Frankfurt Finance Summit 2018 – Ready, Steady, Go!

On May 29, 2018, well-renowned international and national experts from the financial industry and decision makers gathered at the 8th Frankfurt Finance Summit titled Ready, Steady, Go! Who is ready to set the pace in challenging times? to debate the challenges and the strategic responses to current issues facing the European economy, regulators and financial markets. The decision-makers from central banks, stock exchanges, supervisory authorities, banks, insurance companies, politics, business and academia further discussed the future location and supervision of euro-denominated clearing transactions by central counterparties after Brexit and the advancement of artificial intelligence and the potential implications for financial institutions.

Dr. Lutz Raettig, President of Frankfurt Main Finance, opened the Frankfurt Finance Summit by welcoming the attendees and speakers, ranging from several countries and continents and a broad range of backgrounds in the financial services industry. Dr. Thomas Schäfer, Member of the Hessian Parliament and Hessian Minister of Finance, followed with a welcome address in which he discussed recent legislative proposals by the European Commission concerning EU financial markets, stating that he finds a EU single market to not be necessary. In his opening keynote Dr. Jörg Kukies, State Secretary at the Federal Ministry of Finance discussed the transitional period of Brexit as well as the consequences for EU27 and the Financial Centre Frankfurt. Kukies proudly stated, “If we look at Frankfurt, we see a city in a very good starting position. Frankfurt is one of the continent’s leading financial hubs and plays in the league of the world’s leading financial centres.” Kukies further enumerated a lengthy list of the Financial Centre Frankfurt’s advantages, including its deep talent pool, academic network, and outstanding quality of life. Thereafter, Jeroen Dijsselbloem, former President of the Eurogroup and former Minister of Finance of the Netherlands delivered the European keynote in which he gave an outlook on the potential consequences of Brexit and a political and legal way forward, saying that “For Frankfurt, it’s a good outlook. When I go to the UK, bankers will tell me – they won’t say this publicly of course – that the amount of business and the amount of people they’re going to shift, is larger than what is publicly being talked about and Frankfurt is at the top of the list.”

The impact of Brexit on British financial institutions

The Summit’s first panel addressed tomorrow’s strategic responses to the major questions in the financial industry. Chaired by Prof. Dr. Uwe Stegemann Senior Partner, McKinsey & Company, the panel featured Katharine Braddick, Director General of Financial Services at HM Treasury, Bernd Geilen, Vice-Chairman and Chief Risk Officer at ING-DiBa, Thomas Grosse, Industry Leader Banking and FinTech at Google Germany, Felix Hufeld, President of the Federal Financial Supervisory Authority (BaFin) and Dr. Cornelius Riese, Chief Financial Officer at DZ Bank AG. As part of the debate, Kathrine Braddick discussed the impact of Brexit on the financial services industry in London, saying that Brexit is not a concern for most domestic firms, as they are primarily concerned with UK markets. When discussing the relocation of financial institutions from London to Frankfurt Braddick stated, “I think that first phase of moves is relatively confined. Most firms affected I think they are expecting there will be a second phase and depending on the relationship that we achieve with the European Union and of course our aspiration is a very close relationship on financial services that will determine the scale of that second phase and to me that is currently unknown.” The panel further addressed the challenges of digitalisation from an implementation and regulatory standpoint. This discussion naturally progressed to encompass the demands of recent data protection regulations, like GDPR and PSD2.

The consequences of Brexit for Euro clearing

The Summit continued with a discussion on the future of Euro Clearing after Brexit, beginning with a keynote from Yves Mersch, Member of the Executive Board of the European Central Bank, in which he discussed the potential adaption of legal frameworks regulating Central Counterparties (CCPs) who are located outside of the European Union, stating that  “Ultimately, amending both the European Market Infrastructure Regulation (EMIR) and Article 22 will establish a comprehensive legal framework to address the risks CCPs pose to the Union – both its financial markets and its currency. It will ensure that the EU’s legislators, supervisors and central bank – acting in their respective roles – can adopt the wide range of measures needed to safeguard stability.”

The following panel, moderated by Annette Weisbach, further explored the future supervision of the clearing of euro denominated derivates by CCPs with financial industry experts such as Karin Dohm, Managing Director and Global Head of Government and Regulatory Affairs and Group Structuring at Deutsche Bank, Christoph Hock, Head of Multi-Asset Trading at Union Investment Privatefonds, Erik Tim Müller, Chief Executive Officer at Eurex Clearing AG, Patrick Pearson, Head of Financial Markets Infrastructure and Director General of Financial Stability, Financial Services and Capital Markets Union at the European Commission and Fabrizio Planta, Head of Markets Department at the European Securities and Markets Authority. Diving right into the topic, Eurex’s Erik Tim Müller explained, “Our objective is to talk to the clients and find out what their needs are and the needs that we hear is that today obviously all eggs are essentially all in one basket in London and that seems like a very risky set up given the circumstance. So, what we came up with at Deutsche Börse is a market lead alternative for these market participants to build up a second liquidity pool. […] We came from less than one percent market share 12 months ago to over six percent market share now and rising.”

