London — Britain should give investment firms clarity by signaling an end to the trading of European shares in the City of London after it leaves the EU in October, a French regulator has said.

Analysts say a showdown over share-trading between Brussels and Switzerland is a reminder to London what it could face after Brexit if it clashes with the bloc in financial regulation.

The EU has refused to renew Switzerland’s regulatory “equivalence”, which allows investment firms in the bloc to trade on Swiss exchanges directly. Bern is retaliating with an order that Swiss shares can only be traded on Swiss exchanges from Monday.

In a sign that European regulators’ attitudes towards Britain are hardening, Natasha Cazenave, head of international policy at French markets watchdog AMF, said trading in EU-listed shares should take place inside the bloc after Brexit.

Shares in some of the biggest companies from across the EU are currently traded on their home exchange and in London on pan-European platforms Cboe, Aquis and Turquoise. Cboe alone accounts for more than 20% of trading in German, Dutch, Belgian, French, Swedish, and Spanish shares.

The bloc’s markets regulator, the European Securities and Markets Authority (ESMA), ruled in May that in the event of a no-deal Brexit in October, investment firms in the EU must trade about 6,000 EU-listed shares on exchanges in the bloc. This would force funds and other users to redirect trading from London to the EU.

Cazenave said the AMF “strongly supports” ESMA’s stance, adding it could also form the basis for future relations between the EU and Britain in share trading.

“It’s a pragmatic and straightforward approach that provides clarity to stakeholders on what will be required in the event of a no-deal Brexit,” Cazenave told Reuters. “Hopefully, Britain will reciprocate.” 

The EU ruling is known as a share-trading obligation (STO), but Britain’s Financial Conduct Authority (FCA) has yet to formulate its own. Reciprocating would mean Britain adopting an STO that requires UK investment firms to trade UK shares in Britain, but makes no reference to where EU shares should be traded, some of which have a dual listing in London.

Cazenave said a situation where a UK STO and an EU STO do not overlap could become the ready-made basis of cross-border share trading between Britain and the EU in future. It would mean Britain not having to seek the same type of equivalence-share trading deal from Brussels after Brexit that has come unstuck for Switzerland.

Britain has said it should have no problem obtaining equivalence from Brussels for UK exchanges to continue serving EU customers. FCA CEO Andrew Bailey has said that investors should have a choice on where to trade.

Aquis has described ESMA’s STO as a “land grab” by an EU wanting to build up its own capital market after Brexit by splitting liquidity and damaging prices. It, along with Cboe and Turquoise, have set up new hubs in Amsterdam and Paris to cater for any post-Brexit situation that arises.

“Fragmentation is due to Brexit and not Europe,” Cazenave said.

A senior exchange official said Brexit has made the EU realise how the STO, meant to be a technical provision, is a powerful political tool in the Brussels armory. Said the official, “It’s a warning shot to Britain about what happens if you don’t get a Brexit deal. It’s mutual self-destruction if both sides apply hard STOs and won’t be beneficial to anybody.”