Julian Eyre | published on 18th May 2018

Brexit operating model and roadmap design

It is obvious that firms need a footprint within EU27 to continue servicing European clients, even though the full implications for the loss of financial services passporting are not yet clear.  Headlines have flown past us like straws in the wind: “Thompson Reuters moves FX derivatives to Dublin…”; “Goldman trebles Swedish office…”; “Citigroup boosts operations in Dublin, Frankfurt…”; “Mitsubishi eyes Amsterdam as post-Brexit EU base…”.

An important question is how material these legal entities need to be, and how they will operate in practice.  A “materiality” test is likely to conclude that sales and trading, along with senior management and capital, must be present and regulated in the EU27.  But it will be prohibitively expensive for most firms to re-locate risk management and complex post-trade infrastructure.

An emerging approach is the “ServeCo” model.  This is already popular with ring-fenced banks, who have created a central bankruptcy-remote legal entity that serves both the IB and retail bank for operations & finance functions.  Regulators seem to be accepting that ServeCo could service retail, UK IB and EU27 from a single arms-length legal entity.

The detail is important.  It also looks possible that EU27 entities may be allowed to back-to-back non-euro trades to UK IB for risk management, though it seems very likely euro denominated trades will have to be risk managed and funded within the EU27 entity, even if ops & finance are outsourced to ServeCo.

The implementation considerations are numerous:

• Re-papering of customers and counterparts
• Establishing book structures for non-euro trading at both ends of the back-to-back trade
• Setting up trading & risk mgt within EU27 entity ready to start trading Mar 2019
• SLAs with ServeCo and between entities for back to back trading & risk
• Consolidation of risk & finance reporting
• Hiring the people into EU27 entity
• Connectivity to market infrastructure (exchanges, settlement venues, triparty agents, CCPs, iCSDs, ARMs, CCPs, matching utilities… etc)
• Creating new funding capability & relationships
• Collateral management & optimisation

Scary thought… many firms have not yet designed the operating model in the target state, let alone planned a detailed implementation roadmap.  Firms may hope for an extended transition period, but they must plan for the possibility that it will be withdrawn at the last minute – so they have to be ready by Feb 2019.

The Field Effect team are experts at quickly designing complex banking target operating models and roadmaps, and we can also help you implement through our agile delivery approach.  Call us for a chat about Brexit.