Brexit: From one detail to a transformation opportunity
by Alessandro Viviani and Stephen O’Brien
Trading venues in no-deal case and capital requirements
As of today (Nov 23th, 2018) it still unclear whether there will be an agreement (currently a draft proposed agreement is being discussed both in UK and EU – but a clear outcome is still to be defined) or not. And forecasting the result of the ongoing discussions (between ministers resigning for opposite reasons and in the EU on other topics, like Gibraltar) is not our focus.
We have been discussing with some of our clients about the Brexit impacts on their business, and the common line is that there is no “one-size-fits-all” approach but the analysis will have to dig deep into the business and the reasons behind some choices, where the devil is always lingering in the details of a continuously evolving environment.
A contingency plans in case of a no-deal scenario
But some certainties do exist: the EU issued a communication on contingency plans in case of a no-deal scenario. In that case, the EU statement – in the chapter about Financial Services – focuses the attention on an ad-hoc solution on Clearing and Depositary services.
Clearing and depositary activities have been singled out as there is an existing, extremely large volume of outstanding derivatives which will not expire before end of March and these services cannot be replaced in the short-term; to avoid disruption in the market (with potential impacts in terms of market liquidity), the Commission decided that it “will adopt temporary and conditional equivalence decisions in order to ensure that there will be no disruption in central clearing and in depositaries services” (and we will forget the “conditional” term and its potential meaning).
This very focused solution (being an exception it has to be very limited in scope) solves the issue of outstanding positions but leaves many other ones – less urgent but not of secondary importance – still open for market participants. And the term market is not randomly chosen.
Continuity of service in terms of Clearing, but not for trading venues
Although the Commission paper clears the way for continuity of service in terms of Clearing, it does not cover the first part of the chain, that is trading venues (be they Markets, OTFs,..). Trading venues based in the UK after Brexit date, in case of no deal, would still be able to act, and EU market players could trade on them, but they would be out of the EU.
EU market participants trading on UK-based trading venues will be trading outside the EU (and most likely also the other way around for UK market participants trading on EU based market venues) with immediate impacts in terms of capital requirements as UK-based trading venues will be “third country exchanges”, to be considered “corporates” for credit counterparty risk analysis instead of “institutions”, until the Commission formally decides to consider the specific third country “equivalent” in terms of prudential supervision and regulatory requirements.
For a market participant (an asset manager, a bank,…) keeping its trading activities on UK-based trading venues (in case of no-deal) opens up a risk, and implies an additional cost, in the form of increased capital requirements.
The consequences of Brexit will unfold into different areas
This is just one of the potential cases where, although no rules will apparently forbid an activity, the consequences of Brexit itself will unfold into other areas ,(e.g. capital requirements) forcing an in-depth analysis on the reasons of some business choices (i.e. why that trading venue – in this case – is used, but we could also mention outsourcing deals or data privacy and many more ones) and the need to review long-standing solutions which are seldom put in discussion.
Could then Brexit – being still unclear and developing – instead of being approached as a mandatory review exercise to assess its impacts under a regulatory point of view, be leveraged by market players as an opportunity for a radical assessment and review of past choices?
 COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK – Preparing for the withdrawal of the United Kingdom from the European Union on 30 March 2019: a Contingency Action Plan – Strasbourg, 13.11.2018
 REGULATION (EU) No 575/2013 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 ,Title II, Chapter 1, Art. 107, Par. 3,4