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Brexit’s regulatory challenges for financial markets

In a speech given at the European Financial Forum 2019 in Dublin yesterday, Steven Maijoor, Chair of the European Securities and Markets Authority (Esma), commented on how Brexit will impact the financial markets in London. When Britain leaves the European Union in six weeks, Europe's biggest capital market will effectively be moved outside of the EU. Considering that the EU27 and UK capital markets have become very interconnected, this is a major operation.

Maijoor said: “The UK’s decision will sadly, but inevitably, move Europe’s biggest capital market outside of the Union... Carving out the UK capital market requires preparations for all circumstances, by all participants concerned, including for the real possibility that the UK leaves the Union without a deal.”

Maijoor outlined the authority's preparations for a no-deal Brexit across a number of areas including secondary markets, clearing and settlement and cooperation agreements while also looking to the future of the European Union's market after Brexit.

Brexit effect on financial markets

Here are some of the points he makes in his speech:

  • A no-deal Brexit will not only result in UK market participants losing their passports for accessing the EU, but there will be no further legal basis for the current extensive and granular daily data reporting from the UK to Esma’s systems under MiFID II. So, in no-deal Brexit, from that date, no new UK data will be collected by Esma.
  • The central clearing of derivatives is considered to be the area of the securities markets at highest risk of instability in the event of a no-deal Brexit. Esma says there must be continued access to UK central counterparty clearing houses (CCPs) for EU clearing members and trading venues. Therefore, Esma has started the process to recognise UK CCPs under EMIR’s third country regime and aims to adopt the recognition decisions well ahead of the Brexit date.
  • Esma has also made provisions for regulatory cooperation agreements, which are essential for supervision and enforcement in securities markets, for example for continued access to UK clearing. Memoranda of understanding (MOU) are needed between third country regulators and national competent authorities within the EU. These MOUs are essential for effective supervision and enforcement, for example for market abuse cases. Esma has agreed MOUs with both the Financial Conduct Authority (FCA) and the Bank of England and this will help avoid significant cliff-edge risks.
  • The new EU27 environment will be one where there will be a large, liquid and interconnected capital market next door, which is not part of, or subject to, its regulatory requirements. This creates the need to have tools to react rapidly to new developments.

Stronger convergence needed for EU27

Maijoor also said in his speech: “Financial centres in the EU27 should be free to compete based on the particular strengths they can offer relocating firms, like speed and efficiency, but in all cases the EU rulebook should be consistently applied and supervised."

"I would like to stress that Brexit has increased the convergence challenges of European financial supervision as the structure of the financial market is changing. Financial market activity concentrated in London is relocating to a range of hubs across the EU27 including Ireland. So, financial activity is moving from one regulator to a range of regulators, increasing the need for consistency and additional and stronger convergence tools."

CTMfile take: Steven Maijoor began his speech yesterday with an Oscar Wilde quote: "There are only two tragedies in life: one is not getting what one wants, and the other is getting it." Which sums up Brexit nicely.

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