Uncertainty over regulatory passporting post-Brexit – Industry perspective

Today, exactly one week remains before Britain’s electorate casts its vote as to whether the island nation should remain a member of the European Union, or go it alone as an independent sovereign state.

During the advent of the referendum, FinanceFeeds has provided detailed information from various FX brokerages and liquidity providers with regard to how they will manage their risk during the period immediately before and after the referendum.

Volatility in the currency markets at the time is a major consideration, however such volatility would be short lived compared to the lasting effect of a potential ‘Brexit’ – a portmanteau of Britain and Exit – in terms of how companies in Britain can work with European customers and introducing brokers, and how companies in Europe can work with British customers, prime brokerages, liquidity providers and strategic partners.

Currently, Britain’s inclusion in the European Union means that under the MiFID rulings, regulatory ‘passporting’ between companies based in European Union member states is valid, and therefore no extra licenses are required for any firm that conducts business across the European Union.

What happens if Britain leaves the European Union?

If Britain leaves the European Union, it may be the case that companies which only have offices in London and use an FCA license may have to establish operations in a European jurisdiction in order to service European clients.

Various regulatory specialists discussed this at length with FinanceFeeds this week, and today we spoke to Demetris Taxitaris, General Manager of MAP S Platis, which is a prominent law firm, management consultancy and EMIR reporting entity for the FX industry, based in Cyprus.

Mr. Taxitaris, who is a regulatory expert and has published several works on the matter, explained “Firms established in the UK operate in other EU countries via the passport rule, which allows them to do so without any constraints other than the ones already imposed in the UK, being their home country. It is not yet entirely clear what the new state of play shall be in case the UK decided to exit the EU.”

“For example, special rules or a transitional period may apply to avoid distortion of the common market and to ensure potential damage control from both sides. Such arrangements, which are likely in our view, shall become apparent following a decision to exit and not before” he said.

“If we assume that the EU passport will be lost at some point, then obviously firms shall need to find ways to operate in EU countries. One such way would be to set up a firm at another EU jurisdiction which will allow passporting into other EU countries. Other options may include the UK firms being treated as 3rd country firms and being subject to additional constraints when operating in EU countries either remotely or via a branch, but this would be subject also to bilateral agreements between the regulators of the UK and each EU country” – Demitris Taxitaris, General Manager, MAP S Platis

“Having said that, we are observing for some time now firms which apply a dual jurisdiction setup within the EU for various reasons, including agility and risk mitigation. Such firms could be much more responsive in any situation and can absorb any shocks more easily” he concluded.