Giving insights into what is important to asset managers, Union Investment’s Christoph Hock, , highlighted the importance of competition in order to lower transaction costs for the benefit of investors. “You’ve had monopoly structures, take LCH, they’ve had something like […] 95% of interest rate derivatives cleared on LCH and obviously monopoly structures are not beneficial for lowering cost of trading and also when we are looking at innovations, that is completely left aside. […] That’s why we highly appreciate the partnership program Deutsch Börse Eurex offered to the market which caused prices to come down, big offer spreads to tighten. Our assessment is that with this new offering we are able to lower also our cost of trading and in this context our cost of clearing. […] Would we prefer to have a strong second clearing hub here on the continent, i.e. with Eurex? The clear answer is yes,” said Hock.

Artificial Intelligence in the financial industry: a new frontier

The third panel on artificial intelligence in the financial industry began with an impulse speech by Carsten Murl, Head Enterprise Security Solutions Germany at Mastercard, in which he explained how Mastercard is very successfully using artificial intelligence for smart fraud protection throughout their entire stream of transactions addressing various needs. Thereafter, the panel featuring Charles Delingpole, CEO and Founder of ComplyAdvantage, Markus Nigg, COO of ti&m AG, JP Rangaswami, Group Chief Data Officer & Group Head of Innovation at Deutsche Bank AG, Francisco Webber, CEO and Co-Founder of Cortical.io, and Peter J. Wirnsperger, Partner Cyber Risk Services at Deloitte discussed various aspects of data protection and whether artificial intelligence can be understood as the problem or the solution to data security in the financial service industry. During the debate, Deutsche Bank’s JP Rangaswami explored the definition of data safety and the responsibility it brings to companies processing data while highlighting the importance of people feeling secure and empowered by the ability to consent to the usage of private data. Moreover, Deloitte’s Peter J. Wirnspergeremphasised the consequences of data misuse and thus, the importance data protection has, which is something that should be of concern not only to the economy and but society as a whole.

The eighth Frankfurt Finance summit came to an end with closing remarks by Professor Dr. rer. pol. Dr. h.c. Udo Steffens, Chairman of the Executive Board at the Frankfurt Institute for Risk Management and Regulation (FIRM).

Frankfurt Main Finance and the Frankfurt Institute for Risk Management and Regulation would like to thank this year’s sponsors for their generous support. Deutsche Bank was this year’s Gold Partner. Silver Partners included Deloitte, Deutsche Börse Group, DZ Bank, ING-Diba, Mastercard, and Wirtschaftsförderung Frankfurt.

Livestream of Frankfurt Finance Summit

The 8th Frankfurt Finance Summit titled “Ready, Steady, Go! Who is ready to set the pace in challenging times?” is taking place on 29 May 2018 at Kap Europa. Well-renowned international and national experts and decision-makers are meeting to discuss current issues faced by the European economy, regulators and financial markets.

This year’s summit evolves around the strategic responses to challenges faced by the financial industry in times of change and uncertainty. Moreover, the future location and supervision of euro-denominated clearing transactions by central counterparties after Brexit will be discussed by leading financial industry experts. Participants will also debate the advancement of artificial intelligence and the potential implications for banks and financial institutions.

You can watch the summit via livestream!

Euro-Clearing after Brexit – Hubertus Väth in BBC Radio 4 Interview

The Economic and Monetary Affairs Committee of the European Parliament just released a statement on the future regulation of Central Counter Parties (CCP). The euro clearing by CCPs is an important part of the financial architecture of the European Union following Brexit. At the moment, the majority of transactions is handled by a London-based company. Currently, it is up for debate whether this will continue to be the case. In an interview with Dominic O’Connell on BBC Radio 4 Hubertus Väth, Managing Director of Frankfurt Main Finance, discusses the recent ECON statement, which is an indicator for how the EU might eventually decide.

While it is not certain what the consequences of Brexit will be for the financial centre London, it can be assumed that euro denominated interest swaps will be under heightened supervision by the European Securities and Markets Authority (ESMA) and the European Central Bank. Second to London Frankfurt is the most important centre for euro clearing and generally, having more than one euro clearing institution is of importance as it allows for more stability in times of a crisis. While a relocation might have some economic impact, research conducted by asset managers found that a relocation promises to be beneficial to pensions.

