Brexit Update: As Politicians Head Back to Brussels, Regulators Take Action

The resolution of the Brexit dilemma remains as elusive as ever. With the Prime Minister heading back to Brussels, the next UK vote is scheduled for February 14th, just six weeks from the Brexit cliff edge and risk of no deal.   While financial services firms have been planning for this worst-case scenario, challenges still remain – from the ability to access data, to changes in liquidity formation, as well as the ability to trade. Yet regulatory progress is slowly making headway.

The Memoranda of Understanding (MMOU) recently agreed between ESMA*1 and the FCA*2 aims at increasing supervisory convergence, allowing certain activities to continue to be carried out by UK-based entities on behalf of counterparties based in the EEA.  However, without equivalency of trading venues, EU firms planning on delegating services back to a UK trading desk will still face challenges.  Under Article 23 of MiFIR, shares listed on EEA venues must trade on approved venues. This is likely to have implications for European asset managers and the pension funds they represent, particularly in relation to trading dual-listed instruments given the liquidity that currently trades on UK venues. In the absence of equivalence, EEA firms may be required to trade dual listed instruments on an EEA venue even when the main pool of liquidity is in the UK.  This potentially puts European firms at a disadvantage in relation to best execution obligations, impacting not only pension performance but also impacting European companies and wider European Capital Markets.

With only 35 sitting days remaining for the UK House of Commons, time is of the essence to find resolution to these technical challenges.  Given the ongoing political uncertainty on both sides of the Channel, regulators and industry may need to find practical solutions to Brexit dilemmas to ensure business continuity and mitigate the potential market risk, rather than waiting on either UK or European politicians to deliver in time.

To read and download our latest analysis of where Brexit stands and its potential impact on capital markets, click here.


Ellen Gordon