In the wake of Brexit, several banks have announced a relocation to EU 27. Whether, they already have a subsidiary or need to open one, banks should not perceive Brexit as an easy task but have to plan now, in order to gain a competitive advantage. In this short presentation, Chappuis Halder & Co. offers 4 perspectives for Investment banks on the areas where it can help, such as Modelling /Clearing houses/EU Intermediate Holding Company/ Back & Middle Office optimisation

1. CHAPPUIS HALDER & CO.
A snapshot of Brexit and its implications for the
Financial Services Industry
July 2017

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Negotiation Timeline
23rd June 2016:
Referendum leads to
Brexit (48,1%-51,9%)
17th January 2017:
“Plan for Britain” by
Theresa May: 12 priorities
about leaving the EU
29th March 2017:
Article 50 triggered by
the UK
8th June 2017:
Theresa May asked for a UK
General election. She only
obtained a slim Parliamentary
majority accepting a coalition
with the DUP (1)
19th June 2017:
Negotiations
start (2)
14th July 2017:
The PRA
receives
Contingency
plan for worst-
case scenario
29th March 2019:
The UK officially
leaves the EU,
likely to be
followed by a
transition period
23rd June 2017:
Softer approach proposed
regarding EU citizens in the
UK by Theresa May (3)
17th July 2017:
Second round of talks. It will
focus on citizen’s rights and
the UK’s contribution to the
EU budget (~£100bn, 0,5%
UK GDP)
December 2017:
First stage of
negotiations
concluded
October 2018:
Michel Barnier’s
deadline to agree to
a deal ratification
process
 (1) In the UK, situation of a hung parliament, need for cross-party collaboration to solve Brexit-related legislation. Theresa May formed a
coalition with the DUP (Democratic Unionist Party), a right wing and socially conservative Irish party, to reach a weak parliamentary majority
 (2) First round of negotiation: it will focus on EU citizens established in the UK, who represent 5% of the population (2.9 million), UK
citizens established in the EU (1.2 million), the future of the Irish border and the so-called “divorce bill” regarding London’s commitment
towards the EU
 (3) Theresa May proposed early a plan for EU citizens living in the UK, which was one of UK’s main negotiation asset: her intentions
are unclear (softer Brexit?)
 To be noted: Article 127 of the EEA Agreement describes the mechanism to leave the EEA (the UK can’t be forced out by the EU)
– The European Commission (EC) would consider a transitional arrangement if the UK keeps the 4 freedoms (freedom of good,
capital, labour and services), ECJ’s power and budget contribution meanwhile. Currently, the UK is strongly opposed to these conditions
– The UK and the EU are in disagreement regarding the EU single market. If it might increase certainty regarding business, it is, for
Brussels, too politically and legally cumbersome for a temporary deal, and for Whitehall, repercussions will concern the voters, as it would
have to explain why the UK left the EU but is still subject to its laws and making budget contribution

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Identification of 2 major antagonistic scenarios
(in-between scenarios are very likely)
No access to 3rd party country passport
 The UK becomes a member of the EEA, which consists
of all the EU27, and three non-EU Members States:
Norway, Liechtenstein and Iceland. The UK could sign
bilateral agreements (similar to Swiss insurers)
 There will be limited disruption to firms as the UK will
access as before the Single Market, and most of its
economic and trading relations with the EU, including
continued access to passporting
 This option encompasses the continuation of freedom of
movement of workers between the UK and the EU (hire
skilled labour from the EU without being subject to quotas
or visa restrictions), and British can keep working for EU-
based assignments
Access to EEA Membership  The UK will have highly limited access to the EU, as a
result of losing its existing EU passports and not being
given third country status  This is the most disruptive
scenario
 Leaving the customs union would mean a significant
increase in bureaucratic checks on goods passing through
ports and airports and a fall back on WTO rules for trade
with its former EU partners (tariffs range from 9.8% for
cars to 32% on wine). It is estimated that a negotiation for a
Free Trade Deal would last 7 years between the EU and
the UK
 Non-tariffs barriers are even more important for the UK
and usually not covered in a FTA (mutual recognition of
regulations, legal differences, banking rules)
 To continue providing services to EU clients, firms will have
to establish a HQ in a EU country or will need a specific
authorisation by each EU Member State
 Scenarios are multiple but preparing for the worst is thought to be, the best answer – the PRA (Prudential Regulation Authority)
and the EBA (European Banking Authority) asked banks to do so by the 14th of July
 Theresa May is in favour of a Hard Brexit but important disagreements within the government may lead to her disavowal.
Politicians such as Philip Hammond or Boris Johnson, who have a softer stance on Brexit, are openly criticizing Theresa May’s
strategy, to replace her
SOFT BREXITSOFT BREXIT
HARD BREXITHARD BREXIT