Listen to the full interview!

Eschborn for Business 2018

Eschborn for Business 2018

The Trend Concept New York and how Start-Ups are Transforming Work Culture

The newest edition of the magazin Eschborn for Business is now available. The annual, English-German magazine puts a spotlight on Eschborn as an emerging modern business location, focuses on the city’s economic growth and uncovers interesting trends in sustainable city development.

The current issue of Eschborn for Business 2018 covers the trending concept “New York” – which allows employers to participate more and work more independently. Find out more about the innovation friendly concept and the key role of start-ups and agile FinTechs on page eight.

“Forget your shirt and tie, it’s time for beer and pizza!” Start-ups, especially FinTechs, known as pioneers of innovation, are shaping work culture at the FrankfurtRhineMine financial hub: “Despite digitalisation, the ‘human factor’ will be more important in business going forward than ever before”, says Helen Hain, CEO MarketDialog Eschborn. Read more about Frankfurts start-up scene and learn some fun facts. For example, did you know for example that 24 percent of the German start-ups have their own footie table in their offices?

Find more interesting reports, interviews and background stories relating to Networks, Business, Infrastructure and Eschborn Activities. Here are some highlights of this year’s edition:

  • “Small but smart. A quality location” – Eschborn has been growing steadily as a business hub over the past 40 years. Learn more about its small but smart profile.
  • “More space. More green. More at ease” – Gertler Estates intends to set new standards at Eschborn Süd.
  • “Eschborn 2030+ Ideas for the future” – Together with the mayor and local businesses, the city is currently working on an ambitious project: a Masterplan for the future of Eschborn.
  • “The Hessian Oscar” – the exemplary achievements of thirty volunteers were honoured by the communal movie theatre Kommunales Kino Eschborn K

Eschborn: top location with high standard of living

Thanks to a combination of relevant business factors, the city of Eschborn, with its population of 21,000, has developed into an international and modern business hub. Ninety-five percent of the over 4,000 local businesses are service providers, primarily in the finance, IT, consultancy, and telecommunication sectors. About 80 high-tech companies have also settled in Eschborn, establishing the city as an important innovation hub in the FrankfurtRhineMain area.

Download the 2018 edition of Eschborn for Business!

CFS Index_April 2018_Centre for Financial Studies

CFS Index unable to maintain record level from the previous quarter

Growth in revenues and earnings falls, though levels remain high / Financial institutions hiring again after sustained period of job cuts / Investment volume stable

The CFS Index, which measures the business climate of the German financial sector on a quarterly basis, falls by 3.4 points in the first quarter of 2018, though it remains at a healthy level of 116.7 points. The decline can be attributed to weaker performance in revenues/business volume and to lower profitability, among the service providers more than the financial institutions. This development therefore confirms the service providers’ expectation from the previous quarter that the record growth from the fourth quarter of 2017 could not be maintained. On the other hand, employee numbers in the financial industry are on an upward trend. The financial institutions are hiring again for the first time after a prolonged period of job cuts. The investment volume of the financial industry remains stable at a high level.

„The overall index is closely mirroring the downward macroeconomic trend in Germany. The employee numbers reveal a contrasting positive trend. For the first time in a considerable period the optimists are in the majority at the banks. This has already been the case among the service providers for some time. Taken together, the survey participants indicate positive long-term expectations for the financial industry“, Professor Jan Pieter Krahnen, Director of the Center for Financial Studies, interprets the results.

The future international importance of the Financial Centre Germany continues to be rated very positively, though no longer at its peak level.

With a decline of 4.1 points to 131.8 points, the business location sub-index, which measures the future international importance of the Financial Centre Germany, is now just under the extremely high level of previous quarters.

„The importance of the financial centre will grow, which is understood by market players, albeit to a lesser extent. The competition has intensified after the Brexit referendum. Defending our leading position requires greater efforts“, Hubertus Väth, Managing Director of Frankfurt Main Finance e.V., interprets the survey results.

After an extremely strong previous quarter, revenues and earnings take a downturn, yet remain at a high level

Following a particularly strong fourth quarter of 2017, the surveyed financial institutions and service providers are unable to maintain their huge growth in revenues/business volume. The corresponding sub-index for the financial institutions falls by 4.1 points to 118.6 points; the service providers show a larger decline of 16.2 points to 121.3 points. As for the current quarter, the financial institutions are expecting another slight decrease, while the service providers are anticipating a small rise in revenue growth.

The earnings growth of both groups is declining, yet it also remains at a high level. The corresponding sub-index for the financial institutions falls by 2.8 points to 111.1 points, though an increase is forecast for the current quarter. The service providers record a stronger decline of 11.4 points to 122.2 points, and they are expecting the downward trend to continue in the current quarter.

