Key Takeaways:
- Booking models play a crucial role in the financial industry, depicting the trade lifecycle and transaction management processes.
- The heightened supervisory scrutiny of booking models in the EU27 is a result of the Brexit referendum and the need to ensure a level playing field for institutions.
- The ECB’s “Supervisory Expectations on Booking Models” provides detailed guidance on various aspects, including internal governance, staffing, business origination, IT infrastructure, and reporting.
- Implementing the ECB’s requirements presents challenges for organizations with global operations, including identifying existing booking models, defining sustainable strategies, and documenting inventory.
- Local management’s standing within the global organization is a key success factor for implementing the EU27 strategy.
- Different supervisory expectations from the ECB, FED, and PRA add complexity to implementing global booking model frameworks.
- Addressing these challenges requires a holistic approach, identifying gaps, and translating them into remedial actions at a local legal entity-specific level.
Introduction
Booking models are critical components of the financial industry, depicting how firms process and manage transactions in financial instruments. In recent years, booking models have gained heightened supervisory attention, particularly in the EU27. This increased scrutiny is partly a response to the Brexit referendum, where many institutions initially considered establishing empty shells to protect their EU27 business. However, such entities lacking local capabilities would be unable to operate independently or respond to crises effectively. To prevent the realization of empty shell plans and ensure fair competition, the European Central Bank (ECB) published detailed “Supervisory Expectations on Booking Models” in August 2018. This comprehensive guide aims to help UK startups navigate the challenges and impacts associated with addressing supervisory expectations and implementing sustainable booking models.
Understanding Supervisory Expectations on Booking Models
The ECB’s guidance on booking models encompasses 16 principles that cover various areas such as internal governance, staffing, business origination, financial market infrastructure, booking and hedging practices, intragroup arrangements, IT infrastructure, and reporting. Although the requirement to describe an institution’s booking model seems simple, it raises complex questions as these models are interconnected with other core processes, including business strategy, governance, control frameworks, and data enhancement processes. Meeting the supervisory expectations necessitates the involvement of key divisions such as Front Office, Treasury, Operations, IT, Finance, and Risk Management.
Challenges in Addressing Supervisory Expectations
UK startups, particularly those with a global presence, face several challenges when addressing supervisory expectations on booking models. These challenges include identifying existing material booking models, defining a concise and sustainable booking model strategy for EU27 entities, and documenting complex structures based on a common scheme. Corporate structures, such as accommodating client needs, account structures, hedging models, remote booking, and trade flows dependent on legal entity structures, often deviate from standard processes. Translating these complex structures into simplified booking model strategies and documentation proves difficult. Additionally, complex corporate structures and processes can hinder recoverability, resolvability, and the ability to respond quickly to crisis scenarios. Supervisors expect firms to provide a clear rationale for complex structures and processes, as well as address impediments to recovery, resolution, and crisis scenarios.
Global Perspective on Booking Models
The ECB’s expectations on booking models are not the only ones institutions need to address. Other supervisors, including the Federal Reserve (FED) and the Prudential Regulation Authority (PRA), have also communicated their requirements. Global institutions with legal entities across the globe must consider different local expectations when implementing a global booking model framework. Expectations vary based on the predominant supervisory perspective. The FED’s requirements are directed at the eight largest US banks, where they have extensive access to information. The PRA oversees the EMEA business of these institutions, focusing on local legal entity risk management capabilities and independence in crisis situations. Understanding and navigating these diverse supervisory expectations is crucial for UK startups operating on a global scale.
Comparison of Supervisory Expectations
The table below summarizes the key differences between the ECB, FED, and PRA supervisory expectations on booking models:
| General Theme | ECB | FED | PRA |
|---|---|---|---|
| Scope | EEA entities under SSM supervision | Eight largest, most complex US banks | All UK incorporated firms and UK branches of non-UK incorporated firms |
| Overall Requirements | Covering BAU, crisis scenarios, recovery, resolution | Limited to resolution perspective | Including BAU and resolution perspective |
| Expectations | Internal governance, staffing, business origination | Broad alignment of risks and returns | Clear rationale, risk management, controls |
| Documentation requirements | Governance framework, booking model policy | Comprehensive booking model framework | Descriptions of booking models, trade flows, resource needs |
| Outsourcing | Substance to identify and manage risks | Continuity of shared services, retention | Assessing ability to adapt to Brexit, critical services identification |
| Data Requirements | Ability to produce accurate reports | Data aggregation and reporting | MIS capabilities, data integrity and reliability |
Addressing Different Perspectives in a Global Framework
The different supervisory expectations present challenges in establishing a holistic global booking model policy that applies to relevant legal entities worldwide. Identifying gaps between supervisory expectations and translating them into remedial actions at a local legal entity-specific level is crucial. UK startups, especially those newly established or significantly expanded due to Brexit, need to align their booking model policies with the increase in business. The local management’s role within the global organization becomes vital, as decisions regarding corporate structure often prioritize cost savings and tax considerations. Conflicting views and expectations between local management and supervisors can create challenges that need to be effectively managed.
Preparing for the Future
To meet supervisory expectations, UK startups should assess their existing documentation and capabilities against the ECB’s requirements on booking models. Identifying gaps, defining remedial actions, and developing a project plan will enable a smooth transition toward the target state. Institutions that have already submitted documentation and engaged in conversations with supervisors should prioritize the topic, as feedback from the Joint Supervisory Team (JST) will influence their SREP scores. Recognizing the complexity and effort required to address supervisory expectations is an essential step in the right direction. UK startups should use the time until the end of 2020 to fully prepare for the end of the transition period and ensure they have a sustainable business model for their EU27 entities.
Conclusion
As the financial industry evolves and regulatory requirements become more stringent, addressing supervisory expectations on booking models is crucial for UK startups. Navigating the challenges and impacts of these expectations requires a comprehensive approach that considers the global and local perspectives. By defining sustainable booking model strategies, documenting inventory, and aligning with supervisory expectations, UK startups can establish a strong foundation for their EU27 entities. Adapting to changing regulatory landscapes and proactively addressing supervisory expectations will enable UK startups to thrive in a competitive environment.
References:
- Supervisory Expectations on Booking Models Impacts and Challenges when addressing EU27 Requirements in International Organizations. (2020). Retrieved from https://www.pwc.de/de/finanzdienstleistungen/supervisory-expectations-on-booking-models.pdf
- Global bank booking models Making a success of structural reform. (n.d.). Retrieved from https://www2.deloitte.com/content/dam/Deloitte/us/Documents/regulatory/us-advisory-global-booking-models-dcrs.pdf
- The Ultimate Guide to Buy-Side Advisory in UK Startups – UKT News. (2023, July 2). Retrieved July 2, 2023, from Ukt.news website: https://ukt.news/the-ultimate-guide-to-buy-side-advisory-in-uk-startups/
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