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CH&Co. selected 4 critical themes for banks affected by
Brexit relocation to EU27
1
2
3
4
Major modelling implications
EU Intermediate Holding Company draft to be taken into account
Clearing houses and capital relocation
Back and Middle Office optimisation opportunities

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In the case of a relocation, modelling will be a core
concern for banks
High level description
Strategy
Modelling
Implementation
Detailed description
1
2 Define modelling
roadmap
6 Capital assessment
4 Impact Assessment
and solution Design
Priority
Time
consuming
3 Identify operational
business cases
5 Implementation
Roadmap definition
7 Model design/validation
8 EBA transitional
requirements
9 EBA approval Process
10 Implementation / PMO
Which models are
impacted?
 Establish model inventory: assess whether scope of each model is impacted
by Brexit (depending on scenarios): new model/significant impact/no significant
impact/no impact
High Medium
High
High
High
 Prioritise model design and validation function of Brexit scenarios and
business strategy
Low
LowMedium
Medium
Medium
Medium
Medium
Medium
High
High
High
High
High
Low
Low
 Identify operational business cases for different Brexit scenarios
– IHC (Legal structure)
– EBA exigencies (People, Capital or Model requirements)
– Passporting rights
 Quantify modelling functions b-cases by assessing costs impacts
(operational/transformation costs, timing, risk,...)
 Prioritise and align roadmap with Brexit scenarios, business strategy and
identification of dependencies
 Definition of phasing (transitional/target phase)
 Perform impact simulation to assess additional RWA/capital requirements in
the case of new models
 Design new models and validate them before starting EBA validation
process
 Answer EBA transitional/additional requirements to be compliant with EU
regulation: specific studies, justifications, documentations, etc.
 Produce documentation, answer EBA requests...
 Coordinate modelling, validation, risk management, capital planning...
 Manage implementation project
 Steer each transformation stream (organisation, process, etc.)
Modelling implications 1

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The EU Intermediate Holding Company (IHC) draft
proposal: a massive impact for non-EU banking groups
Scope What it means What can CH&CO. bring?
 Who is concerned?
– ‘Globally Systemically Important
Banks’ (G-SIBs) designated by the
Financial Stability Board
– Non-G-SIB third country banking
groups if the total value of their
assets in the EU is at least €30
billion
 After Brexit, the UK will become a
third country, as far as the EU IHC
requirement is affected. A UK
subsidiary of a G-SIB third country
cannot suffice as the EU IHC for the
group. Such an organisation will have
to establish an EU IHC in a EU-27
Member State
 The EU IHC regime requires large non-EU
(‘third country’) banks to establish an
intermediate parent in the EU, so to create an
EU sub-consolidation group
 There is no obligation to establish a new
entity, instead subsidiaries could be
reorganised to lie under an existing entity
 The creation of a new EU sub-consolidation
group would not necessarily increase
capital, liquidity or TLAC (Total Loss
Absorbent Capacity) requirements. This will
depend largely on how the new EU sub-
consolidation group is structured
 For firms based in the UK, accessing the EU-
27 market post-Brexit will be harder, even if
the UK regime was found to be equivalent to
that of the EU-27
 Any revised corporate structure will need
to consider capital, liquidity, corporate
and risk governance, national
accounting standards and tax
implications (deferred tax implications,
intangibles, assets with adverse risk
weights, etc.). Transitional impacts will
also be important
 Institutions should consider the
perspectives of applying it and engage
with their home country supervisor
 Experience & expertise in this area (US
IHC implementation for global banks)
 This draft from November 2016 adds uncertainty to the complications already created by Brexit, such as when the UK will have
to adapt to such regime, or if it will be amended
 Banking groups should take the introduction of an EU IHC requirement as a further signal that authorities are moving toward a
multiple point of entry resolution strategy with limited cooperation among authorities across jurisdictions
EU IHC draft implications 2
Note: the draft proposal amends the Directive 2013/36/EU, Regulation (EU) 575/2013, Directive 2014/59/EU and Regulation (EU) 806/2014