Investment volume remains almost unchanged at a high level

The growth in investment volume in product and process innovations among the financial institutions shows a slight rise of 1.0 points to 114.8 points, and a further increase is expected this quarter. The corresponding sub-index for the service providers takes a slight downturn of 1.3 points to 112.6 points. However, the service providers are anticipating a slight increase in the current quarter.

Employee numbers on the rise in the financial sector / Financial institutions hiring again after a sustained period of job cuts

After the prolonged period of job cuts in recent quarters, the financial institutes report that employee numbers are now rising again for the first time. The employee numbers sub-index climbs by 4.0 points to 102.6 points. However, the expectation is that this level will not quite be maintained in the current quarter. The trend is also positive among the service providers, where more new employees are being hired. The sub-index rises by 6.2 points to 123.0 points. Slightly weaker growth in employee numbers is forecast for this quarter.

CFS survey: German financial industry expects trade dispute between the US and China to escalate further

The US has decided to impose punitive tariffs on steel and aluminium imports, principally from China. For its part, China is showing little willingness to give in and make concessions. According to a recent survey by the Center for Financial Studies, the majority of the German financial industry expects the trade dispute between the two countries to escalate further. 75% of the respondents agree on this point.

The EU and other countries are not directly affected by the trade dispute for the time being. However, US punitive tariffs on steel and aluminium imports from China could lead to Chinese surpluses in these products, which would then be pushed onto other markets, including the EU. The financial sector is divided on the question of whether the EU will also have to increase its tariffs on imports from China sooner or later. While 46% consider this development quite probable, 45% consider it unlikely and 5% consider it very unlikely.
Interpreting the results, Professor Volker Brühl, Managing Director of the Center for Financial Studies, comments: “The survey highlights the high level of uncertainty among market participants about the future development of the trade dispute and its possible consequences for Europe. I therefore assume that the volatility on the European stock markets will increase.”

The EU is also preparing for difficult negotiations with the US, where the current tariff structure of the EU as a whole is expected to be on the agenda. The German financial industry is largely in agreement (83%) that the EU must make concessions in future negotiations with the US (e.g. by reducing import tariffs on other US products) in order to rule out punitive US tariffs on steel and aluminium imports from the EU.

“I believe that the trade policy of the Trump administration has the potential to significantly change the architecture of the European customs union, since Europe will have to make considerable concessions to the US,” Brühl continued. “Ultimately, it is inevitable that transatlantic trade relations between the US and the EU will have to be redesigned.”

In light of current developments, 55% of respondents believe that negotiations on a Transatlantic Trade and Investment Partnership (TTIP) should be resumed in order to form a new basis for trade between the US and the EU. 39%, on the other hand, are against a resumption of TTIP negotiations.

Dr. Lutz Raettig, President of Frankfurt Main Finance e.V., emphasises: “Trade wars are poison for the economy. The uncertainties and heightened risks lead to reluctance.”

2018 Europe – US Symposium: How will Brexit change the map of global finance?

Dr Andreas Dombret
Member of the Executive Board
of the Deutsche Bundesbank

Speech at the 2018 Europe – US Symposium
of the Harvard Law School Program on
International Financial Systems in Armonk, New York Wednesday, 11 April 2018

Read more

Hubertus Väth: Why I’m sticking with the “10,000”

As an economist, you calculate a lot of numbers in your life. As a communicator, you learn to value them as carriers of messages. But none of “my” earlier numbers have stirred minds and the media as much as my forecast for the “morning after”. 10,000 – calculated weeks previously for the worst-case scenario, published for all the world to see the day after the Brexit referendum, this number has been roaming around the media landscape ever since.

It could mean 10,000 jobs ending up in Frankfurt, if… (followed by a whole host of conditions). London’s City could lose as many as 20,000 to 25,000 jobs. Not a lot really, considering that the London financial centre employs 700,000 people, but a big deal for Frankfurt.

The number was a message: a great deal for Frankfurt, not so much for London. It was a broad definition, including as it did all support industries. And the number also had conditions attached: Brexit is coming, passporting is going, the EBA is coming and euro clearing won’t stay in London, the relocation will last for more than five years and – it’s gross, i.e. doesn’t make allowance for any job losses in Frankfurt.

So you can see: all of the key areas of discussion to date had already been highlighted on the “morning after”. But the spotlight was on it alone, the One. The Number. Such complex material, so nicely rounded.

Since then, it has appeared in around 90 countries. You hear it, see it, read it. Journalists from all over the world made the pilgrimage to this beautiful city on the river Main, full of self-doubt, but ready to be convinced. By now I’ve talked to more than 800 of them.

