CCPs face greater challenges than most market infrastructure providers to deliver Brexit readiness

‘Wait and see’ or ‘plan for the worst’? These seem to be the two ways that most financial institutions and market infrastructures are responding to Brexit’s uncertain outcome for capital markets.

In the absence of solid decisions regarding 3rd country equivalence rules and transitional periods (soft Brexit), firms and market infrastructure providers need to plan and execute their strategies now to be sure of their readiness when Brexit comes into effect in March 2019. If they don’t, this may threaten their ability to continue operating in certain markets as of Day 1, or force them into last minute tactical solutions that could potentially increase their operating costs and risks - and also reduce client service quality (leading to a loss or decline in revenues).

More than any other market infrastructure, CCPs are likely to feel the pain, given the complex nature of their business, in terms of servicing global markets, product coverage and client geographical footprint. Add into the mix their primary role as risk mitigators with a dependence on interoperability, portability and service arrangements with trading venues, CCPs, CSDs and potentially central banks, they have a significant challenge ahead of them.

What next for CCPs?

There are myriad challenges facing CCPs, but not all of them will necessarily affect them directly. The depth and breadth of impact depends on their operating footprint, such as cleared product coverage, range of services, business location, the underlying regulatory jurisdiction, client coverage and their geographical footprint. However, the challenges can be grouped into the following categories:

• Regulatory compliance – maintaining compliance with key EU regulation such as EMIR, CSDR and MiFID II is critical to 3rd country equivalence and dependent relationships with EU-based market infrastructures
• Legal Entity structure – setting up a new EU-based legal entity can be a lengthy, complex and costly process, including obtaining regulatory approval in the chosen location. Similarly, the configuration and implementation of the infrastructure to support the new entity can be costly and complex.
• Clients – The need to realign, repaper, configure clearing account structures and perform connectivity testing is resource intensive. Added to that, there is a further difficulty that some key clients may also be restructuring their businesses , thus increasing workloads and threatening the CCP’s ability to meet internally and externally imposed readiness deadlines.
• Market Infrastructure relationships – ensuring that the appropriate legal and service agreements are in place with other market infrastructures is critical to the effective operation of markets and clients. CCPs must indeed be certain that this is in place to ensure that they can continue to operate as they do today.
• Change delivery capacity – the scale, speed and complexity of change will place significant demand on CCP internal resources to be ready in time for March 2019 and to maintain operational effectiveness. Dealing with capacity and skill shortfalls may lead to lengthy recruitment cycles and uncover gaps in agreed budgets.

Key considerations for a successful Brexit outcome

Whilst Brexit itself is a unique situation, the key activities to achieve readiness are familiar. Legal restructuring, regulatory approvals, client and service provider repapering, infrastructure configuration and testing are all types of activities that have been encountered in previous regulatory reforms and post-merger integrations.

The key ingredients to success are co-ordinated planning, strong governance to facilitate decision making, and having enough resources with the right skills and experience to deliver on time and to budget.

Capco has developed a Brexit toolkit that demonstrates a successful track record to manage complex programmes to this scale, offering experience in all aspects of implementation. The toolkit provides a key framework which banks can leverage, to develop a robust and concise Brexit programme.

For more information about how we can help UK and EU-based clearing businesses in the run up to Brexit, please get in touch:

STEVEN HARGREAVES
Partner (London)
steven.hargreaves@capco.com

RACHAEL ZUCKERMAN
Partner (London)
rachael.zukerman@capco.com