By Huw Jones
LONDON, Sept 16 (Reuters) - Overlapping British and European Union share trading rules would damage markets "to no good end" and can be avoided if the bloc is more accommodative, Britain's top markets watchdog said on Monday.
Britain is due to leave the EU on Oct. 31, but has yet to agree a divorce settlement with the bloc.
Brussels has said that if there is a no-deal Brexit, investment firms in the EU must trade about 6,200 euro-denominated shares in the bloc; many are currently heavily traded in London.
"It is therefore easy to conclude that for those shares, market liquidity would be damaged to no good end," Financial Conduct Authority Chief Executive Andrew Bailey said in a speech at Bloomberg.
The FCA will decide soon how to reciprocate on share trading, and Brussels has urged the watchdog not to require UK firms to trade euro shares in Britain as this would create an overlap that fragments trading.
Bailey said the best solution would be for Brussels to grant so-called temporary equivalence, or allow cross border share trading to continue in the event of a no-deal Brexit, as it has already done with derivatives clearing.
"The EU have said to date they will not do that," he added.
Equivalence is the main form of EU financial market access for non-member state countries. Brussels decides whether a foreign firm's rules are aligned enough with those in the bloc.
"We stand ready to enter into dialogue with our European counterparts before we finalise our approach," Bailey said.
Brussels has granted temporary equivalence for derivatives clearing so that EU customers could continue using clearing houses in London, but only until March 2020 if there is a no-deal Brexit.
This reflected Britain's original plan to leave the EU in March, and Bailey said Brussels would need to grant an extension soon to avoid costly disruption in markets.
Without an extension, clearing houses in Britain like the London Stock Exchange's LCH may have to tell EU customers by December to begin closing or moving derivatives positions from Britain by the end of March.
"Ultimately, the best solution is for the EU to grant permanent recognition to UK CCPs (clearing houses)," Bailey said.
The EU is keen to build up its own capital market capacity for trading and clearing to avoid relying on London after Brexit and has made it clear that granting permanent equivalence would not be automatic.
Bailey said British rules would be identical to those in the bloc on day one of Brexit, meaning equivalence should not be an issue.
Britain, however, must not end up being a "taker" of EU rules, or having to copy the bloc's regulation after Brexit for years to come to maintain EU access, he said. (Reporting by Huw Jones; Editing by Catherine Evans and Ed Osmond)