EU parliament makes futile attempt to legislate interbank FX out of London. Not a chance…..
Clearing of derivatives will never be pushed out of its natural home by bureaucrats. London will always dominate, and today’s low value agreement between Euronext and LCH SA is a case in point. We look at the full details of why the European Commission’s proposals will never affect the FX industry
A longstanding method utilized by despotic left-wing governments is to take legislative action in order to force their agenda and gain a beneficial revenue generator by government manipulation rather than to allow a free market to engender genuine competition, thus forming a business environment that flourishes on its own abilities and merits.
London’s position as the world leader in Tier 1 interbank FX, and all of the infrastructure and expertise that supports the handling of over 49% of the entire world’s $5 trillion per day in notional volume is clearly the envy of economically defunct and technologically barren mainland Europe.
As Britain – and for Britain, read London – prepares to make its formal and final exit from the European Union, career politicians in positions of administrative power in Brussels and Strasbourg are devising a completely futile plan to attempt to move all Euro clearing activities from London onto mainland Europe, by interfering with the European Market Infrastructure Regulation (EMIR) rulings set out by the European Securities and Markets Authority (ESMA) which is the centralized regulatory authority operated by the European Commission.
The idea is to strengthen rules set out in the EMIR stipulations relating to systematically important clearing houses that operate outside the EU, and makes some token provision for them to be forced into the European Union’s jurisdiction from an operational perspective.
In London, the reaction from the Conservative government has been exactly as one would expect, with senior Members of Parliament holding the quite correct opinion that many Members of the European Parliament (MEPs) will push for Euro clearing to be moved into the European Union, but instead of looking at it from a sensible business-orientated perspective, they will do this for the purposes of euronationalism.
Indeed, the socialist ideology through and through being to destroy business on the basis of gaining centralized power by a government.
Liquidity takers, prime of prime brokerages and those operating within the Tier 1 interbank FX sector need not fear, however, as even if such a banal rule ever enters itself into the legislative environment, it will make not one jot of difference to any commercial relationship between the prime brokerage divisions of banks, and their non-bank corporate customers which in turn, distribute liquidity to the world’s FX brokerage sector.
Even if euro clearing is interfered with and clearing divisions must clear inside the EU, all it will do is make the Euro an even less attractive proposition than it already is from a trading perspective (it will very likely absolutely plummet in value when Britain makes its exit as Britain props up the EU), and it will also not matter from an infrastructure and market relevance perspective either.
No European politician has the power or the ability to move FX clearing from London to Europe.
London’s interbank market largely trades between North America, Hong Kong, Singapore, Japan, Australia, Switzerland, and China via specialist yuan clearing centers held by British banks (HSBC etc) in Hong Kong and Australian venues in Sydney.
France, Germany, Belgium, Holland – all complete wastelands when it comes to the global electronic trading industry. They have no presence at all and are bound by impossible restrictions laid out by the socialist government which prevent them trading freely with the major financial superpowers of the world, are devoid of infrastructure, are home to a corrupt pan-European central banking system that sponsors its rogue states via continual bailouts, have no technological prowess and are part of a unified currency and national bloc which includes some of the most poor, corrupt and undeveloped nations in the Western hemisphere.
Unlike equities, bonds or derivatives, the $1.7 trillion per day cash interbank foreign exchange markets are not risk-managed through clearing houses but instead settled via London-based CLS International Bank.
Even 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 (26 years ago I began my career in this industry with a company who was an R&D pioneer in this type of financial infrastructure – Ed).
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.
In terms of recent history, dogmatic and manipulative attempts by European entities in which government officials have massive sway include the almost soap opera-esque wranglings between London and Frankfurt when the proposed merger between London Stock Exchange and Deutsche Boerse was undergoing its tumultuous administrative stages.
FinanceFeeds always maintained that such a deal would never proceed, and the European bluster that it would be a ‘merger of equals’ was very far from the truth.
A year ago, FinanceFeeds reported that as a result of research by the European Commission, a merger would create the world’s largest margin pool with a value of 150 billion euros, therefore could impede competition for smaller trading venues that rely on LCH.Clearnet as well as other firms that offer similar collateral settlement services.
On that basis, London Stock Exchange’s response was to make a quick attempt to sell LCH SA in order to address proactively any anti-trust concerns. LCH Group which holds the European subsidiary LCH SA is 57% owned by the London Stock Exchange, with the remainder being owned by other users of the service. Bearing in mind that LCH SA was (and still is) connected to venues and banks across all of Western Europe, jettisoning it would have made no difference to LCH.Clearnet’s core business which remains the clearing of derivatives in London, and as a result, global markets.
It is ironic that the concerns of Lord Myners and other senior London officials with lifelong careers in the exchange traded derivatives sector in the largest financial center in the world were ignored by Germany, and that it took a report by the anti-business and staunch socialist European Commission whose interests are anti-British to stifle a potentially harmful merger which would have placed the control one of London’s fine institutions in Frankfurt, which is absolutely nowhere on the world’s financial markets and electronic trading stage.
In November last year, the desperation that came about has was sensed by Euronext, which was at the time one of the key suitors for the purchase of LCH SA, for which London Stock Exchange wanted £430 million.
In late October, JPMorgan Cazenove was enlisted to oversee the sale of LCH SA, and all looked set to head to market and find a suitable acquirer, with Euronext being in the lead because it contributes around half of the revenue of LCH SA in clearing business from France, Holland, Portugal and Belgium.
The noise made in Europe with regard to this potential sale of LCH SA was deafening, yet nothing happened.
Today, Euronext and LCH SA have signed binding terms for the continued provision of derivatives and commodities clearing services, including a 10-year agreement delivering long term and sustainable clearing income for Euronext, with a revenue sharing mechanism.
Euronext is now set to swap its current 2.3% stake in LCH Group for an 11.1% stake in LCH SA, which is a direct investment in the multi-asset Eurozone based central counterparty.
So much for a full sale.
London, you may relax – the world is still your oyster and always will be.