At the Association for Financial Markets in Europe's compliance and legal conference in London yesterday, 'Brexit' dominated the agenda.

Panel discussions about the regulatory effects of whatever deal that HM Government might strike with the European Union reached few solid conclusions. Delegates were told that Dominic Raab, the UK's 'Brexit secretary,' had now admitted that a 'no deal' Brexit was possible. The conference constantly referred to the phrase 'third country,' an EU term for a non-EU country. It also referred to 'equivalence,' another EU concept that allows countries declared by the EU to have regimes that are 'equivalent' to its own to trade with it on better terms than others.

One delegate struck an optimistic note, arguing that the regulated community already knows something about the shape of things to come: "We do know the details of the transitional period. Third-country treatment is sort of probably going to the UK [and there could be] issues around margin. Also, the UK has largely shown its hand on how it plans to cope with No Deal, [expending] thousands of civil service man-hours on the subject. The shape of that is broadly pretty clear. The UK is going to treat the EU as a third country. A third thing - also reasonably clear - is that neither party is trying for anything super-ambitious about the end-state. We're possibly going for enhanced equivalence."

Barney Reynolds, a partner at the City law firm of Shearman & Sterling, gazed into his crystal ball: "I anticipate that in any event there will be unilateral equivalence across many areas. CCPs (central counterparties) may terminiate EU memberships, it said in the Financial Times today. Therefore I think that they [the EU] ought to grant recognition. On enhanced equivalence, the Government's (very reasonable) proposal is to start with equivalence and then see how it goes. The supervisory practices hold no fear because we have top-in-class supervisory practices and 80% of the market is here on any analysis. I think we will get enhanced equivalence. Does it go to aspects of retail? I hope it does."

A Brexit survey

Compliance officers who attended the conference were asked to announce, on a scale of 1 at the bottom and 5 at the top, how well-prepared their banks and asset management firms were for 'Brexit,' the moment when the UK leaves the European Union on 29 March next year. At the bottom on 1 were 11% of the audience; higher up on 2 were 17%; on 3 were 25%; on 4 were 32%; and the best prepared of all, ranking themselves 5, numbered 15%.

Martin Parkes of Blackrock, the world's largest money manager, had his own view of Brexit for asset managers: "Almost all asset managers run on a global delegation model. Some EU clients may want to re-book with an EU entity. A number of firms across the buy-side have been looking at the booking entity. There have been a number of build-outs, but these are not significant. With 'best execution,' we've been looking at what it's going to mean in terms of liquidity and counterparties. There's no clear answer. We know that market participants will adapt, but looking at scenarios and case studies is as far as we can go at the moment."

Chris Bates, a partner at the City law firm of Clifford Chance, cast doubt on the 15% of people who said that their firms were fully ready: "Are all their clients fully repapered? You always hear firms say 'we're ready and everybody else isn't,' but nobody can fully see the whole market picture of where we're going to be. It's taken the sell-side much longer to get their contracts re-done [than anticipated] and there are bottleneck areas. A full repapering exercise (on legacy contracts, particularly on the derivative side) has begun, but it is a case of getting ready but not yet pressing the button."

Equivalence and its discontents

The whole question of 'Day One equivalence' came up at another panel session, with panellists pointing out that the UK is not going to be able to apply for 'equivalence' before 'Brexit Day.' Whatever deal emerges between the EU and the UK, everyone expected the EU to have to change parts of its second Markets in Financial Instruments Directive (MiFID II) and add 'new substantive terms' to the European Market Infrastructure Regulation (EMIR). They also expected the UK to have to change the Financial Services and Markets Act 2000, which it has done many times already.

In EU law, 'equivalence' clauses support three objectives: they reduce or even eliminate overlaps in regulatory compliance for the EU and/or the non-EU entities concerned; they allow the EU to decree that certain services, products and activities of non-EU countries’ firms are as good as compliant with EU laws and regulations; and they impose a less burdensome prudential regime on an EU firm that wants to deal with a non-EU one.

Laura Muir, the legal head of Barclays, which is shifting its European branches' ownership to Ireland, thought that most firms were well-prepared for Brexit but also thought that their plans were bound to be different from those of their counterparties and that this would cause clashes between different sets of plans. Kate Sumpter of Allen & Overy detected a ray of light in the fact that the 'temporary permissions' regime (which will allow European Economic Area passporting firms to keep working in the UK for a limited period of time once the UK leaves the EU - a sort of failsafe mechanism in case of a 'no deal' Brexit) was going to give firms some breathing space in which to talk to each other about their plans and flatten out some of the inconsistencies between them.

Brexit is also causing ructions in the very fabric of AFME itself, having inspired it to open a new office in Frankfurt at the beginning of last year. It is also planning to "be more present" in Paris, which has an important fintech hub. Its CEO related his own Brexit-related fears to Compliance Matters: "Firms have arranged data for the benefit of their clients and regulators so that there is free flow of data throughout the EU. Brexit could change that."

The long shadow of MiFID II

Julian Allen-Ellis, the trade body's expert on MiFID II, added: "MiFID II has fully changed the financial services industry. It took seven years and 30,000 pages of rules. It has been nine months since the 'go live' date now and there has been major market structural change. The pace of change is going to continue. Brexit will happen in March 2019, then there will be a new European Parliament, a new commission and a new chairman for the European Central Bank." One of his colleagues added: "Generally, when there's a change in the market the buy-side goes first, with the sell-side following on."

On yet another panel, a MiFID II expert said that the regime that the directive had established was "not set, but evolving month by month," adding that the biggest surprise since 3rd January (when MiFID II 'went live') was the fact that "we have had a bigger share of systematic internalisers trading than expected, but we need to clean the data to get a better picture. It's all a work in progress." Systematic internalisers, however, still only account for about 3% of the market. Less surprising, he thought, was the great improvement in regulatory reporting that the directive has caused. Another related problem that concerned the panel was the fact that EU countries' regulators are highly dependent on each other for market surveillance and that Brexit could remove the legal basis for this co-operation, depending on the deal that eventually emerges.