„Britain’s banks need a watertight Brexit transition deal by Christmas to avoid a potentially disorderly shift of people and operations to the European Union.“
The statement from BoE Deputy Governor Sam Woods appears to contrast sharply to the progress made so far in the negotiation process between the UK and the EU. At this stage, it is far from certain, that any such deal can be achieved by Christmas. Hence: Are we looking at a chaotic process in 2018 and 2019, with everybody rushing for the exit? What are the options and is there a realistic time plan to still meet a potential hard-Brexit-deadline of end of March 2019, if work is not started until Christmas?
To prepare such a time-plan, some crucial assumptions with regards to possible negotiation outcomes have to be made in order to clarify the regulatory environment after Brexit. It should be noted, that these assumptions have a significant impact on overall planning. Following the current status of the negotiations – and apart from grandfathering and the use of internal models – contingency assumptions have been chosen:
- It is assumed that no longer-lasting equivalence between regulatory regimes will be agreed, and the simplified market access via the European passport will be discontinued.
- It is assumed that Banks have to be prepared to link to a EU-based derivatives clearing organization in addition to maintaining the links to the London based Clearing organization.
- Switching clearing venues is a highly complex task and will most likely not be possible within the timeframe left until March 2019. However, if grandfathering is granted (see below), only newly closed transactions will have to be routed across the new links, simplifying the efforts.
- Market links may have to be (re-)established potentially using General Clearing Members either of the same group or of other brokers if no EU-domiciled entity is available.
- Margining and Collateral handling processes will need to be revised, most likely leading to less efficient use of collateral and higher operational risks.
- It is further assumed, that some grandfathering agreement for existing transactions is reached, or the migration for such transactions can be completed at a later stage. This is reducing the migration efforts significantly, as no existing trade portfolio would need to be renewed and/or migrated.
- Approval for internal risk measurement models can be obtained after the Brexit deadline.
There are also external factors driving the time pressure on the migration plan:
- According to advice given by the Bafin, banks and FSIs should plan for a six to twelve months period to obtain the relevant regulatory licensing approval. This assumes there is no significant backlog at the Bafin due to the number of applications, and the application documents are complete.
- As a new entity is being set up, also the relevant clients need to be onboarded again. We are assuming this can be accomplished within a three-months period. In order to be able to contract with clients at the end of March 2019, this process would need to start at the beginning of 2019.
- This requires the new entity to be operational by year-end 2018.
- If a twelve-months application process is taken into account, the application for the license would need to be with the Bafin at the beginning of next year.
Implementation and migration path
From a high level-perspective, this implies the following implementation and migration path:
In parallel to obtaining the regulatory approval, the necessary work on local governance, operational, reporting and risk management processes will need completed. This also includes the establishment of new links into the local markets and clearing organizations. Basically, a new bank will need to be designed starting from early 2018. This may be complicated by other entities/branches in Europe to be integrated into this structure. Let alone, this is already an extremely ambitious time-frame.
The biggest risks regarding a delivery on time
We regard the availability of sufficient and skilled ressources as well as the implementation of the suitable IT-platform as the biggest risks regarding a delivery on time.
- In order to ensure sufficient resourcing and know-how, we suggest to co-operate with local parties who are able to cover sub-processes of the envisaged setup: Starting from employing consultants and contractors with local experience and track-record, this could go as far as outsourcing operational processes to relevant parties. Outsourcing is offered e.g. for compliance, finance and regulatory reporting, HR or even security-operations services. Using these offering in a first step can help to mitigate staffing issues and ensure local know how, while maintaining upfront investments at a low level. Once there is more certainty on the final regulatory environment, these arrangements can also be adjusted / insourced, to better meet future requirements without time-pressure.
- A further reduction of implementation workload and risks can be achieved by (partially) relying on tried-and-tested software packages, which already include functionalities as required in the market environment. Our experience with implementation projects suggests that a successful implementation can be achieved in six to nine months, significantly reducing capacity and know-how requirements during technical design and testing. The software already comes with existing connections to the market and clearing infrastructure and allows for an outsourcing of the technical infrastructure (data-center, network, firewalls, etc.). PASS can provide immediate consulting and implementation support. with extensive experience from a variety of implementation projects with different business models.
An extremely tight schedule
If there is no further agreement on a transitional agreement, the schedule until March 2019 is extremely tight. By using the available options to simplify and support the implementation, a successful completion appears still feasible, however assumes that relevant preparations for the licensing application are complete and grandfathering is granted. Resource availability and especially staffing for the local entity will most likely become issues, which will have to be countered by employing relevant external staff.
In order to avoid a loss of business and a reputational damage, banks need to progress on their plans now. A successful migration is not impossible, but it is getting more difficult by the day. There is no time to waste, it’s time to start now!
Dr. Manfred Beinhauer has been working in finance and banking for over 25 years. After earning his Master and Doctorate degrees, he supported banks and financial services providers with regard to organizational matters and the development of controlling and accounting systems. Subsequently, 15 years at UBS followed in various management functions in Frankfurt, London and Zurich. He played a key role in the conversion of German sales and trading activities at UBS Investment Bank to a European booking model, thereby implementing a business model based on simplified market access. In addition to various regulatory projects (Mifid, ORC introduction, etc.), he also supported financial transactions and change initiatives to streamline corporate structures.
After his time at UBS, Dr. Beinhauer took responsibility for Hypotheken Management, the leading service provider in the area of Performing Loan in Germany. After the company was acquired by a new shareholder forming the largest service provider in the loan processing field in Germany, Dr. Beinhauer has lead the successful integration of Hypotheken Management. Now, based on his extensive industry-experience, he has moved on to build FinTeam.eu, a service provider for banks and financial service institutions which are forced to develop a new European business model after Brexit.
Asmus Christesen, a Business IT Professional and Business Economist, has been a member of the Board of Managing Directors of PASS MULTIBANK since 1995 and currently holds the position of the Chief Customer Officer. Prior to that, he worked as an IT manager at a Danish bank in Flensburg and Hamburg. Furthermore, he worked for two major banks in Northern Germany and carried out audits as an employee of the IT department. This also included the support of several foreign branches including the introduction of core banking solutions.
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