Continental Brexit
10 July 2019
What will be the lasting impact of Brexit for European financial services? Will Brexit act as a good opportunity for more growth on the continent, moving capital away from London?
Image: Shutterstock
At the time of writing, the UK stands in the interim of deciding its next Prime Minister. By the time you read this, the Conservative Party will be down to two competitors and the eventual successor’s first heavyweight priority will be the ongoing battle of Brexit.
Brexit news coverage tends to focus strongly on negotiations from the UK side, but how could Brexit affect continental European asset services and post-trade?
Much talk around Brexit considers the impact on UK financial services, but what of companies who have a stronger hold on the continent? Have they too been preparing for all possible eventualities? Are they more or less prepared than their British neighbours?
It’s fair to say that many never thought Brexit would happen, as reflected by the referendum results released back in June 2016, which indicated a borderline result of 51.9 percent favouring to leave.
Since then, Nigel Green, the chief executive and founder of deVere Group, has voiced: “Brexit has cost Britain three lost years of opportunity. Brexit has almost entirely overtaken the public sphere in Britain. All of Parliament’s time and energy is vested in Brexit. It appears nothing else is getting done. And so much needs to be done.”
He adds: “The actual process of leaving the EU itself is now increasingly irrelevant. Indeed, even if the UK didn’t leave, unprecedented damage to the UK’s financial services industry has already been done.”
And it is also fair to say that no one really knows what will happen post-Brexit. However, most European financial services institutions seem to have a framework for every eventuality.
Regulation
A recent panel at the Association for Financial Markets in Europe concentrated on how post-trade in a post-Brexit world would affect regulation and the possible changes that might arise, throughout Europe.
One panellist said financial services markets are built on law and a regulatory environment, but the current uncertainty surrounding Brexit may mean in the future the industry will see a different set of rules for different markets as there will be a significant split between the UK and European law.
Another panellist said after Brexit he thought the “general outlook for post-trade would be rather pessimistic as one regulatory space will become two regulatory spaces. And in terms of the law, it is difficult to gather contractual continuity”.
One panellist welcomed the European Commission’s adoption of conditional equivalence for central clearing counterparties (CCPs) and central security depositories (CSDs) post-Brexit, as part of its no deal contingency action plan.
Although, Daniel Carpenter, head of regulation at Meritsoft, indicates: “Both European Securities and Markets Authority (ESMA) and the Financial Conduct Authority have different philosophies towards regulating European markets post-Brexit.”
“Market participants can only fully assess the potential long-term impact on their businesses when and if a definitive Brexit outcome materialises, which could have an impact on activity for central counterparty clearing houses and CSDs in the longer term.”
Carpenter indicates: “Lots of different companies in different regions will be jostling for more business post-Brexit and will all have a different view of post-trade market infrastructure and what it should look like.”
Another panel at AFME discussed post-trade reform agendas, one speaker said that as the current Brexit withdrawal deal stands, there is no good to come from Brexit, either for the UK or Europe. She also predicted that Europe and Asia will probably benefit the most.
Across the board
Steven Maijoor, chair of ESMA, has indicated a no-deal Brexit may have some significant effects of the second Markets in Financial Instruments Directive (MiFID II), a European-wide regulation.
In his speech at the European Financial Forum 2019 in Dublin, Maijoor said: “I appreciate that some of the MiFID II thresholds may need recalibration in the new EU27 environment.”
Maijoor had also explained that the MiFID II transparency framework is founded on a number of thresholds to be specified at ESMA level, to introduce a transparent regime for trading all types of asset classes on a level playing field in the EU. But across the board, the sentiment is not quite the same and there are fears from others that London could lose business.
PwC released a report last year that indicated the city of Frankfurt as the likely recipient of London’s relocated activity, particularly from Japanese and US banks, while Amsterdam was predicted to be the main location for trading venues. However on more of a positive note, at the ISITC conference in London earlier this year, a European Central Bank representative affirmed the bank’s aim to include and present everyone in collateral and corporate actions discussions after Brexit.