Frankfurt as the big Brexit winner? The doubters were not hard to find. There are no schools, no offices, no apartments. There was even carping about the food and beer, not to mention the quality of the locally available coffee, and a damning indictment of the cultural landscape. The image was frightful, according to harmonious souls in Munich, Dusseldorf, Cologne, Hamburg and Berlin, and the City and its competitors for London jobs in Paris, Dublin and elsewhere cited them with relish.

It will be 2,000 to 3,000 jobs at most, it was said, quietly and in confidence. A forecast that has since been increased several times in the same place. The Frankfurt School of Finance & Management saw 20,000 bankers on their way across the Channel. By contrast, supposedly sober-minded people held any forecast at all to be frivolous (the who’s who of the consultant scene however did exactly that in London: forecast. But in Frankfurt we were serious, oh yes!) But around 15 months later, the same source felt able to report about 5,000 jobs net. In other words, there were now forecasts of an influx from London and job losses in Frankfurt at the same time. Despite every effort to do so, we cannot figure out the two components of this number to this day.

Helaba leaped to our defence early. The always well-received, annual, and in contrast to us as a lobbying association (more disparaging would hardly be possible), always considered respectable study on the situation in the financial centre came up with 7,000 London jobs in 2016, before going on to see a lower limit of 8,000 a year later in 2017.

No sooner were the first names of the financial institutions coming out in favour of the location known, and scarcely had it been made public by the board that in the worst-case scenario up to 4,000 jobs are under scrutiny at Deutsche Bank in London, than the calls came for us to increase the number. The decision to relocate the EBA in favour of Paris had barely been reached, and many people already wrongly believed Frankfurt to be playing a losing game.

No, we stuck with and are sticking with the 10,000. Are we not capable of learning? Yes, we are, but if you think ahead, you don’t have to up the ante: to this day, we still don’t know exactly what Brexit will look like. Although many things are a lot clearer than a few months ago: Brexit will come. That can be considered very certain. A transitional period of 21 months has been agreed. The five-year period in which the 10,000 jobs we forecast would relocate to Frankfurt has proven to be far-sighted, as has the thesis that euro clearing would become an issue and will be decisive in terms of the outcome.

So yes, we are undeterred, because 21 months after the referendum, our scenario is still intact. The transitional period cannot be prolonged. The exit from Brexit that some believe they can see will turn out to be a mirage. Only the EBA didn’t come, giving us the perfect excuse if the number doesn’t quite reach 10,000.

And one more thing: you can take advantage of opportunities, or you can fail to do so. 10,000 is absolutely possible for the Financial Centre Frankfurt. If we don’t reach it, the question must be: why did they not come? We think it’s better to now ask the question: what else do we have to do to reach it? Plenty! The 10,000 is still feasible. Because many people have very quietly done a great deal of good. If you consider the use of the (modest) funds with which everything so far has been achieved, the result is sensational. Simply Frankfurt.

This guest contribution was first published in the daily newsletter at Finanz-Szene.de.

Andreas Dombret – Living with Fragmentation: Post-Brexit Realities in Financial Services

Keynote at the AIMA Global Policy and Regulatory Forum in Dublin on March 20, 2018

Introduction

Ladies and gentlemen

Thank you for the kind introduction. It is a pleasure to be in Dublin and at the 2018 AIMA Forum.

“Managing a fragmented world” is, in my view, a well-chosen topic. Most economic policymakers currently have their hands full trying to escape the doom loop of a trade war and a potentially hard Brexit. At the same time, banks, investors and most other firms have to prepare for these worst-case scenarios – not least, because supervisors urge them to.

And of course such fragmentation in financial services and its regulation may cause nightmares for many in the industry as well as for policymakers. And I do understand that – because it implies a great deal of uncertainty.

But we should not, I believe, panic: greater fragmentation seems inevitable after Brexit. Though, repercussions will not be as bad, as some fear, when we succeed in managing this greater fragmentation constructively – that means without resorting to nationalism that would just be destructive for all of us.

My topic today, then, is to look at the estimated extent of fragmentation in regulation of financial services after Brexit and what we should do about it.

Brexit and financial services

In Brexit negotiations common ground still seems hard to find. Even the basic principles of a new partnership remain vague. Given that and because time for preparation is running out for firms, uncertainty among businesses weighs heavier every day.

From an economic and financial market perspective, the two most important questions probably are:

  • Will there be a free trade or a comparable agreement?
  • Would a possible free trade agreement also include financial services?

In my view, there is substantial scope for a general free trade agreement. The main question to me is therefore how far-reaching can this future relationship be. For example an agreement without tariffs would be of high value and is possible. Another, less clear and highly complicated question is how to deal with non-tariff barriers like product standard regulations.

