Brexit Post Trade Infrastructure : How To Design For Success Within Capital Markets ?

In March 2017, 9 months after the UK voted in a referendum to leave the European Union, Theresa May triggered the official mechanism for making it a reality – by invoking article 50 of the Lisbon Treaty. This effectively set the timeline for development of the business models that will be required across industries to maintain access to the European market in March 2019.

Much has been written around the implications for the financial services industry in the ‘Brexit’ landscape and 9 months on significant uncertainty remains around some major themes, such as passporting vs equivalence. However, whilst most institutions have spent the last 18 months planning contingency strategies around the impact to their businesses they are now faced with moving into execution mode due to what is effectively now a ticking clock.

Entity transformation strategies – either new entity build-out or adaption of existing structures – are rarely quick processes, driven in part by the fact that they impact the full end-to-end (E2E) stack of infrastructure and process. PwC conducted an assessment for AFME in January 2017[1] and one of the key findings was that the spread of timelines for execution of this type of transformation was between 2 years (relatively simple location switch of trading activities) through to 5 years (large scale booking model change and realignment of technology and process). This highlights the challenges that many institutions are facing when trying to balance waiting for regulatory ‘surety’ with ensuring day 1 readiness under the new regime

2017 saw most institutions start to play their hand, with public statements of intent around how they will look to mitigate the risk of Brexit. Utilisation of existing entities (in cities such as Frankfurt or Dublin) or applying for new licences in EU locations appears to be a consistent theme, providing a mechanism to continue to trade with EU-customers through a passported entity. Where possible, the risk is then passed back into the UK entity through creation of an inter-company (or back-to-back) trade – enabling the risk management, hedging and processing activities to be maintained within current infrastructure. Whilst agreement on this concept from a regulatory perspective is some way off – the EBA wrote in October 2017 that all entities must have appropriate risk management and capital within the EU to support inter-company activities –the market seems to be moving in this direction as a mitigation strategy.

Implications for Infrastructure

Much is written around the limitations of legacy infrastructure within financial services firms, where capacity/throughput requirements, product complexity and regulatory expectations combine to create customised and inflexible technology stacks. This makes even relatively straightforward change risky due to the potential knock-on impacts this can create, with a significant amount of programme costs being absorbed through testing and due diligence. Cutting[1] corners around this creates at best client service implications and at its worst regulatory censure and sanction – so this creates challenges for organisations trying to balance operational readiness with a constrained (and seemingly fixed) timeline.

Responding Successfully – Designing The Model

Many organisations are wary of the implications to their client base through being unprepared and will not want to be in a position whereby existing revenue flows disappear to a competitor. Though the challenges for Brexit readiness are well publicised, this should not be an excuse for leadership to avoid being proactive in trying to drive the organisation forward – the successful organisations will be those that think creatively around delivery against a fixed timeline. Here are some thoughts based on our own experiences of delivering successful outcomes in similar environments:

1. Embrace The Opportunity. As the organisation develops its booking strategy and thought goes towards enablement or enhancement of the process, this creates a multitude of opportunity to make things better. Mass migration of old data into the new entity should be the absolute last resort – this is the perfect time to cleanse and sanitise data to eliminate the examples of the same counterparty being in set up in multiple ways. Similarly, this is the ideal time for an organisation to think around which clients really need to be set up within the new entity – not just all of the ones that the sales team think they want, but who they actually need. Legacy systems that may play a role in the infrastructure through history as opposed to necessity also require challenge – rarely does mandatory change deliver opportunity for enhancement, so critiquing each process flow before wiring it into the future is essential.

Avoiding polluting a new entity with the legacy challenges of the old one should be a mandatory principle for the whole programme.

2. Day 1 And Beyond. Re-architecting a new entity or business model flow (or even scaling an existing one) is not an overnight process. The end state for the business model requires some finality around the environment that it will operate in – making a future vision hard to define in the absence of political decisions. But being practical around what must be in place for the Day 1 and what can be phased beyond this will avoid expensive re-work or wasted budgets whilst delivering a more sustainable business model.

Making clear commitments to all stakeholders (such as risk or operations) that budget will be available to deliver further enhancements will help this mindset – as opposed to thinking that they must ‘kitchen sink’ the Day 1 requirements to deliver a sustainable process. This facilitates execution of the design on a phased basis and supports de-risking the mandatory/must-have deliverables – though, in our experience success relies heavily on the commitment of all teams to deliver subsequent phases on time to limit the initial work arounds. Risk of delivery slippages or descoping quickly disincentives pragmatism.

3. Inter-Company Flows. Whilst seemingly inevitable based on the direction of the legislation, development of the new entity relationship creates a similar opportunity to enhance the process. Many of the reconciliations and controls used for management of these trading flows are old and have been in place for some time – this creates an opportunity to revisit booking procedures and flows to drive efficiency and improved controls.

Could an industry solution provide the same degree of control (vendor matching platform vs building yet another internal reconciliation)? Can internal reference data be tidied up to lock down the amount of counterparties traders use to book to?

Inter-entity trading flows are often viewed as a poor partner to those which face an external counterparty, when in reality they can make up a significant proportion of an institutions volume. The amount of optimisation to make these flows efficient should be equivalent (and it could be argued more so given associated operational risk) to that focussed on external trades.

4. Cost of Business. Adding entity complexity to a business model costs money – this is cost additive and calculating the impacts upfront is important to set expectations and drive ongoing efficiency. This is not just cost of entity set up but also of the impact of changes to the booking model which may not exist today – such as the additional cost of the extra inter-company settlement that will be introduced into the business. Other costs may manifest themselves as a direct result of booking activity out of the new entity to access market infrastructure – where clearing is now via an affiliate which will attract capital charges, as an example.

Ensuring that the model for calculation of costs is inclusive is key to avoiding longer term shocks down the line as well as being able to consider mitigation approaches during the design phase.

5. Resourcing. Impact analysis regarding operating model design is often too simplistic and can lead to capacity constraints or control issues further down the line. Budget holders may question why it is not a zero-sum gain – ‘if we are just moving volume to another entity, shouldn’t that create capacity to service it?’ – but the reality is that adding an extra entity into the flow creates additional volume and complexity that needs to be serviced.

Understanding how much of a physical footprint is required to support the new entity will ultimately be determined by both local and EU wide legislation. As an example, the MaRisk requirements from the BaFin specify what can be outsourced and what has to be retained within the institution which may require an alternative operating model to that which exists today. Considering how to scale up (and perhaps down) between the UK and Europe will be critical as the regulations firm up and the new operating regime becomes clear. Proactive resourcing strategies that avoid reliance on local contract markets (some traditional BPO providers now have a presence inside the EU, removing the need for visas to scale up an engagement) will be an important part of the E2E operating design in both the short and medium term.

6. Regional Variations. Whilst infrastructure design may initially consider EU vs UK requirements, the intra-EU reglatory requirements may well diverge between member states. Though equivalence between core legislation may be anticipated, each national regulator may have specific criteria that may not be obvious at the conceptual design phase. With Frankfurt being a popular location of choice, consideration should be given to the expectations of the German regulators regarding areas such as outsourcing and physical location of general ledgers. These may be quite different to the expectations that underpin current systems and process within the UK.


Winning organisations will adopt a proactive approach to delivering an infrastructure that will not just meet mandatory compliance in March 2019, but one which will be flexible enough to support their future business models. Experience shows that execution of the full end-state may not be realistic within the timeframe – so adopting an evolutionary approach creates an opportunity to develop and enhance both infrastructure and process.


[1]Planning for Brexit Operational impacts on wholesale banking and capital markets in Europe’ by PwC, January 2017.


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