulator said a new third country regime should cover all types of trading venues; just one equivalence decision should made with regard to their functions (e.g., placing of trading screen, post-trade transparency, and trading obligations); ensure that third country trading venues accessing the EU comply with requirements that are equivalent to those for EU trading venues; and establish one point of entrance to the EU with effective supervisory tools.
Central clearing
He highlighted the central clearing of derivatives as one of the areas which entails the highest stability risks in the event of a Brexit deal not being agreed.
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Emir, the EU’s central clearing legislation, does not allow Esma to recognise clearing houses based in the UK as third-country CCPs while the country is an EU member state
“This legal obstacle results in a situation where EU clearing members, and EU trading venues, are uncertain about the continued access to Emir-recognised CCPs,” he added.
In his view, in order to mitigate risks to the stability of EU financial markets, there needs to be continued access to UK CCPs for EU clearing members and trading venues.
“Such continued access is in line with the Emir 2.2 proposal which allows, under certain conditions, systemically important CCPs (Tier 2 CCPs) and non-systematically important CCPs (Tier 1 CCPs) from third countries to provide services in the Union,” he continued.
Therefore Maijoor would support a swift conclusion of the Emir 2.2 legislative file, complemented by a transitional provision allowing for the continued access to UK-based CCPs, subject to conditions ensuring that UK CCPs continue to comply with Emir requirements and colleges continue to monitor this compliance.
He continued that similar arrangements are also needed for supervision and enforcement in securities markets.
“In the case of a no deal Brexit, national competent authorities and Esma should have in place with our UK counterparts the type of memorandums of understanding that we have with a large number of third country regulators,” added Maijoor. “These MOUs are essential to meet our regulatory objectives and allow information exchange for effective supervision and enforcement, for example for market abuse cases.”
Esma plans to start negotiations with the UK Financial Conduct Authority to have these agreements in place well before the end of March 2019.
Reuters reported that Andrew Bailey, chief executive of the FCA, said he welcomed Maijoor’s comments that MOUs are being discussed.
Bailey told a City & Financial conference according to Reuters: “It’s a recognition on both sides that we are working together and we will put in place what is needed to make this as smooth a transition as it can be.”
Relocation
Verena Ross, executive director of Esma, spoke at The Institute of International and European Affairs in Dublin those morning.
She said the risks posed by a hard, or no-deal, Brexit are so high that contingency planning is paramount.
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Ross continued there are a number of considerations to take into account when deciding where firms will move post after Brexit and regulators need to ensure that there is supervisory convergence.
Sean Tuffy, head of market and regulatory intelligence, custody and fund services, EMEA at Citi, said in a report this week that despite the Brexit uncertainty, asset managers cannot afford to wait to initiate their Brexit plans.
Tuffy said: “For many, at the very least, this will mean establishing or strengthening substance with the EU. For others, particularly those selling UK funds into the EU, it may mean launching new EU-domiciled funds.”