* French watchdog says EU must develop own capital market
* Disagrees with UK regulator over future EU access
* Wants stronger powers for EU markets regulator (Adds reaction)
LONDON, March 15 (Reuters) - The European Union system for granting financial market access to foreign firms must be toughened up given that a dominant financial centre will become a close neighbour after Brexit, the head of France's markets watchdog said on Thursday.
Robert Ophele, chairman of the Autorite des Marches Financiers (AMF), said EU market access rules for non-EU or "third countries" should be urgently revamped before the bloc's financial market is opened up to Britain, which is quitting the EU next March.
"When the main financial centre of the EU is about to leave the Union, it is clear that the European third country regimes as previously defined can no longer be appropriate and hence deserve to be revisited," Ophele told a meeting of the OMFIF think tank.
Currently, foreign firms can serve EU customers if their home rules are "equivalent" or as strict as the bloc's. This allows EU regulators to "defer" to a firm's home supervisor, meaning not every EU rule has to be complied with.
Due to Brexit, the EU is already looking to revamp its equivalence rules for foreign clearing houses that handle large amounts of euro-denominated derivatives, and for foreign investment firms.
Britain, meanwhile, wants a more accommodative system of equivalence that does not rely solely on the "whim" of Brussels to grant market access. The stakes are significant for Britain's economy, as financial services make up its biggest sector, raising over 70 billion pounds ($97.8 billion) in tax annually.
Ophele singled out the EU's sweeping MiFID II securities rules that were introduced in January, saying they should be more comprehensively applied to foreign firms to ensure consumer protection and financial stability.
"In my opinion, this can only be ensured by mandating that a subset of MiFID II... on transaction reporting, transparency, mandatory trading of shares and derivatives on platforms, is applied to third country firms operating in the EU."
This is not extra-territoriality or regulatory overreach, he said. "This is ensuring a proper level playing field in Europe, when European clients are involved."
Ophele said the EU should grant "transitory" equivalence to market infrastructure - such as for trading and clearing securities - to allow the bloc to make the changes to its equivalence regime as he set out in his speech.
Oliver Moullin, head of Brexit at European banking industry body AFME, said Ophele recognised the importance of avoiding a disorderly exit from the EU for British market infrastructure.
"With little more than a year to go before the UK leaves the EU, clarity is needed urgently on actions to mitigate these cliff-edge risks in order to maintain financial stability," Moullin said.
Ophele said that Andrew Bailey, chief executive of Britain's Financial Conduct Authority, had "eloquently" called for UK and EU regulators to cooperate closely so that cross-border financial services continue.
"If one supports this line of thought, basically Brexit should change nothing in relation to the current situation," Ophele said. "I am of a slightly different view."
He wants the bloc's European Securities and Markets Authority (ESMA) to have stronger powers to police equivalence, a step that some EU states are leery of.
French Finance Minister Bruno Le Maire said last week that equivalence was the best that Britain was likely to get for financial services after Brexit.
France has been open in seeing Brexit as an opportunity to attract financial firms from London, with banks, insurers and asset managers there planning new EU hubs because they don't want to rely on equivalence.
Ophele said he wants the EU to be self-sufficient in a broad range of financial services, as proposed under the bloc's capital markets union project, rather than relying heavily on a non-EU centre like London.
($1 = 0.7157 pounds) (Reporting by Huw Jones Editing by Mark Heinrich)