(Bloomberg) -- Equity markets will face significant damage in a no-deal Brexit unless the European Union reverses a plan to block traders in its home territory from using London exchanges, the U.K.’s top market watchdog said.
Andrew Bailey, the Financial Conduct Authority’s chief executive, called on the EU to urgently rethink its position before Oct. 31, when Britain is scheduled to leave with or without a deal. Trading in a large number of European shares will be harmed, Bailey said in a speech on Monday in which he called for a new round of talks with European counterparts to prevent a rupture in markets.
Bailey said some shares would face dual, conflicting obligations because of the overlap between U.K. and EU rules. “It is therefore easy to conclude that for those shares, market liquidity would be damaged to no good end,” he said in prepared remarks published Monday.
The European Commission said it “agrees that it would be desirable to mitigate disruptions caused by an overlap.” The FCA should “clarify as soon as possible the scope” of its own version of the rule, a spokeswoman said in an email, adding that the EU doesn’t plan to adopt additional contingency measures for a no-deal Brexit.
The European Securities and Markets Authority stood by its previous statements. David Cliffe, a spokesman for the regulator, said the so-called share trading obligation would come into play if the Commission does not deem the U.K.’s rules to be equivalent to its own.
“ESMA has been clear about its approach to the STO in such a situation, providing clarity to market participants in May, giving them time to prepare for such an outcome, and would welcome the FCA providing similar clarity too,” said Cliffe by email.
Bailey’s speech at Bloomberg’s London office came with broader Brexit negotiations at an impasse, as Prime Minister Boris Johnson sticks to his pledge that Britain will leave the EU “do or die” on Oct. 31 despite widespread opposition in the U.K. parliament. The lingering possibility of a chaotic divorce has led financial regulators in recent weeks to step up contingency plans to limit disruption in markets and ensure banking, investment and trading continues between the U.K. and EU.
While regulators say the biggest threats to finance are contained, headaches remain for 16 trillion pounds ($19.9 trillion) in uncleared derivatives contracts, cross-border access for stock exchanges and the exchange of data between firms in the EU and U.K. Bailey said more work was needed on plans for all these issues.
“At the FCA, we will take a pragmatic approach to issues as they arise. We will use forbearance generously but appropriately, to maintain market integrity and protect consumers and market uses,” he said.
The FCA, Bank of England and European authorities have all redoubled their efforts to encourage financial firms to make sure their own plans are in order. Just last week, the FCA warned firms against complacency and encouraged companies to seek any temporary permissions needed as soon as possible.
After the original March deadline for Brexit was delayed, financial firms slowed their preparations and refrained from moving assets and staff to new hubs in the EU from London. “Brexit fatigue” took hold of finance, European regulators said in a report last week that warned the industry against complacency about the no-deal possibility.
In the event of a no-deal exit, the FCA would take a pragmatic approach toward enforcing U.K. rules in a bid to help calm markets, Bailey said in a Bloomberg TV interview on Monday.
“To not forbear would be to damage our objectives, and our objectives are integrity and the operation of markets,” Bailey said. “Clearly the authorities, the FCA, central banks, other regulatory authorities will have a very big role to play to step in there and deal with it as most appropriate and as best they could,” he said. “We would not stand on the sidelines.”
(Adds European Commission response in fourth paragraph.)
--With assistance from Alexander Weber.
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