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Financial sector Brexit preparations enter the home stretch

01 Sep 2017

Financial sector Brexit preparations enter the home stretch

Guest article by Alexandra Hachmeister, Chief Regulatory Officer of Deutsche Börse Group, in Börsen-Zeitung, 1 September 2017

Great Britain
The clock is ticking in Brussels. The third round of Brexit talks finished a few days ago. The results are sobering midway into the total of six scheduled meetings. There is a risk that the UK will leave the European Union on 30 March 2019 without having fully clarified the terms of the exit or future relations. So London, one of the world's largest trading venues, could lose its link to the financial centres of the EU27. This would restrict the smooth flow of capital and services and threaten the stability of the financial system, which makes the situation extremely precarious.

Deutsche Börse Group's main task is to contribute to the stability of the financial system. We achieve that primarily by providing a reliable market infrastructure. We are working intensively with our clients on solutions to guarantee that capital can still reliably flow between the UK and the EU27 after the spring of 2019 – and that financial services can still be provided.

However, finding these solutions amounts to a Herculean task. Although EU law still applies during the negotiations with the UK, major banks in particular cannot just wait for this situation to be over. Accordingly, we know from talking to many of our clients that many banks are living by the mantra “hope for the best, but prepare for the worst”.

Almost all major British and American banks have meanwhile prepared Brexit plans. It basically comes down to this: the more complex the business model, the longer the preparations will take. Other institutions, such as some asset managers and smaller investment companies, are not as far along with their plans, although we expect they too will be focussing on the details soon. The fact is that all institutions have started on Brexit projects by now, preparations are well underway, and the issue is being taken very seriously – not least because the Bank of England and the European Central Bank have recently demanded detailed plans from the sector.

These preparations, which also cover the worst case scenario, are good news for financial stability. After all, the way the negotiations have been going so far increases the probability of a “cliff edge” Brexit. In this scenario, the UK would leave the EU in 2019 without any transitional deals or agreements about future cooperation. This would have far-reaching consequences on cross-border capital movements between the UK and the continent. It would not least hamper progress on the planned and urgently needed Capital Markets Union.

But luckily it hasn't come to this just yet. The UK and EU representatives will be meeting monthly until October to discuss the rights of EU27 citizens in the UK and those of UK citizens in the EU in the first stage of negotiations. They also need to determine the financial settlement to be paid to the EU and the future nature of the border between Northern Ireland and the Republic of Ireland.

The most pressing matter for the EU in the negotiations is to first of all set the course for the separation. Only after this should issues such as future trade relations and transitional deals be discussed. If this doesn't happen until December of this year or January of next year, the UK will only have 10 months left to negotiate trade agreements with the EU. The risks of this delay are clear.

We still very much regret the UK's decision to leave the EU. As leading market infrastructure provider with a global network, we have many clients in the financial centre of London, and want to maintain and further develop these stable relationships. That is why we are devoting all our energy to ensuring that our participants and members still have access to our systems on day one after Brexit.

We are developing the appropriate products and solutions in Frankfurt, with a focus on trading and clearing. Our clients are concerned with two key questions in particular: firstly, how can they ensure that they can continue to trade on the Frankfurt Stock Exchange and Eurex Frankfurt? And secondly, how can they have these transactions centrally cleared? The solution generally is to operate a subsidiary within the EU27. The European Securities and Markets Authority (ESMA) has already announced that it will not accept shell companies.

Many of our clients are therefore planning to establish subsidiaries in the EU27 and are discussing with us how to best maintain access to our systems. This is complex not only in regulatory terms, but also from a technical point of view. It is clear when we look at the Brexit timeline that our clients will need to have made the relevant decisions by the end of the year. We are lending our support – after all, we also need to complete all the necessary tasks without any capacity bottlenecks.

At the same time we are working to strengthen Frankfurt as a financial venue, because if businesses have to be moved, we naturally have an interest as a Rhine-Main area company in bringing them here. The Otto Beisheim School of Management (WHU) recently calculated that around 10,000 jobs could be created in the financial sector in the next four years. As a result, between 35,000 and some 88,000 jobs in other sectors could also follow. Brexit offers opportunities for Frankfurt, and at the same time, we are making sure that our British clients retain access to the capital markets of the EU27.

Video: Brexit in simple terms

 

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