This article was written by Ron Finberg, BD at Cappitech.
With the UK heading out of the EU, a lot of the immediate attention has been rightfully focused on the Brexit referendum’s effects on the financial markets and 30 year lows for the British pound. But, beyond the current volatility in stocks and currencies, the online trading industry for both the EU and UK have plenty of regulatory issues that they will have to digest.
First things first, despite the vote to leave, all current EU laws and financial regulation that the UK abides by continues to be in effect. As a member state of the EU, as per Article 50 of the Lisbon Treaty, the UK is required to submit a formal notification to the European Council of its intention to withdraw.
That will then put into effect a two-year period for the UK to create a withdrawal framework, including new trade treaties with remaining EU countries.
There has been speculation that the official withdrawal notification won’t take place until October, due to first putting in place government officials to handle the process. Even if a decision was made today to formally submit a withdrawal notification, the UK is still in the EU for a two-year transition period.
Where things get murky is what happens next. A major consideration of current EU financial regulation is the uniformity of rules and cross-border agreement of policies. As a result, there is free movement of marketing of financial products across the EU.
For example, mutual funds set up under the UCITS structure and domiciled in the UK can solicit clients across the EU. In the online trading industry, the cross-border passporting of licenses allows brokers with Cypriot based CySEC regulation to onboard customers from the EU and vice-versa. (Brokers still need to abide by specific country by country laws such as Belgium’s limit on bitcoin related CFD trading or the UK’s requirement that financial firms have an investment advisory license for copy trading)
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Without having put into place new treaties to govern passporting of licenses, a British broker with regulation from the UK’s FCA will no longer be able to accept clients from the EU once the complete Brexit withdrawal takes place. Similarly, EU licensed firms will have difficulties accepting clients from the UK.
Most likely though, due to the existing trade taking place, it isn’t in anyone’s best interest that huge fences regarding passporting appear. As such, we can expect some sort of compromise trade agreements to take place as the UK will probably continue to use much of the financial frameworks in use across the EU.
EMIR and MiFID I & II
The expectation of a compromise structure is due in part to recently initiated and upcoming regulation set to take place in the EU. Among them are EMIR regulations and MiFID that are already in effect and MiFID II which is set to start in 2018.
The initiation of EMIR and MiFID set transaction reporting requirements in the EU for equity and derivatives trades. When MiFID II goes into effect it will apply requirements around best execution reporting and real time monitoring of trades.
As the reporting rules include execution and counterparty reporting, non-compliance with portions of this regulation may cause brokers and banks to have difficulties accessing EU based liquidity pools and exchanges.
In addition, the UK has had input around many of these laws and specifically the Bank of England has been a leader of publishing opinions around best execution analysis. As such, expectations are that any new UK financial rules will include transactional reporting regimes similar to those they have already been on the path to implement and which are needed to trade pan-European exchanges.
(One wild card is EMIR regulation which governs derivative reporting. As much as it hurts me to state this due to my firm Cappitech, providing a solution for brokers to automate their EMIR reporting, there is a good chance the UK will decide to get rid of double-sided reporting and use a simpler single-sided framework that resembles programs put in place in the US and Australia. Such a decision would greatly limit the amount of firms that need to comply with EMIR, although forex/CFD/binary options would probably still need to report).
The bottom line is that there is no precedent for how the Brexit will play out, but current regulatory inertia points to reasonable cross border frameworks between the EU and UK being put in place.