However, with a view to the financial services sector, a far-reaching free trade agreement is rather unlikely given the UK’s aspired exit from the single market and the customs union.

Likewise, I am rather sceptical about the approach via mutual recognition or about similar approaches based on regulatory harmonisation through technical committees and independent arbitration mechanisms.

Approaches of this kind could well undermine the ability of jurisdictions to set their own rules and the ability to safeguard financial stability.

The options that remain on the table are a “no deal” scenario or one with quite limited freedoms for financial services, as in the case of CETA. What would such scenarios mean to financial transactions between the UK and the EU?

First, the “no deal” scenario would mean that the EU and the UK would trade under rules set by the World Trade Organization – where services sectors are only thinly covered.

Service providers would then have to apply for comprehensive licenses in both jurisdictions and have all the necessary elements of a fully functioning bank ready in both places.

And second, even a CETA-like deal would most likely not mean far-ranging freedoms to provide financial services in the respective foreign jurisdiction.

Living with fragmentation

Therefore, it is – like it or not – quite likely that we will see greater fragmentation in financial regulation and supervision in Europe. What exactly that will mean is, however, unclear up to now.

It is this uncertainty about the exact nature of fragmentation post-Brexit that makes it so hard to assess the costs and benefits of more fragmentation.

Financial firms highlight that fragmentation is likely to mean organisational inefficiencies and higher organisational costs. And there can be no doubt that at least the transition to a new regime and new organisational structure will be costly. However, these costs may be less substantial in the long term – once firms have adapted to the new regime, clever managers will find new organisational solutions that integrate new compliance realities with organisational efficiencies.

Significant as these costs may be, politicians, regulators, and supervisors nevertheless have to take a broader perspective, one that is in line with the changed democratic preferences.

Thus, from the UK perspective, a far-reaching free trade agreement for financial services – and services in general – could be considered an obstacle to taking back legal and regulatory power.

At the same time, from the EU perspective, we cannot accept a liberalised common market, without a common supervision. Otherwise, as a supervisor, I would be concerned about financial stability. It seems therefore that some degree of fragmentation is almost inevitable.

But, should we simply wait for the end of EU-UK financial relations? Should we simply hope for the best?

Of course not. We have to manage fragmentation constructively –  we have to find innovative approaches for a new reality.

But let me make one thing very clear: this must not result in a race to the bottom. Fragmentation should not lead to competition through lax regulation or supervision. Such policies may seem to be in the best national interest, but ultimately they represent special interest politics. We must expose these policies for what they really are: threats to financial stability.

And that is why politicians, firms and supervisors have to deliver on three crucial points: first, a transition agreement; second, pragmatic supervisory cooperation; and third, managerial innovation.

Let me take each of these briefly, starting with the transition – or implementation phase, as it is now called.

The need for a transition phase

A transitional deal between the UK and the EU was agreed yesterday on negotiators’ level. During the implementation phase, which is to last until end 2020, EU rules would continue to apply in the UK and the exact terms of the future partnership shall be worked out. It is of utmost importance in order to give firms more time to adjust to the new realities.

It furthermore can reduce the long-term costs of Brexit. Firms can weigh up their options and decide which markets they want to serve and with which organisational design. They have now time to re-arrange their organisations on the basis of an analytical and forward-looking approach, rather than an approach of simply minimising uncertainty. The inefficiencies and potentially higher costs of financial intermediation can be reduced with this agreement.

I am confident that both sides have apparently recognised the importance of a transition phase in making Brexit less abrupt and, in the long run, less painful.

Despite all this positive news, it is still too early to lay back. Many issues are still to be discussed and the transitional period is still not fully guaranteed. It remains to be subject to a successful conclusion of an Article 50-deal within the next twelve months. For instance, the Irish question – i.e. keeping the border between the Republic of Ireland and Northern Ireland invisible – needs to be resolved. Hence, the recently widely used phrase that “nothing is agreed until everything is agreed” still holds true.

Managing financial firms in a fragmented world

But even after a transition phase, Brexit and fragmentation would mean two things. First, future access to financial services markets would be more like the access given to a third country. Second, a successful conclusion of the Brexit negotiations is not guaranteed as it depends on whether a fully-fledged long-term agreement is achieved and ratified.

This is why I see no alternative to timely preparation, and to preparing for the worst-case scenario of a hard Brexit without any free trade agreement.

Looking at banks, proper preparation would include establishing at least basic entities in the other economic area – that is, the EU27 or the UK – in order to continue doing business there. The concept of a “basic entity” is not easy to define. As far as we are concerned, I can repeat that we will certainly not accept empty shells or letterbox companies where the business effectively continues to be run from London. For critical functions such as management, controlling and compliance, qualified personnel need to be present at the EU entity at all times. We expect any branch or subsidiary to retain chief responsibility for its business.

