Deutsche Bank FX leaving London? How many times can the media cry wolf?
Yet again, following Deutsche Bank’s plans to move some of its Euro clearing business to Frankfurt, the cacophony of sensationalism is abound. Let us reiterate: No institution is moving its FX business in any form from London to Europe. It simply will not happen
During the past few years, a substantial amount of noise has been generated by left-leaning mainstream media in Britain, as well as the completely unbiased anti-London pens of Europe, stating that Britain’s impending exit from the European Union will cause major Tier 1 banks to move their FX dealing centers to Europe.
Yesterday’s dissemination of Deutsche Bank’s intentions was no exception.
Deutsche Bank may well be of German origin, however its investment banking and electronic trading divisions are firmly rooted in London’s global financial center at Canary Wharf, from which the world’s FX markets are served by just a few banks, Deutsche Bank being one of the major ones.
Sensationalist warblings such as “Deutsche Bank is shifting business out of London hinting at troubling post-Brexit future for $1 trillion industry” dominated the headlines yesterday, which is all very well, except for one very important factor: this is quite simply not true.
What Deutsche Bank is actually planning is to move approximately 50% of its Euro clearing business to the firm’s global head offices in Frankfurt, which is necessary to comply with European regulations. Currently, Britain is a member of the European Union, hence consolidating all of the Euro clearing business in London is compliant, however once the United Kingdom makes its exit, there will have to be a contingent in Frankfurt.
This does NOT by any means signal a shift of business from London at all. Indeed, Deutsche Bank, along with all of the Tier 1 banks, British, Swiss, American or German in origin, will remain in London in their existing form as long as London remains the world’s dominant financial markets center, which will be pretty much as long as the financial services industry exists, ie: forever.
The acceptance of English law and widespread use of English language has made London a hub for clearing globally. London handles more than 70% of the daily euro clearing business, equivalent to around €930 billion (£792 billion, $995 billion) of trades per day, according to a House of Lords report.
Deutsche Bank has shifted some of its euro clearing volumes from London-based LCH, which is owned by the London Stock Exchange, to Deutsche Börse subsidiary Eurex, however this is by no means an operational removal of any components of Deutsche Bank’s commercial structure to Europe. No bank in the world will do that.
Eurex, which is a Frankfurt-based clearing house owned by Deutsche Bank, revealed its program to award its largest customes a share of its revenues late last year, which has been construed by the pro-Europe mainstream publications in London as an attempt to incentivize large institutions to conduct their clearing in mainland Europe rather than in London and can be considered a lobbying attempt, and a futile one at that.
In October last year, Eurex Clearing said that its 10 most active participants will be eligible for a “significant share” of the returns from its multi-currency interest rate swap offering, as well as being offered seats on its board.
Deutsche Boerse at the time boldly claimed that Bank of America Merrill Lynch, Citigroup, Commerzbank, Deutsche Bank, JP Morgan and Morgan Stanley have all signed up to the program, adding to the existing 200 clients which Deutsche Boerse claims Eurex currently has on board. Since then only a small percentage of clearing has taken place in Europe compared to existing business in London (probably to maintain compliance with having Euro clearing in Europe to a certain extent of the entire global business).
Indeed, these are major Tier 1 FX dealing banks, and yes they may well have signed up to the program, but that absolutely does not indicate a priority to clear all their trades in Germany. No Tier 1 bank would even consider doing that, and LCH Clearnet’s firm, London-based OTC FX clearing customer base will remain absolutely undiminished.
“This market-led initiative will benefit clients and the broader market place through greater choice and competition, improved price transparency as well as reduced concentration risk,” said Eric Mueller, Eurex’s chief executive last year.
Competition is not fostered by offering conflicting ownership stakes in clearing houses which are located far from the mainstay of interbank dealing and have no place in this industry’s global topography or infrastructural considerations.
The impending MiFID II rulings, set forth by pan-European regulatory authority ESMA require all venues, Deutsche Boerse being one of them, to report their trades as Regulated Marketplaces (RM), and will ensure that favorable advantages such as the sharing of the revenues of a trading venue with its participants, or offering shares in an RM to its customers are not permitted, as it creates the possibility of not providing the same terms to each participant, thus is not able to operate as an impartial centralized marketplace or counterparty.
That aside, Eurex already handles the vast majority of continental European trade clearing, yet is absolutely insignificant when compared to LCH.Clearnet’s clearing volumes in London and always will be.
The European contingent is well aware of this, so realizes that the string it has in its bow is an ability to lobby the European Cental Bank to ensure Euro clearing can be moved to Germany, this ideology being partly down to an escalating war between London and the European Union over euro clearing, with the City of London currently handling over 90% of Euro clearing.
Looking at the history of the failed merger between London Stock Exchange and Deutsche Boerse, the intrinsic reasons behind which were extensively reported by FinanceFeeds, it was clear that clearing dominance was part of Frankfurt’s agenda.
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’s recent citing that there is a 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, and hosting and infrastructure giants are all centered on prioritizing London. Simply put, London’s financial markets infrastructure has been in constant refinement for almost 40 years and the vast investment into improving and refining it is ongoing at a level unrivaled by any other city globally.
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.