(Adds FCA reaction)
By Huw Jones
LONDON, Oct 26 (Reuters) - The EU's markets watchdog said on
Monday banks and asset managers based in the bloc should execute
most of their share trades inside the EU after full Brexit from
January, in a step set to fragment cross-border markets.
Large chunks of cross-border share trading are currently
done on platforms in London, but Britain's unfettered access to
the bloc ends on Dec. 31.
The European Securities and Markets Authority (ESMA) set out
a revised "share trading obligation", or STO, that mandates
where banks and other users of stock markets must trade
EU-listed shares from January if Brussels decides not to allow
London's unfettered access in share trading to continue.
ESMA eased previous guidance that EU shares must be traded
inside the bloc in one respect, saying that shares listed on
exchanges inside the bloc can still be traded on platforms in
London if they are traded in sterling.
The EU is keen to build up its own capital market to cut
reliance on London, and ESMA said trading in a non-EU currency
introduced a currency risk for EU investors.
Fewer than 50 EU-listed shares are traded in sterling in
London, accounting for less than 1% of total EU trading, ESMA
said.
London-based pan-European platforms Cboe, the London Stock
Exchange's Turquoise, and Aquis Exchange trade shares listed on
EU exchanges.
"This revised guidance aims at addressing the specific
situation of the small number of EU issuers whose shares are
mainly traded on UK trading venues in pounds," ESMA said.
ESMA said it had done the "maximum possible" to avoid a
clash with Britain over where shares must be traded from
January.
Britain has yet to set out its own rules on trading of
EU-listed shares, saying the best solution would be for Brussels
to extend full access.
"However, we note ESMA's latest interpretation of the scope
of the EU STO, and we will set out our approach in due course,"
Britain's Financial Conduct Authority said in a statement.
Bankers hope that if Britain and the EU agree on a trade
deal ahead of January, that might encourage Brussels to offer
stock and derivatives trading access too.
Cboe, Turquoise and Aquis have opened hubs in the EU that
are ready to offer euro-denominated trading in EU-listed shares
to avoid disruption to clients.
Turquoise and Aquis declined to comment. Cboe had no
immediate comment. ESMA and the FCA have yet to say where
derivatives must be traded from January.
(Reporting by Huw Jones; Editing by Kirsten Donovan and Mark
Potter)