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Clearing houses and capital relocation: the unknown of the
Brexit equation
Clearing
Houses
Perspectives in the near future
 The European Commission proposed a Law on June 13th
2017: the ESMA would have direct oversight over non-EU
clearing-houses deemed systemically important. This
includes the right to demand information, conduct on-site
inspections and levy fines, compliance and subject to the
ECJ. LCH, owned by the London Stock Exchange is part-
supervised by the American regulator
 Forced relocation if a clearing-house is of “such
substantial systemic importance” that even direct external
oversight does not “ensure financial stability”
Context
 London’s clearing houses give the whole supply
chain massive benefits (off-setting, netting and
capital efficiency). London houses have an outsized
role, clearing 97% of dollar interest-rate swaps and
75% of those in euros
 EU Central Banks (mainly France, Germany, Italy)
have called for all euro-denominated contracts to be
cleared in the Eurozone
 Booking centres may move to EU27 subsidiary or
relocate to Asia/the US, the 2 main factors being 1)
portfolio composition/location 2) Bank’s Global Brexit
strategy
 €57 billion of bank equity capital may need to be transferred
 Shifting €83 trillion notional outstanding of euro-denominated
interest rate contracts from the UK to the EU27 would impose
an additional collateral requirement on the European banking
sector of circa €30-40 billion (a 50% increase)
 €3-4 billion of additional default fund contribution which
represents a 20-30% increase
 68% of the €380 billion of trading Risk Weighted
Assets (RWA) booked in the UK are for EU28
clients
 €1,100 billion of trading assets booked in the UK
support EU27 clients (€610 billion derivative
products and €490B securities)
 €83 trillion denominated cleared swaps (33% of
notional across all currencies)
Capital
Relocation
Source: LCH, EBA, and AFME
Clearing houses and capital relocation 3

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Brexit also presents optimisation opportunities for M/O and
B/O functions, one of CH&Co.’s domain of expertise
To do list
Transition &
Oversight
Early-stage
Target Location
Transferability
Study
Target
Operating
Model Design
 Benchmark local markets (Dublin, Lisbon, Madrid and Warsaw)
 Identify accurate assumptions for the elaboration of the business case:
– Quantitative metrics: labour costs, tax incentives, premises cost
– Qualitative metrics: labour market depth, regulation, labour law, political
stability, workforce skills, languages, infrastructures, travel difficulty (visa)
 Ensure a proper current state assessment to identify transfer constraints:
proximity, process maturity and stability, complexity, time zone, regulations..
 Assess qualitative & quantitative benefits (ROI, costs and savings)
 Define the implementation roadmap
 Check the organisation “readiness“ and pay attention to the communication
 Define and formalise split of roles and responsibilities between onshore and
offshore teams
 Identify potential synergies between units and evaluate gains of centralisation
or pooling
 Revamp some processes to optimise the workload and avoid redundancies
 Assess the risks related to the transfer and define mitigating actions
 Design KPIs & track the realisation of the B-case (ROI, unexpected costs,
etc.) and escalate if necessary
 Implement specific governance related to near/off locations
 Post-transition phase: reorganise both teams after the transfers
CH&Co. credentials
 Analysis of competitive landscape in
the EU/US for risk functions smart
sourcing
 Benchmark Global Markets and
Transaction Banking for Front Office
nearshoring in Europe
 Near/Off shoring for ITO Capital
Markets
 Global Finance transformation
Program by B/O relocation to Romania
and India, department reorganisation
and lean management implementation
 Regional offshoring project
management of a Structured Finance
Operations department
Smart sourcing 4

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CH&Co. is an international strategy and management
consulting firm, specialised in Financial Services with a
strong spike on Brexit implications
200 consultants dedicated to the Financial Industry, 8 offices covering the
major financial places, 25% average growth for the past 7 years We are organized to provide 3 main kind of
services
 Risk & Finance
 Business Operations & Transformation
 Business Development & Innovation
We have developed recognized thought
leadership and expertise on some key topics
 EBA requirements & expectations on Modelling
 Regulatory transformation
 IHC
 Business relocation
 MO/BO optimisation
For the past 10 years, we have supported
major banks defining and implementing their
strategy in almost all business lines and many
geographies
Our international network allows us to pull from worldwide best practices in
order to provide tailored-made solutions to our clients