Pan-European regulator European Securities and Markets Authority (ESMA) is in the process of drawing up memorandums of understanding (MoU) between the Financial Conduct Authorities (FCA) and the 27 other EU regulators in a safeguard against the fall-out of a no-deal Brexit.

Speaking at the World Federation of Exchanges General Assembly and Annual Meeting in Athens on 3 October, ESMA Chair Steven Maijoor explained that with about 40% of equities issued in the EU27 trading in the UK preparing for a no-deal was essential.

EU and UK negotiators are currently facing deadlock over a Brexit deal, with disagreement over issues such as the border in Northern Ireland.

In addition, Prime Minister Theresa May’s so-called Chequers deal – which is not in favour with either the EU or many within May’s own Conservative party – fails to make provisions for financial services.

MiFID II, which came into force in January, only allows for trading on a third country trading venue when the European Commission has made an equivalence decision, with the EU’s highest authority only having issued one such judgement as yet to the SEC in the US.

A no-deal Brexit would therefore mean UK market participants losing their authorisations to conduct business across the EU, and the removal of any legal basis for the daily data exchange between the UK and the EU27 under MiFID II.

In order to avoid these consequences, as well as the impact no-deal would have on financial stability for the EU27, Maijoor explained: “In the case of a no-deal Brexit, [national regulators] and ESMA should have in place with our UK counterparts the type of MOUs that we have with a large number of third-country regulators.

“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 has coordinated the preparations for such MOUs together with the EU27. Taking the wider negotiations between the EU and UK into account, we plan to start negotiations with the UK FCA with the objective to have these MOUs in place sufficiently on time before the end of March 2019.”

Maijoor added that Brexit requires an improvement in the third country arrangements in securities markets legislation.

He explained: “The prospect of a very large financial market moving out of the EU, while likely continuing to be very interconnected with the EU financial markets, has triggered a reconsideration of our third country arrangements.

“I would mention in particular the need for a comprehensive and harmonised EU regime for third-country trading venues.

“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.”

Brexit relocations

Elsewhere in his speech, the ESMA chief identified the large number of trading venues, asset managers and investment firms “currently seeking authorisations in the EU27 to continue to access their financial markets”.

Maijoor said it was important ESMA ensures the “consistent application of regulatory and supervisory standards to the relocation of activities, entities and functions from the UK to the EU27”.

He explained that in order to prepare for the relocation of “entities, activities and functions” to the EU27 a common approach is required at EU level to “safeguard investor protection, the orderly functioning of financial markets and financial stability”.

Authorities must therefore ensure, Maijoor said, new authorisations are granted in “full compliance with Union law and in a coherent manner across the EU27”.

He added that ESMA has set up a Supervisory Coordination Network where European supervisors can “report on and discuss cases of relocating UK market participants and which, based on the last few months of experience, usefully contributes to promoting consistent decisions by NCAs.”

Maijoor concluded: “The UK and EU27 financial markets are highly integrated, and preparing for Brexit requires major efforts from all involved, trading venues, CCPs, national competent authorities (NCAs), and of course ESMA.”

This is reproduced from Investment Week; all views are from the publication. This originally appeared online on 4 October 2018.

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