Canele Pie in the sky: Bruno Le Maire’s ludicrous idea that Paris could trump London as financial center

France’s finance minister thinks Paris will overtake London as a financial center. Where is the FX industry? Where is the hosting and connectivity? Where are the Tier 1 banks, large retail giants and infrastructure? Where is the finely honed talent and incredible modernity combined with world beating work ethic that has made London the absolute pinnacle of electronic trading for the entire world? Anyone hear tumbleweed?

Just when it could be considered that the bottom of the Pinot Noir barrel had been scraped and the depths of the Grande Ravine had been plumbed by the desperate European officials in their attempt to divert the very realistic notion that when Britain exits the European Union, the entire mainland continent will no longer be able to benefit from London’s astonishing financial markets prowess, France’s finance minister Bruno Le Maire unleashes a corker.

Speaking to Reuters at the World Economic Forum, Mr Le Maire said: “There will be a new leader after Brexit. I see the possibility for France to become in the coming years, the most important financial centre in Europe and the UK is in Europe.”

Such a statement can be dismissed as political hyperbole in as much time as it takes to say “trade union” or “three day working week”.

Mr La Maire’s preposterous claim that Paris has any possibility of becoming a center for today’s financial markets industry can be dissected very easily indeed.

First and foremost, the longest established and most highly regarded retail FX firms in the world reside in London, those being IG Group, CMC Markets and the institutional and retail division of Saxo Bank, Saxo Capital Markets.

From their London head offices, they serve not only a very loyal and discerning domestic customer base, but also the entire world, which recognizes them as pillars of the electronic trading world, and backed up by a financial services environment unrivalled anywhere globally.

A high net worth portfolio manager from South East Asia or the Antipodes for example will without blinking put his faith in London’s retail firms. Paris, however, where’s that?

The European Parliament has for far too long had a golden goose insofar as Britain’s enormous and incomparable monetary contribution to a technologically and industrially defunct European mainland with which it has absolutely no alignment socially or commercially massively outstrips the entire continent.

For this reason, Britain – and for Britain read London – will soon jettison the burden of a giant, archaic, socialist juggernaut which controls its markets and simply takes and does not give.

In the FX industry, London is the absolute powerhouse for the entire region, and indeed one of the world’s focal points for the entire financial services business. It is a gigantic producer of revenues and has a highly dedicated and skilled series of professionals who continue to strive toward moving forward, and do so in a very sophisticated manner.

Underpinning the entire combined cognitive prowess of London’s senior executives is a massive and finely honed technological infrastructure that ranges from hosting (Equinix LD4 being one of the largest electronic trading data center locations in the world) to order routing systems, liquidity management and in-house developed interbank and institutional trading systems that are supported by hundreds of developers and engineers per bank.

Europe does not have this in any shape or form, and before any dissenters seek to present Deutsche Bank as Frankfurt’s equivalent to Canary Wharf’s institutions, it is worth bearing in mind that Deutsche Bank conducts no electronic financial markets business whatsoever from Frankfurt, instead doing so from London, which is at odds with the all-controlling political stance of the socialist government of its host nation, obviously because business efficiency is more important than post-war socialist-progressive nationalist aspirations.

Last year, a further soundbite was circulated by the European Central Bank, the sponsor of defunct EU member states which operate their treasury with the aplomb of a casino member with an addictive personality, that being a supposition that the European Union’s hopes of bringing London’s financial markets sector to the mainland are impinged by approximately 8,000 miles of fiber optic cables which emerge from the seas around the UK at locations such as Crooklets Beach and Sennen Cove in Cornwall, and Highbridge in Somerset.

These cables carry data not only across the UK but to its continental neighbors, and whilst the European Central Bank is correct in suggesting that
the majority of Europe’s critical infrastructure for trading FX, as well as shares and derivatives, is clustered in a 30-mile radius around the City of London, and that regardless of the UK’s future, some of the industry’s biggest data center operators, which host banks and high-frequency traders’ IT equipment, have announced capacity increases this year to cope with rising demand from investors in both Asia and the US, the real reason is not just infrastructural, it is really around why that level of infrastructure exists only in Britain and not elsewhere in Europe.

Britain’s interbank sector is responsible for 49% of all global FX order flow at Tier 1 level, and consists of British and international banks based in London, marking out London as a true free market, with no controls on which banks and non-bank entities (Thomson Reuters, Currenex, Hotspot all have centers in London) operate there, yet that is the de facto center for electronic trading and always will be.

The ECB citing that the need to transfer data along fiber optic cables under the sea to and from London is a barrier to business is quite topsy-turvy. The actual reason is the reverse of that, simply that the reason that infrastructure is London-centric is because the entire global financial markets business is London-centric.

A clear (pardon the pun!) example here is that unlike equities, bonds or derivatives, the $1.7 trillion per day cash foreign exchange markets are not risk-managed through clearing houses but instead settled via London-based CLS International Bank.

The European Central Bank acknowledges that investors and companies have been empowered since the 1980s in London’s financial markets, as Britain began laying submarine fiber optic cables in the 1980s which now carry the majority of internet traffic.