And banks have to begin implementing their plans and submitting their license applications no later than at the end of the second quarter of 2018. Otherwise, it will be very difficult to prevent a cliff edge.

Firms have a lot to complain about with regard to Brexit, and I do not mean to play this point down. But if the UK and the EU are attractive markets, I think there is something to be said for innovative approaches to comply with this new regime. That’s why firms will have to find new, efficient organisational strategies. For example, I am convinced that profitable business models can be organised with two independently licensed entities.

Managing regulation and supervision in a fragmented world

But don’t get me wrong: regulators and supervisors, too, have to be pragmatic and innovative to achieve our goals of efficiency, stability, and ensuring the real economy is provided with credit.

With financial sector firms relocating their business between London on the one hand and Frankfurt, Dublin and other cities on the other hand, close supervisory cooperation becomes even more important, especially over the coming years when we have to break new ground in supervision.

The cooperation between the EU and the UK authorities will have to be put on a new foundation. We will need to ensure information exchange, and of course we will have to think about how we can reduce unnecessary burdens from double licensing.

Whatever political decision is taken, bank supervisors will not only do all they can to make the transition to a new regime as smooth as possible; they will also, in the long run, try to reduce unnecessary inefficiencies where possible.

In December last year, the PRA published a draft proposal for a post-Brexit supervisory approach. I very much appreciate the spirit behind this approach. It reflects a solution-oriented, pragmatic, yet stability-oriented stance. In the same vein, the SSM has developed quite pragmatic, cooperative policy stances on many of the relevant issues. I am confident that this cooperative style can make an important contribution towards a smooth transition.

Conclusion

Ladies and gentlemen, greater fragmentation will most likely be an inevitable result of Brexit.

Instead of wishing to do away with what is beyond our control, we should set about finding pragmatic and at times innovative solutions to managing Brexit and the ensuing fragmentation constructively.

However, such a constructive approach will take time, because it means many complex answers have to be developed – which is why we need a sufficiently long transition phase.

And I have to say that I was really facilitated well and truly relieved when I heard the news yesterday that a transition phase had been agreed, because this could make Brexit less abrupt and, in the long run, less painful.

During that phase, supervisors will have to find solutions that enhance financial stability without undermining economic efficiency.

And financial firms will have to find innovative and pragmatic ways to comply with the new demands while maintaining their efficiency and profitability.

For all the bullet points on our to-do list, we need an honest dialogue – if unnecessary problems and burdens arise, firms and investors should always come and talk to us. Brexit is both too complex and too important to muddle through.

Thank you for your attention.

Source

Dombret, Dr. Andreas. “Living with Fragmentation: Post-Brexit Realities in Financial Services.” Speech, Dublin, Ireland, March 20, 2018. Deutsche Bundesbank. https://www.bundesbank.de/Redaktion/EN/Reden/2018/2018_03_20_dombret.html

 

CEo Theodor Weimer

Theodor Weimer: Why we are championing Frankfurt

Deutsche Börse is championing Frankfurt – and this supports the city as a financial centre. And it also helps Deutsche Börse. Because these initiatives enable us to also strengthen ourselves as a listed company on the global competitive stage. However, this works the other way around too. Frankfurt as a financial centre relies on Deutsche Börse’s strength to enable it to seize the opportunities currently available on the European financial market.

One example is euro clearing. With the forthcoming Brexit, the most important and, in terms of volume, predominant clearing house for interest rate swaps to-date would lie outside the EU. However, the EU will need to be strong enough to keep the systems so vital to its provision of financial instruments under its own jurisdiction without the British and without London.

Sounds complicated? Let me put it more simply: having just a single central clearing house for euro interest rate swaps is neither good nor is it in line with market requirements. Having a single such central clearing house – that is outside the EU, is just not on. Deutsche Börse has been very successful thus far with its offering to clearing customers. Customers see this matter the same way that we as the central financial service provider see it. We are ready, and in my opinion, the euro products clearing business should come to Frankfurt. Both the city and Deutsche Börse stand to profit. We should regard the decision to relocate the European Banking Authority (EBA) to Paris as a warning sign. We must all make an effort now; and I am sure that we will make an effort.

Our offer for the euro clearing operations, which nearly all major banks and financial service providers have meanwhile subscribed to, benefits us and simultaneously strengthens Frankfurt as a financial centre. By establishing a competitive, extremely efficient second trading point, we are promoting both the transparency and the robustness of the international financial markets. The volumes concerned are vast; our partnership programme achieved an average daily volume of €35 billion in the off-exchange interest rate segment in January 2018. Strengthening Frankfurt strengthens efficient and secure markets – and this is Deutsche Börse’s aim.

