Brexit – End of Transition Considerations for Capital Markets Institutions

It’s been four and a half years since the Brexit referendum and for many banks’ Brexit responses and programmes, the journey has been just as long.

With the end of the Transition Period imminent (and still no clarity about whether there will be a trade deal), we wanted to revisit the status of year-end preparations for UK banks, as well as highlight areas which may require focus and attention in the New Year.

The list below is not intended to be exhaustive of UK banks’ preparations, but rather highlight areas of focus where actions and preparations may still be ongoing and subject to change, particularly:

• Impacts for the end of the transition period
• Actions being taken by banks to mitigate these impacts

Active considerations:

1. Client Access - The majority of EU27 national temporary permissions regimes will have expired by 31 December, with some exceptions and select national exemptions still available for ongoing access to EU clients
   • Action: Regulatory and legal analysis should be updated on an ongoing basis to identify latest views of permitted activities, clients and products by jurisdiction from UK entities. Changes in ongoing permissions from the UK entity will need to be accounted for in post-Brexit client coverage models.

2. Client Transition (new business) - Given few banks have expected a positive MiFIR Article 47(1) equivalence determination from ESMA, movement of clients has been underway for some time with most banks having repapered up to two thirds of customers. However that leaves a material number of clients still to be transferred to EU entities
   • Action: The population of any remaining ‘tail’ of EEA clients that are still to be transitioned to EU entities should be known and any notifications should have been made to clients where trading relationships are being discontinued. Maintaining a ‘revenue at risk’ analysis has been useful for management to gauge the potential loss of business post-Brexit.

3. OTC Derivatives Back-book Migrations (legacy business) - Certain trade ‘lifecycle’ events may not be able to be performed on UK/EEA uncleared OTC derivative contracts after the end of the Transition Period
   • Action: Banks should have performed a review to identify impacted population of OTC derivative contracts with EEA clients, as well as confirming an approach to either proactively novate existing positions or an ability to manage related legal risks (e.g. reactive novations in advance of lifecycle events). 

4. Trading Controls - Adequate trading controls will need in place prior to 31 December 2020 in order to avoid breaching revised regulatory permissions for EEA client access post transition
   • Action: Banks will need to implement both systematic preventative controls to restrict activity to impacted clients in EEA jurisdictions, as well as detective Front-to-Back controls to monitor and identify potential breaches. Banks will also need to ensure adequate training is provided to front office staff for awareness of upcoming changes in permissions and client access.

5. Data - Revised reference data sources will be required for ongoing reporting requirements – e.g. Transaction Reporting
   • Action: Banks will need to have identified all reference data that will need be transitioned from EU sources to UK sources (E.g. ESMA vs FCA data) and ensured adequate testing of new data sources (e.g. Financial Instruments Reference Data System, FIRDS) in advance of year end operational activities to transition data sourcing.

6. People -  Late relocation of staff, changes in residency requirements for EU nationals as well as changes in travel requirements for UK employees to EU member states will be applicable post transition
   • Action: Banks have been introducing dedicated HR / employment helplines for impacted staff as well as communicating rules for UK employees that are regular travellers to the EU for future activity. 

7. Financial Resources - Expected Credit Losses (ECL) provisions under IFRS9 have to incorporate estimations of impact under economic events such as Brexit
   • Action: Given the recent increased risk of No-Deal, Banks will need to factor downside scenarios into IFRS9 expected loss allowances for year-end reporting

8. EU Entities' Day 2 Operating Model (Local risk management) - While not a legal point that triggers at the end of transition, there are wider changes in operating models post 31st December, where the European Central Bank expects some of the very largest banks to have their Day 2 (local risk management) models for their EU entities in place from 1st January 2021.
   • Action: The remaining banks are executing their plans to move to a Day 2 model with local risk management at some point in 2021-22.

Although banks are lining up activities for the year end and have already executed the bulk of their preparations, there is expected to be a tail of EEA clients (point 2) and legacy OTC derivatives (point 3), which will persist in UK entities into the new year. These alongside initial operational challenges and teething issues arising from truly testing a post-Brexit operating model, will require some attention and focus in early 2021.

Whilst the full challenge of Brexit is a long way from being fully behind us, a key milestone soon will be and banks will soon be finally able to turn their full attention to making the most of their post-Brexit reality, instead of perpetually preparing for it.

If you have any queries about active preparations or post-Brexit impacts to your operating models, please do reach out.