17 December 2017

Financial Times: Investment banks split on shifting assets ahead of Brexit

The world's biggest investment banks are split on whether they have to move hundreds of billions of clients’ assets ahead of Brexit, with some planning to begin “novating” assets to EU entities while other want to leave existing trades where they are even after the UK leaves the EU.

“Novation” — the process of moving client assets from one legal entity to another — has become a hot topic in the Brexit countdown, with bankers describing it as one of the most problematic and confusing issues they are grappling with.

In some businesses, such as private banking and treasury, banks are already preparing to move assets over to new EU entities by April 2019. But banks have taken radically different stances on what they will do with their markets businesses and what regulators will sanction.

Assuming the UK does not retain access to the EU’s common market, some banks say they will have to move the markets assets of EU clients to an EU entity before April 2019 unless clients set up UK entities to take over the trades.

In either case, they warn that the situation is precarious, because moving those assets could require long-date derivatives contracts to be reset at current market prices, and new margin and collateral rules to be applied to trades created under old regimes and “grandfathered” in.

“Novation is a much bigger issue than people [outside the industry] realise,” said one senior investment banker. An executive at another large bank said regulators were aware of the issue and were very engaged in finding a solution, but that the path ahead was not yet clear.

“It’s very high up on their [regulators’] priority,” he said, adding that there were implications from a “market disruption and efficiency point of view” and also financial stability issues.

One option that would ease some of the pressure is to novate clients en masse under generic terms, rather than having individual agreements with every client, as happened when the euro was introduced. Such a deal would include continuity of existing terms and allow grandfathered transactions to remain as they are.

Other executives said that they were not planning to novate clients unless they specifically asked for it. Another said that banks that wanted to transfer all the business first were taking a very “legalistic” interpretation of the rules, and that regulators would not come down on anyone who was acting in the best interests of their clients.

Full article on Financial Times (subscription required)

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