Traders are warning of disruptions in financial markets from January without making clear decisions on how the UK and EU will work together after the end of the Brexit transition period.
Some derivatives trades may need to be relocated to the US unless both sides can reach an agreement on what is known as equivalency, which would allow mutual recognition of regulatory standards, industry associations said.
The relevant decisions were due at the end of June, but the EU withheld guidance from the UK without further clarification on how far it intends to depart from EU rules. Fear rises only six weeks before the limit value.
“There are still some obvious loopholes that neither the UK nor the EU have closed, including the equivalence of trading venues,” said Scott O’Malia, general manager of Isda, an industry association for the derivatives market.
Without equivalency, UK and EU companies may have to trade some derivatives in the US, he added. “This will lead to fragmentation and inefficiency with no apparent benefit. . . We need security as soon as possible. “
The EU and UK have agreed that the future relationship for financial services should be regulated by each side in order to assess whether the other qualifies for access rights. This requires individual decisions on nearly 40 market activities, including auditing standards, capital requirements, and access to exchanges and clearing houses. The discussion is separate from trade talks, which are still being negotiated.
The UK announced this month that it will push forward some equivalency provisions that will allow UK-based banks to use EU financial benchmarks, clearinghouses and rating agencies and free them from a capital jump they use to absorb losses related to EU exposures need. However, Brussels did not reciprocate.
EU diplomats say the Union’s stance reflects a mix of negotiating tactics related to talks on the future relationship between the two sides, a political agenda on city independence after Brexit, and concerns about the transfer of rights to a country that tried to break away from the EU rules.
A lack of equivalency decisions would not exclude UK banks, investors and trading venues from the EU market, but it would open regulatory loopholes as both sides work out agreements with colleagues on a country basis.
“The uncertainty is of no use to anyone,” said Mark Spanbroek, chairman of FIA Epta, an industry group that represents around 30 European dealers. “If you don’t solve this, you will find bilateral agreements where some [national] Regulators interpret the rules differently from others, ”he added to attract businesses.
Among other things, European regulators are trying to find a workaround that will prevent EU bank branches in London from having to conduct derivatives deals through New York – operations that run the risk of being between overlapping EU and UK regulations lie.
The European Commission has stated that its UK equivalency assessments must be “forward looking” and take into account any UK plans to depart from EU rules. The Brussels-based institution has said it needs more information, despite the UK government providing 2,500 pages of replies to EU questionnaires earlier this year.
However, some in the sector have argued that the EU should be more open on equivalency decisions, which primarily reduces the incentives for divergence in the UK.
“Given the nearly identical rules for trading venues in the EU and the UK, we believe equivalence is justified – and very necessary,” said O’Malia.