In addition a panellist at this year’s TSAM London, who is the legal head of her company, revealed that most EU countries are taking it upon themselves to create agreements with the UK, or are creating domestic laws in preparation for a no-deal Brexit.
The panellist said countries that have put forward or are drafting domestic laws and/or agreements with the UK in the case of a no-deal Brexit include Sweden, Austria, Malta, Finland, Spain, Belgium and Luxembourg, among others.
In addition, Guernsey’s financial services regulator has signed a memorandum of understanding (MoU) with the UK’s Financial Conduct Authority to ensure market access for Guernsey investment funds into the UK after Brexit.
The MoU will come into effect if EU law no longer applies in the UK, either through a no-deal Brexit or at the end of any transitional arrangements once the UK leaves the EU.
This will mean that Guernsey funds will still be able to be marketed into the UK.
A chance to change and consolidate?
Aside from Brexit, the financial services industry has other things to worry about, such as keeping up with changes to technology, data compliance, Securities Financing Transactions Regulation (SFTR) and the Central Securities Depositories Regulation (CSDR), to name a few.
As Carpenter cites: “From client conversations, we know houses are planning for all possible Brexit options. Preparations for Brexit are only part of the story, though, as there are a plethora of post-trade global regulatory requirements which houses have to plan for, such as CSDR which is causing substantial overhaul in firm’s operations and now requires just as much attention as Brexit.”
Anders Kirkeby, vice president of enterprise architecture at SimCorp, indicates: “While geopolitical developments like Brexit seem contrary to the notion of a shared society, it will not stop the buy-side from evolving and innovating.”
“As an industry, it has been moving towards a global way of operating for many years. We can see this in the sheer number of global products, instruments and even the electronification of markets, all born out of cross-border collaboration.”
Kirkeby says: “What is interesting is that Brexit is yet another example of the need for operational readiness in a changing landscape. We’ve seen this over the last few years with cross-territory regulations like the markets in financial instruments directive and SFTR, which is increasingly being mirrored around the world, and the continuation of this is a likely eventuality. The same can be said for geopolitical developments too. The delay can be seen as an opportunity, not just for firms in the EU, but for the global buy-side to review their operations.”
Brexit news coverage tends to focus strongly on negotiations from the UK side, but how could Brexit affect continental European asset services and post-trade?
Much talk around Brexit considers the impact on UK financial services, but what of companies who have a stronger hold on the continent? Have they too been preparing for all possible eventualities? Are they more or less prepared than their British neighbours?
It’s fair to say that many never thought Brexit would happen, as reflected by the referendum results released back in June 2016, which indicated a borderline result of 51.9 percent favouring to leave.
Since then, Nigel Green, the chief executive and founder of deVere Group, has voiced: “Brexit has cost Britain three lost years of opportunity. Brexit has almost entirely overtaken the public sphere in Britain. All of Parliament’s time and energy is vested in Brexit. It appears nothing else is getting done. And so much needs to be done.”
He adds: “The actual process of leaving the EU itself is now increasingly irrelevant. Indeed, even if the UK didn’t leave, unprecedented damage to the UK’s financial services industry has already been done.”
And it is also fair to say that no one really knows what will happen post-Brexit. However, most European financial services institutions seem to have a framework for every eventuality.
Regulation
A recent panel at the Association for Financial Markets in Europe concentrated on how post-trade in a post-Brexit world would affect regulation and the possible changes that might arise, throughout Europe.
One panellist said financial services markets are built on law and a regulatory environment, but the current uncertainty surrounding Brexit may mean in the future the industry will see a different set of rules for different markets as there will be a significant split between the UK and European law.
Another panellist said after Brexit he thought the “general outlook for post-trade would be rather pessimistic as one regulatory space will become two regulatory spaces. And in terms of the law, it is difficult to gather contractual continuity”.
One panellist welcomed the European Commission’s adoption of conditional equivalence for central clearing counterparties (CCPs) and central security depositories (CSDs) post-Brexit, as part of its no deal contingency action plan.
