Brexit – what now?Impact on the financial sector

On 23 June 2016 the UK population voted with a narrow majority for their country to leave the EU. Subsequently, on 29 March 2017 Prime Minister Theresa May officially notified the Council of the European Union of the United Kingdom’s intention to exit the EU. This announcement invoked Article 50 of the EU Treaty for the first time, which means that the UK’s EU membership will now automatical-ly end on 29 March 2019. Since then, negotiations have been held to decide what the new relationship between the parties – the EU and the United Kingdom – will look like.

Copyright: Deutsche Börse AG

What happens next?

Although a provisional agreement on the exit issues and a possible transition period has been reached in 2018, 29 March 2019, the date on which the United Kingdom will leave the EU, is drawing ever closer. The next months will show whether a viable solution can be found or whether the United Kingdom will leave the EU on 29 March 2019 without a withdrawal agreement, transition period and an agreement on future cooperation – this scenario is referred to as “cliff-edge Brexit”.

The biggest problem for (not only) capital market participants is that the outcome of the negotiations remains unclear.

Copyright: Deutsche Börse AG

What impact on the financial industry is to be expected?

Brexit concerns all types of financial activity between the United Kingdom and what will then be the 27 EU member states. Up to 80 per cent of EU activities have so far been conducted via the UK. As it stands, the “passporting” mechanism makes it possible for businesses to conduct financial transactions from one member state across the whole of the EU without the need to have a subsidiary in every single member state. At the same time, passporting also means that trading venues, central counter-parties (CCPs), trade repositories (TRs) and central securities depositories (CSDs) are permitted to serve members from anywhere in the EU. If no new agreement can be reached between the United Kingdom and the EU, the United Kingdom would have to be considered as a third country. What this means is that UK-based financial businesses would lose their passporting rights and would no longer be able to transact business with the other 27 EU states – and vice versa.

Essentially, this would leave two options for access to the EU Single Market:

  • Financial services companies currently based in the United Kingdom establish a subsidiary in an EU member state, thus preserving their passporting rights.
  • Alternatively, financial services companies can gain access to the EU financial markets as a third-country firm on the basis of an equivalence decision by the European Commission.

The first scenario will involve the relocation of the entire business, or a material portion thereof, to an EU member state. The national supervisory authorities have already made it clear that they will not accept so-called letterbox companies. Moreover, the existing EU third-country rules on financial market regulation (e.g. MiFID II/MiFIR, EMIR, CSDR) are not an adequate substitute for the EU passport.

How can Deutsche Börse Group help?

To minimise the impact of Brexit and the associated uncertainty for market participations Deutsche Börse Group has installed a dedicated Brexit Transition Team. This team deals with all aspects of Brexit and with the potential consequences for market participants along the entire value chain of Deutsche Börse Group. These colleagues support our clients in their individual Brexit strategy. The aim is to continue offering clients secure access to the infrastructure of Deutsche Börse Group.

In order to ensure at the same time that access to market participants currently based in the United Kingdom is guaranteed after Brexit, we have created a Group-wide Brexit Readiness Project. It is designed to prepare the individual business areas for the regulatory, legal and implementation-related implications on all relevant markets and for all relevant products of Deutsche Börse Group. Our partnership programme for the clearing of OTC interest rate derivatives is designed to make it easier for market participants to prepare for Brexit and the time following. Further services will be added in the first quarter of 2019 to support market participants during and after Brexit in order to alleviate its consequences as much as possible.

Deutsche Börse Group 

Headquartered in Frankfurt/Main, Deutsche Börse Group is one of the largest exchange organisations worldwide. It operates markets that provide inte­gri­ty, transparency and security for investors wishing to invest capital and for issuers wishing to raise capital. On these markets, institutional traders buy and sell shares, derivatives and other financial instruments in accordance with clear rules and under strict supervision.

Deutsche Börse Group is now more than just a trading venue or exchange – it is a provider of financial market infrastructure. Its products and services span the entire finance value chain – its business areas range from pre-IPO services and the admission of securities, through trading, clearing, settlement and custody of securities and other financial instruments to collateral management. It also offers IT services, indices and market data worldwide.