Frankfurt needs Deutsche Börse as a strong partner in order to be able to seize opportunities. A second example: regulation. We have positioned ourselves much more broadly here too and developed offers that efficiently implement regulation.

Regulation is, in a sense, a double-edged sword, as it is designed to create security without stifling motivation or creativity. I personally believe that regulation in the last ten years since the financial crisis has done a great deal to make our markets more secure and our banks more robust. I say this as CEO of Deutsche Börse, but also as someone who still remembers very well some nine years I spent as head of a major bank. I know banks, and I know the stock exchange – better and better. While regulation and its unintended consequences should be subject to regular review, regulation itself is a success.

It is important to me to expressly state that. This is the viewpoint that we, as Deutsche Börse, submit to the debate. At the same time, we offer solutions that facilitate implementation of regulations for our customers and that help to accurately process reporting requirements. This position means we enjoy technological leadership and set the pace for the entire sector as well. This competitive advantage will enable us to hold our own at the top with new initiatives.

Frankfurt is, therefore, a regulatory centre; important institutions are based here – first and foremost, the European Central Bank and the Deutsche Bundesbank, with a BaFin representative office as well. Then we have the most important and largest German banks, and what I consider a definite advantage to Frankfurt – many international banks. And not forgetting us – Deutsche Börse. We are reinforcing our company with offerings that turn the tomes of rules and accompanying manuals into efficiently functioning systems. There is also a need for this. Three very important regulations have gone into effect this year: MiFID II, the Benchmarks Regulation, and the European Central Securities Depositories Regulation (CSDR). The MiFID II text alone numbers 25,000 pages.

Frankfurt needs Deutsche Börse in order to be able to seize opportunities. Example number three: IPOs. In this regard, we face a good, possibly an excellent year. This is good for the real economy, good for Frankfurt as a financial centre, and good for Deutsche Börse.

We want this trend to continue and we are doing what we can to also make Frankfurt an attractive location for IPOs. Our various initiatives that support companies long before their IPOs are part of that. With our offering of location, funding, and business environment, we address the start-ups and creative individuals that we so urgently need in Germany. Frankfurt has caught up considerably here but we need to become better still. Our Scale segment and the Venture Network will help Frankfurt to become considerably more visible across Europe in this regard.

We are now investing a lot of money in a major renovation of the stock exchange building in Frankfurt city centre – with a focus on three aspects of improvement.

Firstly, a visitor’s centre, intended to bring especially young people closer to stock exchange activity and financial market functions. It is particularly important to me that the next generation knows and understands what our sector is all about. The stock exchange up close. This knowledge, referred to as “financial literacy”, makes many things a lot easier – from personal retirement savings to a broad public discussion about economic relationships. I believe that this century will be marked by these issues.

Centre for IPOs

Secondly, we are building a conference centre that we will also offer for use to others. The stock exchange is an ideal forum for debates and disputes. The architecture of our stock exchange building in Frankfurt actually invokes the agora of ancient Greece, the marketplace. A conference centre in a stock exchange is therefore not a strange thing that we made up. It belongs there.

Thirdly, we are constructing a new centre for IPOs. We can and want to do more for our customers in this regard and we are, of course, doing it wherever possible starting now. As part of the expansion, we are creating an appropriate physical space as well. IPOs serve first and foremost to raise capital. But they also always have a communicative function. They attract more attention – and that applies especially to SMEs. Attention to the right message — that applies to all companies, even large ones. This is because an IPO is pretty much a one-time chance for companies to make themselves known to a broader public. They will be even more successful if they use our new IPO centre – at least that is our plan. We want “Listed in Frankfurt” to become a seal of quality.

The renovation of the stock exchange – in the building owned by the Chamber of Commerce and Industry, with whom we have a long-term lease – strengthens Frankfurt as a financial centre and thus also Germany as a business location. Our sector needs Deutsche Börse to be strong, to be able to make good offers for raising capital. And one that promotes a vibrant system of young and small companies that (hopefully) demonstrate how we want to achieve prosperity in 20 or 30 years.

So, why is Deutsche Börse strengthening Frankfurt as a financial location? Because we need a strong European financial centre that can efficiently perform vital functions for our sector, such as euro clearing. Because Frankfurt is the centre of clever regulation with a sense of proportion, and because regulators and our customers have an interest in market-oriented implementation of those rules. And because Frankfurt is Germany’s most important stock exchange location and therefore the leading stock exchange of the largest European economy.

After Brexit, Frankfurt will become more important in all these aspects. Let’s all work together so that Frankfurt can utilise its strengths.

By Theodor Weimer. The article was first published in the Börsen-Zeitung, “Finanzplatz Frankfurt” supplement