Traders grow anxious over market access ahead of Brexit deadline

Traders are ramping up warnings of disruption in financial markets from January without clear decisions on how the UK and EU will co-operate after the Brexit transition period ends.

Some derivatives trading may need to shift to the US unless the two sides can come to an agreement over so-called equivalence that would allow mutual recognition of regulatory standards, industry bodies say.

Decisions on the matter were due at the end of June, but the EU has withheld guidance without more clarity from the UK on how far it intends to diverge from EU rules. With just six weeks remaining before the cut-off point, anxiety is rising.

“There are still some glaring gaps that haven’t been addressed by either the UK or EU, including equivalence for trading venues,” said Scott O’Malia, chief executive of Isda, an industry association for the derivatives market. 

Without equivalence, British and EU companies may have to trade some derivatives in the US, he added. “This will lead to fragmentation and a lack of efficiency for no apparent benefit . . . We need certainty as soon as possible.”

The EU and UK have agreed that the future relationship for financial services should be settled through each side assessing whether the other qualifies for access rights. That requires individual decisions on nearly 40 market activities, including audit standards, capital requirements and access to exchanges and clearing houses. The discussion is separate from trade talks, which are still under negotiation.

The UK this month announced it would press ahead with some equivalence determinations, allowing UK-based banks to use EU financial benchmarks, clearing houses and credit-rating agencies, and exempting them from a jump in capital they required to absorb losses linked to EU exposures. Brussels, however, has not reciprocated.

EU diplomats say the union’s stance reflects a mixture of negotiating tactics connected to the two sides’ future-relationship talks, a political agenda to become more independent from the City after Brexit, and concerns about handing rights to a country seeking to break away from EU rules.

A lack of equivalence decisions would not shut UK banks, investors and trading venues out of the EU market, but it would open up gaps in regulation as both sides hammer out agreements with counterparts on a country-by-country basis.

“The uncertainty is not doing anyone any good,” said Mark Spanbroek, chairman of FIA Epta, an industry group representing about 30 of Europe’s proprietary traders. “If you don’t solve this you are running into bilateral agreements, where some [national] regulators interpret the rules differently to others” in a bid to attract business, he added. 

Among other elements, European regulators are racing to finalise a workaround that will stop London branches of EU banks having to route derivatives trades through New York — operations that risk being caught between overlapping EU and UK rules.

The European Commission has said its equivalence assessments of the UK must be “forward looking” and take into account any British plans to diverge from EU rules. The Brussels-based institution has said that it needs more information despite the UK government providing 2,500 pages of answers to EU questionnaires earlier this year. 

However, some in the sector have argued that the EU should have been more forthcoming with equivalence decisions, reducing incentives for UK divergence in the first place. 

“Given the rules on trading venues in the EU and UK are virtually identical, we think equivalence is justified — and very necessary,” Mr O’Malia said.

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