UK and EU in danger of “Balkanisation” of liquidity if they diverge too much, says equities head

Speaking at TradeTech 2021, head of equities at Premier Miton warned that too much regulatory divergence could lead to friction caused by a fragmented liquidity landscape.

A buy-side head of equities trading has warned that too much regulatory divergence between the EU and the UK following Brexit could lead to the “balkanisation of liquidity”.

Speaking in a regulatory fireside chat alongside the UK’s Financial Conduct Authority, head of equities at asset manager Premier Miton, Gervais Williams, told the audience that the UK and EU’s increasingly different approaches to regulating the capital markets could lead to a fragmented and friction-filled landscape for participants to navigate.

According to Williams, the market is currently “buoyant” with a strong appetite following the previous year and a half’s volatility caused by the ongoing global pandemic, which  has prevented the negative effects caused by divergence from being felt too severely by participants.

However, should the liquidity or appetite in the market change then regulatory divergence would become “horribly interesting” for those trading within it, he added. “The nightmare scenario is that all these changes would make it more difficult for companies to raise capital. The more burdens you place on liquidity,  the more the cost of capital goes up.”

His warning comes as both the UK, in its Wholesale Markets Review, and the EU  in its consultation on MiFID II’s Regulatory Technical Standards (RTS) 1 and 2, are on the cusp of major regulatory changes following Brexit that could lead to significantly different frameworks on either side of the channel.

“The purpose of the Wholesale Markets Review is to reshape the regulatory framework in the UK that maximises scope for practitioners to prosper,” said Jamie Bell, head of secondary market oversight at the FCA. “I don’t think these changes will result in significant arbitrage risk between the UK and the EU,” Bell stated at TradeTech.

Bell stressed throughout the panel that its stance – including its previous move to scrap the Share Trading Obligation in in April earlier this year —was one of fostering an international and open market.

“Scrapping the STO] will allow firms to trade shares on any trading venue in the UK or overseas with any counterparty on an over-the-counter (OTC) basis, as long as best execution is upheld,” said the Treasury in its Wholesale Markets Review.

Broker crossing networks (BCNs) were one area of discussion that Williams agreed could foster new interest in the UK following Brexit.

BCNs, which used to allow brokers to have clients interact with their principal liquidity on an OTC basis, were previously scrapped in 2018 as part of the MiFID II regulation and are one area of potential divergence that the UK is considering as a way of fostering new interest in London as a financial hub.

“The Treasury is aware that after Brexit we are on our own in terms of generating liquidity. We need to put the UK in the best position to succeed. Anything that fosters liquidity is favourable,” concluded Williams.