Flexibility in the Shadow of Brexit

Christophe Lattuada and Dirk Bellens, of Societe Generale, discuss how the firm is taking a flexible approach to Brexit for the benefit of their clients.

This article was originally published by HFM as part of a Brexit Proofing Special Report.

How is your prime services platform calibrated towards each possible Brexit outcome to ensure flexibility for all of your clients?

We made the decision very early on to get ready for the worst possible Brexit outcome – a hard Brexit with no transitional period anticipated. Considering the time to adapt to the different scenarios, we felt strongly we needed to act decisively, and if we didn’t it would have meant we would potentially be at risk of not being ready on day one for our clients. What makes us somewhat different from others is that we have a significant presence on both sides of the channel. Our headquarters in Paris have all the support there, from finance to risk, IT and more. Then there is the UK side of the business which deals with international clients, and our US offices for the US clients, and finally an Asian office to support our Asian clients.

How well-positioned are you to handle whatever Brexit outcome occurs?

The range of different territories we inhabit allows us to offer our clients the choice of whether they want to face an EU- or a UK-based entity. In some cases, regulation offers no choice and will force some clients to face a EU or UK entity. But in some cases, clients have to determine whether they want to move, some may be more comfortable with the UK law and regulation, and others will be more comfortable with the governing laws of continental Europe. For our clients, we're building from a solid base that we already have in Europe with multiple offices across the continent, and as a result we're able to provide great optionality and flexibility for ourselves and our customer base as is required.

What Brexit-related queries have you been receiving from your clients since the referendum result?

What we've seen over the last couple of months is that the type of questions have gone from quite generic to quite technical and detailed. People have been asking a lot about memberships of (to) exchanges, CCPs and whether they can continue as before, and what it may mean for their association with us. We also see a lot of clients who assumed they were not going to be impacted, begin to take a strong interest in the possible Brexit outcomes. They want to know how Brexit could impact the marketplace as a whole, but they also want to know if they have missed a potential 'impact point' which may affect them if they don’t look into it now.

Do you always have all of the answers?

Our set-up is in preparing for hard Brexit which means we can offer optionality. Whatever the client decides for themselves – who they should be facing and where they want to be booked and so on – we are able to accommodate this. This gives our clients confidence that we are the right partner to continue servicing them. At the same time, there are some questions we have no definitive answer to. We don't know if there will be a transitional period, and there are a range of as yet undecided political questions which we're unable to comment on as yet.

How helpful would a transitional period prove to be?

You would be hard pushed to find someone who wouldn't think it was helpful to receive more time for the industry as a whole to prepare and make sure we have all of the answers to the questions everyone has. Technical answers typically require some amount of time to implement, even for us as an organisation who are very well-positioned to respond to these possible likely changes. The issue we have for some markets, in particular the cleared OTC products, in case of non-recognition of UK CCPs, is that everyone needs to move in a coordinated fashion. I think it's going to be challenging to organise as everyone needs to make changes at the same time. Many clients are only just beginning to realise that they may have to move, and banks have a huge number of transactions to potentially move from one CCP to another. I think it will be highly challenging to do that over in a limited time frame.

Whatever the client decides for themselves – who they should be facing and where they want to be booked and so on – we are able to accommodate this.

Are larger and smaller firms going to face different challenges?

Some of the clients we met just started to realise in September that they were concerned and had to allocate some resources in their budget to handle Brexit. Up until that point, they were looking at the situation as observers, and they are just now realising that they themselves must adapt, and time is running out.

There is certainly a question around resource allocation and whether everyone has the same amount of resources available to what is often quite heavy lifting. Smaller firms may not have enough resources from a legal or operational point of view to do this migration on time.This comes back to the benefits of a transition period. We are all ultimately aiming for a stable financial marketplace, and the more that we can make sure this is done in an orderly fashion, the better.

With the hardest outcome, we are fully prepared to engage in a worst-case scenario form of preparation. As said, if everyone is reasonable, even though there is no transition, at least there will be a few days to get ready and avoid disruption to the market.

Now, we can't entirely rule out that on 29 March 2019, there is some degree of market disruption and not only this, the adaptation to a new regulatory environment will need to be monitored. And you also have to manage what could potentially trigger financial and market disruptions. In parallel to the Brexit preparation, we are also planning to be prepared for a situation of financial and market disruption.