Brexit and Post-Trade: First Thoughts and Questions
Thomas Murray wishes to share some preliminary thoughts concerning the United Kingdom’s decision to leave the European Union, as pertains to the financial industry’s post-trade services. These are the questions we will be asking ourselves as this transformational project takes shape in the coming years. This piece introduces a series of five articles that will be posted in the days and weeks ahead. As policies get clarified in the months to come, the firm’s further reflections will become progressively more detailed.
Forty-three years after joining the European Community, the UK’s capital markets are deeply interconnected with those of the 27 other member states of what has since evolved into the European Union. The decision for the UK to leave the EU will have a substantial impact on the financial services industry, as on every other aspect of British society.
Nearly two months on from the UK’s Referendum of 23 June, the UK government has provided very little in the way of government policy. This is quite understandable seeing as the government itself changed significantly in the weeks following this historic decision. Any substantive work offered by those who campaigned for the UK to leave has been conspicuous only in its absence. Prime Minister Theresa May and the government were left with essentially a blank sheet of paper from which to work.
Moreover, no matter what the UK government proposals will be when Article 50 is invoked to set the separation process in motion, none of us has any firm idea of what the 27 Continuing-EU member-states will put on the table as counter-proposals. Nor does any one of us know what the outcome of the negotiations will be. Or the timetable.
With such massive uncertainty, speculation is rife, but also futile.
Thomas Murray’s first questions as to how this will affect post-trade infrastructures and custody providers working or based in the UK are very general:
- Will the regulatory regime edge away from the EU model as the UK strikes out on its own, with an even more distinctive capital markets identity? By this, we do not necessarily mean an update of the “light touch” in effect prior to 2007-2008. Instead, can there be a modernised, fresh British take on what needs to be done by the end of this decade to distinguish the London market from its continental rivals, and those beyond Europe, as financial services evolve?
- Will negotiations between the UK and its neighbours take the direction of “relative independence” or “intimate collaboration?” The follow-through to the question above is that access to the Single Market (the value of financial institutions’ “passporting” across the region) may be judged to be so significant that the UK will have no real choice but to accept the common regulatory model imposed by Brussels and supervised by ESMA, or might this opportunity to rethink matters lead the government to judge a certain distance from the Continent to be the more worthwhile option?
- These choices and decisions will not be made in a vacuum. Whilst the questions pertaining to market infrastructure and custody services will doubtless be reviewed in some detail, given the world-leading role Britain plays in both, the likelihood is that a package offer for all of Brexit will emerge, with trade-offs on the innumerable topics that today constitute membership of the European Union. EU decisions are notorious for being made a few minutes after midnight with all sorts of compromises tossed into texts.
- In addition to the EU-UK negotiating constraints that lie ahead, there is the matter of overarching global policy reforms and their implementation since the G20 Pittsburgh Summit of 2009. A new world financial order is coming into place, a broad push towards harmonisation via minimum standards, though with national variations on the details still extent. The standards come from the Basel Committee of Banking Supervisors, the Committee on Payments and Market Infrastructures, and the International Organisation of Securities Commissions. These organisations have developed frameworks for capital requirements for banks and operational/risk management standards for market infrastructures. The bodies of regulation now implemented will be subject to ongoing review as to their effectiveness, and therefore continuing retuning of policy and commercial practice.
The UK participates in the formulation of these global standards. The UK’s financial market regulation and practice cannot wander beyond this framework.
Any Briton voting to exit the European Union with the objective of regaining national sovereignty is likely to discover, upon further observation, that no government has the ability to act entirely independently of its neighbours and competitors when it comes to capital market operations. UK-based central securities depositories, clearing houses, trade repositories, banks providing custody services are not going to get the answers to these questions anytime soon.