Combine this with London’s Square Mile providing 19% of all tax receipts received by the European Union from just 0.0009% of the workforce of the European Union, a £176 billion value per year in revenues to the British economy and a trade surplus of £72 billion, and freedom to do business with the major financial centers of the world in the Far West and the Far East, this is one city which will never be supplanted by any faltering relic with aspirations of dividing and conquering.

Whilst on the subject of banks, Societe Generale and BNP Paribas do indeed have prominent Tier 1 FX interbank dealing desks, however those are operated from London’s Canary Wharf, alongside the other giants that account for most of the world’s electronic trading order flow.

Indeed, these are subsidiaries of French institutions, but they are separate British entities because quite simply there is no other way to be able to provide Tier 1 FX business outside London.

In terms of infrastructure, London’s highly advanced in-house technologists at all of the banks quite simply trounces anywhere else in the entire country and in most parts of the world. I remember 15 years ago when I operated my own institutional software consultancy, having been a project lead on an outsourced program by PA Consulting to UBS to bring in third generation mobile connectivity to trade messaging servers, all conducted on the UBS site at Canary Wharf. In 2001!

Infrastructure and connectivity are the lifeblood of this industry and the lack of such in France and the rest of mainland Europe is enough of a testimony that there is absolutely no demand there and no modernity, hence no infrastructure. Indeed, only 10% of all internet traffic in the UK goes north of Bedford (30 miles north of London), despite there being over 80 cities in the Midlands and North, and only 12% goes south of London, which is perhaps more alarming when considering that there is an entire continent which is home to over 400 million people not too far south. This in itself speaks volumes.

It has been clear for some time now that despite the Tier 1 bank FX risk management departments’ lack of appetite for extending counterparty credit to OTC derivatives companies, culminating in just a handful of genuine prime of prime brokerages being in existence today, largely those which have been under continual scrutiny during their long term relationships with the banks with whom they trade, and can continually maintain a balance sheet in excess of $100 million.

Today’s single dealer platforms are, however, a golden egg for London’s banks, largely because they realize that this is a huge and very effective business for them. They operate one center, and participate in a vast and liquid market, rather than have to maintain thousands of retail branches and serve small retail customers with massive personnel costs and government bureaucracy as per that in mainland Europe.

Thus, the vast majority of the prime brokerage talent is also in London, and in Europe, there are no prime brokerage divisions of banks or prime of prime brokerages offering aggregated liquidity to retail firms that exist outside London. It is all completely London-centric and this will never change.

Indeed, once Brexit takes place, Britain’s position will be even more secure, as London’s entities, most of which already have vast operations in the Asia Pacific region, North America and Australia, will be even more free to conduct business with the world’s most important financial centers rather than pay taxes to a delinquent continent.

Mr Le Maire pointed to the business-friendly reforms being rolled out by President Macron as well as the attraction of Paris as a place to live. That probably took all of 20 seconds, with a lot of head scratching. France? Business friendly? Really Mr Le Maire? It is an adversarial business environment controlled by trade unions and with a 75% tax rate, and is a nation which has intentionally shunned modernity.

Mr Le Maire’s comments were made after London’s mayor Sadiq Khan said yesterday that the capital, and Britain, needed to do all it could to maintain its standing for businesses. “I think the reality is, we’ve got to realise we have competitors who are courting business in other parts of the world,” he told members of the London Assembly. “You’ll see the great reviews President Macron received in his visit to London, he’s also getting great reviews, I understand, in Davos.”

Whilst Sadiq Khan really does not have much of a remit to talk about business, being a very newly elected mayor and another in a long line of left wing London mayors that are completely at odds with London’s business prowess hence have a very easy job involving making soundbites and showcasing the hard work and achievements of London’s incredibly sophisticated populace, The Bank of England’s deputy governor for financial stability is perhaps a figure whose words should be paid attention to.

He has previously expressed confidence in the City of London’s standing as a financial hub post-Brexit, saying he does not see its success being replicated. Sir Jon Cunliffe, a member of the Bank’s Monetary Policy Committee (MPC), told the Western Mail, that while some job moves may well take place, the capital’s financial centre crown was unlikely to be displaced.

“It may be that some activities that are carried out in London have to move to the continent,” he said. “And maybe some activities carried out in London no longer become efficient, and rather than moving to the continent, they just go back to New York or somewhere else, or maybe they don’t happen at all.”

“But I don’t see London as a financial centre being replicated on the continent anytime soon as it takes an awful lot of critical mass of expertise and knowledge,” he said.

Quite right. What can be learned from this is that those who want a sensible analysis should pay attention to industry leaders, and not to career socialist politicians with their hand in the government coffers.

London’s highly comprehensive and world dominating electronic financial services business can rest easy in the knowledge that Mr La Maire’s comments are no more than a dream, and that Paris has absolutely as much hope of toppling London in today’s highly sophisticated and most well developed financial services sector as William the Conqueror had of making southern England part of France in 1066.

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