Traders and venues urged to prepare for non-equivalence

By Emma Olsson | 26 October 2020

With Brexit looming, politicians and trading market participants are growing increasingly sceptical of equivalence between EU and UK trade reporting.

“I have not the impression that the European Commission is inclined to move forward with an equivalence decision for trading venues swiftly, particularly in the absence of an overall agreement with the United Kingdom,” said Markus Ferber, member of the European Parliament in an email.

“Therefore, my advice for any market participant would be to prepare for a no-deal, no-equivalence scenario, otherwise there could be rude awakening on January 1, 2021.”

Effective January 1, 2021 UK trading venues will become third country trading venues according to the European Securities and Markets Authority (Esma).

Market participants say venues, exchanges and trading firms should be prepared to leave the UK and adapt their trade reporting, despite continued uncertainty from the regulator.

“The challenges everyone faces is that some of the information from the regulators only ever comes out late, so if you’re planning to do it now you’re probably still in a good state that you can have time to adapt to those changes and be ready – I think if you haven’t looked at it or you’re not sure then I’d be concerned,” said Ben Duckworth, head of business development, TRADEcho during a UnaVista webinar last week.

The number of third country firms reporting to trading venues will change drastically as a result of non-equivalence, said Adam Wood, head of Europe, Turquoise during the webinar. All member firms outside of the UK will be considered third country members for UK trading venues. Similarly, UK member firms will be considered third country member for EU venues.

As a result, a number of firms will be required to report for the first time.

“Today Turquoise UK has roughly 65 trading members of which only a very small handful, roughly three to four, are classed as third country members. Going forward, for Turquoise UK that potentially jumps to 40 trading firms being caught as third country,” said Wood.

The trading venue recently announced plans to launch a European platform at the end of November.

“I’ve highlighted 59 member applications for Turquoise Europe – on there you’ve got about 16 that will be classed as third country, meaning Turquoise as a whole will jump from three or four third country member to potentially over 50.”

Not only is equivalence unlikely, but it would be highly difficult to achieve, said Ferber.

“I do not think that there will be any divergence in January 2021, but the UK has already announced that it would like to diverge in certain areas of financial markets regulation going forward. That announcement in mind makes granting equivalence to the UK very difficult,” he said.

Chancellor Rishi Sunak announced in June that the UK will cease reporting under key EU regulations such as the Securities Financing Transactions Regulation (SFTR) and the Central Securities Depositories Regulation (CSDR).

“To me, a prerequisite would be to also establish a mechanism that ensures that the degree of regulatory alignment is constantly monitored over time, precisely to ensure that we do not grant equivalence and then start diverging substantially,” said Ferber.

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