Brexit planning: wish for the best but prepare for the worst
Brexit has thrown the future of many financial services arrangements into doubt. As with other cross-border players in the financial industry, this has been a key concern for the Deutsche Börse Group, the mother company of Luxembourg-based Clearstream.
How has the Deutsche Börse Group approached this problem?
“From an early stage, we decided to prepare for the worst-case scenario,” explained Italo di Lorenzo, the group’s manager of its Brexit Readiness Project, speaking to ILA members after the 18th June AGM. The on-going uncertainty surrounding Brexit arrangements justified this, he said. After Brexit, the UK would be considered a 3rd country and UK-based financial firms would lose their EU passporting rights and vice-versa, which would entail a major impact on the financial markets. To better manage the challenge Italo’s team broke it down into three strands.
The groups threefold strategy
As a first element of the group’s strategy, the Brexit Readiness Project was established, ensuring continued UK market access. All of the group’s entities were asked to identify suitable contingency measures by the initial Brexit date in March 2019. Such measures have all been achieved and discussions with UK regulators are still on-going to this day on some topics. Second, the Brexit Transition Team sought to solve problems in relation to UK clients’ access to the EU. This consisted in opening new customer accounts and adapting the legal and contractual set-up mainly due to their transfer of relevant activities into the EU27.
Finally, on the growth side, the development of the Eurex Clearing Partnership Program, which is specifically focused on the clearing of for euro-denominated derivatives clearing of interest rate swaps. The program has triggered significant interest for all stakeholders and the market as a whole and an alternative for the clearing of such instruments post-Brexit.
“These were all thorny processes, as there are no “one-size-fits-all” approaches for the range of services we offer to different clients,” said Italo. Often there was a need to rebuild contractual relationships, establish new companies and redefine the regulatory arrangements around long established processes. “This has taken us years, and in some cases, we are still working with regulators and clients on these questions,” he said, noting that the most recent delay has given everyone more time to Brexit-proof their arrangements.
Hard or soft Brexit?
In theory, the current Withdrawal Agreement, which was negotiated between the UK and the EU, foresees a transition period, which implies stand-still transition arrangements until the end of 2020. However, Italo highlighted the uncertainty on whether this deal will be agreed upon before the next 31st October deadline. He also mentioned that the current uncertainty will prevail at least for some additional months, despite the UK and the EU having put detailed contingency legislation in place, to mitigate negative effects of a potential “no-deal”-scenario. As a consequence, Deutsche Börse Group continues with its short- and long-term Brexit preparations. “In times of uncertainty, there is no harm in being as well prepared as possible to ensure continuity,” Italo added.