Although, Daniel Carpenter, head of regulation at Meritsoft, indicates: “Both European Securities and Markets Authority (ESMA) and the Financial Conduct Authority have different philosophies towards regulating European markets post-Brexit.”
“Market participants can only fully assess the potential long-term impact on their businesses when and if a definitive Brexit outcome materialises, which could have an impact on activity for central counterparty clearing houses and CSDs in the longer term.”
Carpenter indicates: “Lots of different companies in different regions will be jostling for more business post-Brexit and will all have a different view of post-trade market infrastructure and what it should look like.”
Another panel at AFME discussed post-trade reform agendas, one speaker said that as the current Brexit withdrawal deal stands, there is no good to come from Brexit, either for the UK or Europe. She also predicted that Europe and Asia will probably benefit the most.
Across the board
Steven Maijoor, chair of ESMA, has indicated a no-deal Brexit may have some significant effects of the second Markets in Financial Instruments Directive (MiFID II), a European-wide regulation.
In his speech at the European Financial Forum 2019 in Dublin, Maijoor said: “I appreciate that some of the MiFID II thresholds may need recalibration in the new EU27 environment.”
Maijoor had also explained that the MiFID II transparency framework is founded on a number of thresholds to be specified at ESMA level, to introduce a transparent regime for trading all types of asset classes on a level playing field in the EU. But across the board, the sentiment is not quite the same and there are fears from others that London could lose business.
PwC released a report last year that indicated the city of Frankfurt as the likely recipient of London’s relocated activity, particularly from Japanese and US banks, while Amsterdam was predicted to be the main location for trading venues. However on more of a positive note, at the ISITC conference in London earlier this year, a European Central Bank representative affirmed the bank’s aim to include and present everyone in collateral and corporate actions discussions after Brexit.
In addition a panellist at this year’s TSAM London, who is the legal head of her company, revealed that most EU countries are taking it upon themselves to create agreements with the UK, or are creating domestic laws in preparation for a no-deal Brexit.
The panellist said countries that have put forward or are drafting domestic laws and/or agreements with the UK in the case of a no-deal Brexit include Sweden, Austria, Malta, Finland, Spain, Belgium and Luxembourg, among others.
In addition, Guernsey’s financial services regulator has signed a memorandum of understanding (MoU) with the UK’s Financial Conduct Authority to ensure market access for Guernsey investment funds into the UK after Brexit.
The MoU will come into effect if EU law no longer applies in the UK, either through a no-deal Brexit or at the end of any transitional arrangements once the UK leaves the EU.
This will mean that Guernsey funds will still be able to be marketed into the UK.
A chance to change and consolidate?
Aside from Brexit, the financial services industry has other things to worry about, such as keeping up with changes to technology, data compliance, Securities Financing Transactions Regulation (SFTR) and the Central Securities Depositories Regulation (CSDR), to name a few.
As Carpenter cites: “From client conversations, we know houses are planning for all possible Brexit options. Preparations for Brexit are only part of the story, though, as there are a plethora of post-trade global regulatory requirements which houses have to plan for, such as CSDR which is causing substantial overhaul in firm’s operations and now requires just as much attention as Brexit.”
Anders Kirkeby, vice president of enterprise architecture at SimCorp, indicates: “While geopolitical developments like Brexit seem contrary to the notion of a shared society, it will not stop the buy-side from evolving and innovating.”
“As an industry, it has been moving towards a global way of operating for many years. We can see this in the sheer number of global products, instruments and even the electronification of markets, all born out of cross-border collaboration.”
Kirkeby says: “What is interesting is that Brexit is yet another example of the need for operational readiness in a changing landscape. We’ve seen this over the last few years with cross-territory regulations like the markets in financial instruments directive and SFTR, which is increasingly being mirrored around the world, and the continuation of this is a likely eventuality. The same can be said for geopolitical developments too. The delay can be seen as an opportunity, not just for firms in the EU, but for the global buy-side to review their operations.”
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