Enormous amounts of literature have been produced off the back of Brexit, most of it seemingly warning about the disruption and dislocation that the UK financial services industry will go through over the next two to five years. But spare a thought for Ireland.
While it is true that some banks are setting up subsidiaries in Dublin or bulking up their Irish operations, Brexit is actually causing some headaches in the country, most notably around securities settlement. The reason is simple. At present, settlement in Irish equities, exchange traded funds (ETFs) and bond securities takes place in CREST in the UK, which is operated by Euroclear UK and Ireland.
The EU’s Central Securities Depository Regulation (CSDR), however, requires trades be settled in EU-authorised CSDs, something CREST will not be once the UK exits the EU. On July 27, 2017 Ireland’s Department of Finance issued a statement saying that it felt the establishment of a domestic CSD was the most effective solution to ensure the smooth continuation of securities settlements and market stability. It added that applications to establish a CSD should be made to the Central Bank of Ireland (CBI).
“Euroclear welcomes the statement made by the Irish Department of Finance last week. As a global settlement infrastructure, the Euroclear group has provided settlement services for the Irish securities markets for the last 20 years. And we remain fully committed to providing these services post-Brexit. We have been engaging in close, regular and constructive dialogue with the Irish market and the Irish authorities, including the Central Bank and the Department of Finance on this issue,” said a spokesperson from Euroclear.
“We are well advanced with our planning and we are considering the establishment of a new CSD in Ireland, fully in line with the Minister’s statement. We will continue to engage with the Irish market and authorities as we develop a solution for the market,” added the spokesperson.
There are, of course, other options for the country. An alternative may be for Ireland to establish connectivity with an EU CSD to settle domestic securities. “Existing links between the ISE (Irish Stock Exchange) and the Frankfurt Exchange through its Xetra trading platform may facilitate further linkages on the settlement side as the Deutsche Boerse, which operates the Frankfurt Exchange, also owns Clearstream,” said a briefing by Dillon Eustace, a law firm.
Irrespective of whether Ireland created its own CSD or leveraged a regional provider, it would be able to participate in Target2Securities (T2S), the European Central Bank’s (ECB) securities settlement platform. “Due to objections from UK policymakers, CREST is not participating in T2S. Participation in T2S would allow Ireland to take advantage of the efficiencies provided by the platform’s economies of scale, which should reduce settlement costs. T2S also eliminates the need for banks to hold collateral and liquidity buffers in silos across EU markets,” read a Brown Brothers Harriman (BBH) report.
Building a CSD or establishing connectivity with another regional provider may be the only options, particularly if the European Securities and Markets Authority (ESMA) declined to grant CREST with equivalence under CSDR. Under an equivalence regime, CREST would be allowed to maintain the status quo, and its linkages with other cross-border CSDs. Through this set-up, there is no reason why Irish securities could not continue to be settled through CREST. However, equivalence can be withdrawn at 30 days’ notice and it is in no way certain that it will even be granted in the first place. Gambling on equivalence would be a risk for the Irish securities market.
So will equivalence be given or not? In theory, it should be. The UK – has after all – implemented CSDR, and is fully compliant with its requirements and equivalence is only refused if a third country deviates from the EU’s rules. However, Brexit is a complicated monster, and equivalence could stall because of several factors.
The dilemma for EU policymakers is whether the UK’s adherence to its rules will continue in the months and years after Brexit. Even so, equivalence is going to be a politically charged issue, and many inside the EU may be reluctant to grant it in the event of a Hard Brexit. The European Commission, for example, is already re-evaluating how equivalence is assessed. As such, this might not bode well for the UK. Given this uncertainty, Ireland is playing a smart game by inviting CSD applications.