How would Brexit affect the UK's financial services?

Britain, Europe's biggest financial centre, votes on June 23 on whether to leave the European Union.

The country's banking and fund management industries are among those that could lose most from a so-called Brexit, many analysts have said, though much depends on the trading terms Britain would be able to negotiate with the EU.

The following details the potential changes that could affect different parts of the industry.

Regulatory structure

*Rules

Nearly all of Britain's financial services rules are derived from EU law. Though Britain has gone further than the EU in some cases, such as tougher capital requirements and restrictions on banker pay, a new rule framework would have to be devised within two years of Brexit.

*Passporting

Financial firms like insurers, banks, asset managers, payment services providers who are authorised in Britain have "passport" rights to conduct their business in all EU countries, either remotely from Britain or from a branch in another member state.

If Britain were to join the European Economic Area (EEA) -- comprised of Norway, Iceland and Liechtenstein -- financial companies would continue to have passporting rights to conduct business in all EU countries but would have no say over the formulation of EU rules.

If Britain did not join the EEA, UK firms wanting to operate in the EU would have an "equivalence" test to prove to Brussels that their home rules are as strict as those in the EU.

British firms seeking to offer financial services to retail customers in the EU are also likely to need a locally capitalised subsidiary in the EU, which would be more expensive than running a branch.

*Political implications

Open-ended negotiations over equivalency are prone to political horse-trading and it took several years for the EU to accept the equivalence of U.S. rules on derivatives clearing.

A British departure from the EU could alter the political balance within the bloc by removing a major pro-market member, possibly tilting it towards less sector-friendly rules.

The industry

*Banks

Among the most costly Brexit factors for banks would be the loss of the passporting facility, necessitating creation of European subsidiaries rather than merely operating additional branches.

*Funds

Much of the UK's 5.5 trillion pound ($7.9 trillion) mutual funds sector is run almost entirely under EU rules known as UCITS. Unless Britain joins the EEA, lawyers say there is potential for substantial disruption as funds could lose their UCITS designation, seen as a gold standard globally.

*Trading, clearing, reporting

Pan-EU share trading platforms, such as Bats Chi-X and Turquoise, along with clearing houses including LCH.Clearnet, CME Clearing Europe and ICE Clear Europe, are also authorised in Britain under EU rules providing a passport to serve customers across the bloc.

Leaving the EU and not being part of the EEA could affect their cross-border business and EU-based customers might be unable to use trading platforms and clearing houses authorised by UK regulators until they have gained approval from Brussels.

*Ratings agencies

Credit rating agencies (CRAs) are authorised by EU markets watchdog ESMA. There are eight CRAs in Britain authorised by ESMA, but the larger ones would be able to operate via subsidiaries already established in some EU states.

Trade repositories

*Derivatives transactions in the EU must be reported to a repository and four of the six authorised in the bloc are based in London. To continue serving customers in the EU, the London-based repositories would have to show regulation equivalency.

*Derivatives, repos, stock lending

A large chunk of the world's $550 trillion derivatives market is traded using contracts that come under UK law, even if both sides of the trade are based elsewhere.

Courts in EU countries have agreed to recognise UK law for resolving disputes, but this could change if Britain left the bloc. Hundreds of thousands of contracts could be affected. Repurchase agreements (repos) and stock lending could face similar disruption.

*Benchmarks

If the UK left the EU and did not join the EEA, any benchmark administered in Britain, such as Libor, could only be used by EU banks after equivalency approval.

*Data protection

If Britain joined the EEA there would be little change in terms of the use of personal data. Outside the EEA and EU, Britain would have to show that its standards of protection meet EU rules to allow data transfers between the UK and the EU. Without this, it would be disruptive to banks that regularly transfer personal data across borders.

*Insurance

UK insurers and reinsurers benefit from passporting under the EU's Solvency II rules, but this would be lost if Britain left the EU and did not join the EEA and firms could have to open offices in the EU.

*Failing banks

Under new EU rules, regulators are required to recognise each other's actions in dealing with a failing bank, such as debt writedowns. If Britain were to leave the EU, there would be no legal guarantee that an EU state would cooperate with any UK regulatory action. ($1 = 0.6994 pounds) (Editing by David Goodman)