Booking model challenges and opportunities
Booking models have been a key area of focus for several years, primarily due to increasingly intense interest from UK and US regulators. The need to comply with new regulatory requirements and supervisory expectations requires regular assessments of banks’ business and operating models. The outcome of the EU Referendum has only intensified the level of regulatory interest around booking models, with significant changes to market access rules between the UK and EU expected once the UK leaves the European Union. European regulatory attention is now shifting to Brexit-specific variables and their effect on booking models, in particular the impact on cross-border practices of banking groups.
Our market leading Structural Reform team has successfully led global booking model programmes in partnership with a range of banks including GSIBs, large European investment banks and smaller investment banks with a global footprint. We have also been the strategic Brexit implementation partner for 13 GSIBs. Drawing on this experience, we have been working closely with banks on the Brexit challenges associated with booking arrangements. In particular we have been helping them understand current and future regulatory expectations and to address key questions, such as:
- What are the current booking model arrangements of your group, both in the UK and EU, and globally?
- What are the main drivers for your chosen booking structures?
- How and why is risk managed in your chosen legal entities?
- How do you govern your booking model, including what booking model controls are in place?
- Does senior management understand the booking model and are they able to rationalise it?
- Are there opportunities to optimise the existing booking model?
With London being a major global booking hub, a likely change in the UK-EU relationship is prompting banks to evaluate the knock-on effect to their booking models. Booking models are influenced by several external and internal drivers, such as regulatory/legal restrictions, client preference, strategic alignment and risk management strategy. As such, banks that trade extensively are likely to have more complex booking models than smaller local banks, with Brexit likely to increase complexity. Regardless of the size, no banking group with trading operations is immune from these drivers and senior management must be able to clearly explore and articulate the impact of these on their organisation’s booking arrangements.
Regulators have made public statements outlining their expectations for inter-country booking models post-Brexit. In particular, regulators have focussed on “back-to-back" risk transfer arrangements when reviewing banks’ relocation plans, as well as banks’ “remote booking” arrangements, where the expectation is that banks have the appropriate controls in place for cross-border transactions. Furthermore, the effect of these arrangements on the group’s ability to wind down certain trading positions in resolution has been given close attention.
To prepare for the changes to come and the changed regulatory expectations, banks should begin assessing their current booking structures by:
- Documenting their current booking practices in detail, including the rationale for legal entity usage. In addition to helping senior management understand their booking model, this will also help banks identify optimisation opportunities in their booking model and understand whether booking practices are carried out consistently across the group.
- Assessing the robustness of current booking model governance structures in place, which should include a set of principles to guide booking model decision making.
- Demonstrating the level of senior management engagement in the booking model, especially in firms that need to conform to the Senior Managers Regime in relation to product, legal entity and regional responsibilities.
- Assessing whether booking model management is further supported by strong front-to-back controls and monitoring processes, and ensuring back-to-back and remote booking arrangements are transparent, controlled and monitored.
Our extensive experience in booking model programmes, as well our direct engagement with regulators on this topic, means we are able to quickly identify ways in which our clients can optimise and simplify the booking structures they have in place, and ensure consistency across their global networks. Whilst Brexit has highlighted different perspectives from which banks need to assess their booking model, our pre-eminent Brexit implementation programme experience has resulted in a unique and specialised team that will be able to guide you in understanding your booking model at its core, and on the impact of Brexit on current booking structures.