Brexit had wide-ranging logistical implications in different sectors of the UK economy. After all, it would take a concerted effort to rewrite trade agreements that had lasted decades.
These issues affected both institutions and individual traders. For the past five years, investors have deployed various risk management strategies as they followed Brexit developments. The decision by British voters to leave the Union was decisive. However, it would take the government half a decade to complete the transition.
Such is the complicated nature of modern markets and trade alliances. Brexit saw the departure of David Cameron and Theresa May as Prime Ministers before Boris Johnson actualized the exit. Still, amid the disarray, it was an opportune time for people to start investing because a lot was dependent on the market and what was to be brokered.
One of the contentious issues was the terms of access to their respective share trading markets. The entities in charge of this process are the European Securities and Markets Authority (ESMA) and UK Financial Conduct Authority (FCA) respectively.
Impact of Brexit
After the completion of the transition period, the London Stock Exchange and other UK markets ceased to be EU regulated markets (MTFs). The only way to remedy this situation was the creation of an equivalence decision or deal between the UK and the EU.
The EU has a regulation called the Markets in Financial Instruments Directive (MiFID) that provides common regulatory standards for firms operating in the EU. MiFID firms could no longer execute transactions on UK venues as well.
The regulations are more detailed, but the general idea is that Brexit led to the decoupling of regulatory systems. Institutions that had dual-listed shares traded in substantial volumes in the other jurisdiction faced this challenge.
Taking Cues from Switzerland
Switzerland is one country that can provide useful lessons on EU relations. Contrary to popular perception, Switzerland is not part of the European Union. That said, Switzerland had an equivalence agreement with the EU that lasted until 2019. An equivalence agreement Is a mechanism by which the EU recognizes the regulations of the third country as compliant with, and equivalent to, the EU’s.
In 2019, the EU decided to let a recognized equivalence of the Swiss stock exchange lapse. This decision came after a dispute over bilateral relations.
SIX Swiss Exchange Head Christian Reuss told CNBC that this delisting may have helped Swiss markers during the Pandemic. Despite not being a member state, the equivalence agreement meant that EU shares could be traded on Swiss exchanges.
After the equivalence lapsed, European traders could no longer trade stocks in hundreds of Swiss Companies. Investment firms in the EU (then including the UK) and Switzerland could not access key share trading venues on a cross border basis.
This scenario saw the Swiss stock exchange obtain almost total control market share. The Six Swiss Exchange soon became the third-largest primary exchange on the continent.
Accordingly, the new regime can have benefits for local stock markets. Liquidity has a narrower focus, and spreads remain stable. This combination improves overall trading efficiency on a specific exchange. Having liquidity pooled in one place also makes the markets more resilient to volatility shocks. Covid triggered unprecedented volatility in 2020. For Swiss markets, the spreads came back quicker.
The UK And Swiss Equivalence Reinstated
Incidentally, the UK’s exit from the EU on January 1 created a new paradigm. The UK renewed an equivalence arrangement with Switzerland. Swiss shares resumed trading on London exchanges.
Reuss saw this reinstatement differently. According to him, it helps with competition and the development of innovative capabilities. The UK needs to position London well in the Post-Brexit environment. London will want to continue asserting itself as one of the most important financial centers in the world.
A stock market equivalence agreement between the Swiss and British governments would be useful. The Brexit effect saw a massive overnight shift in liquidity from EU member states away from London. Finding an agreement with Switzerland goes a long way.
The Big Picture
Negotiating with a country like Switzerland is vital. It is easier to deal with one party than a whole bloc. Getting the EU to agree to a Swiss-style equivalence agreement calls for months of talks. For the EU, it would probably take the negotiation of a full trade deal before agreeing on something specific like an equivalence agreement.
London has a vested interest in maintaining its position in world finance. The Brexit move may have given the UK more control of its markets. However, in a competitive world, the largest markets have the most liquidity. These conditions make the need for smart negotiation even more pressing.
