German attempt at liquidity monopoly thwarted by trade unions

Any notion of a continental European assault on British domination of the Tier 1 banking sector can be well and truly put to rest.

For quite some time now, Germany’s investment banking, interbank FX trading and exchange traded derivatives moguls have wanted to obtain a stranglehold over the European markets, and in particular create large scale mergers in order to outstrip the rivals on the grounds of size and market presence.

Deutsche Bank, whose FX dealing market share has slipped from fifth to seventh globally in 2018, still holding its position within the top ten interbank FX dealers worldwide, is a prominent force in the market making structure of the global FX industry, however that particular division is headquartered in London, and not Frankfurt.

In an attempt to eclipse Canary Wharf, Deutsche Bank and Commerzbank, another of Germany’s largest financial institutions which also has a well recognized investment banking and interbank trading division, have been working on a merger which would have placed the newly formed entity in a strong position to dominate the European clearing and execution market, even if the actual trades themselves were to take place in London.

The two European giants began talks last month after the German government, which owns a 15% in Deutsche Bank, signalled it would not object to any necessary cost cuts or job losses. The German government has pushed for the merger in an attempt to create a national banking champion after becoming concerned over the health of both banks.

The merged bank would have become the Eurozone’s second largest lender behind BNP Paribas, with around €1.9 trillion (£1.6 trillion) in assets and a market value of €25 billion, BNP Paribas being a relatively commonly favored TIer 1 prime brokerage among UK institutional FX trading firms.

As is often the case in mainland Europe, it was the trade unions that reared their recalcitrant heads this time, thwarting the merger which is now completely off the table.

Socialism reigns supreme in Europe, which is one of the reasons for the lack of modernity, lack of business infrastructure and inability to compete with Anglosphere regions on many levels.

Government ownership, unionized workforces and huge taxes on company revenues and financial transactions, along with a public misunderstanding of the financial sector and the technology that underpins it are some of the factors that have hampered progress in mainland Europe whilst Australia, the UK, North America and the Asia Pacific region have centralized the most efficient and highly advanced electronic financial ecosystem that powers the world’s economies.

In tandem with these factors, many mainland European domestic economies teeter on the brink of obscurity and require continual bail outs only to find that their lack of productivity and modernity along with the sense of entitlement that the IMF has created for them results in repeats of the same money printing exercises, thus not inspiring investment from innovators or banks.

This may conjure up images of sleepy southern European villages, Greece’s national insolvency or Portugal’s agrarian financial black hole, however Germany, a self proclaimed industrial center, has its own difficulties, one of which includes the government not willing to bail out Deutsche Bank should it go to the wall.

A merger with Commerzbank would have straightened out Deutsche Bank’s fiscal woes, however socialism and investment banking do not go together, as demonstrated by the commercial environment in its homeland, and the position taken by prime minister Angela Merkel who would allow the nation’s largest bank to collapse.

The potential tie-up between Commerzbank and Deutsche Bank faced vociferous opposition from trade unions, because 30,000 jobs came under threat and was also criticised by investors and analysts.

Deutsche Bank confirmed talks had collapsed and said the merger did not carry enough benefits to offset execution risks, restructuring costs and capital requirements needed for the deal.

The bank’s executives had discussed raising between €3bn and €10bn for the proposed merger, according to reports.

In a statement, the Deutsche Bank said: “After careful analysis, the management board of Deutsche Bank has concluded today that a combination with Commerzbank would not have created sufficient benefits to offset the additional execution risks, restructuring costs and capital requirements association with such a large-scale execution.”

Italian bank Unicredit could now be poised to strike with a rival bid and has already begun preparing a bid, according to reports.

Italy’s second-biggest bank has developed plans to buy a large stake in Commerzbank and merge it with another German institution under its ownership, HypoVereinsbank, the Financial Times first reported earlier this month. Italian prime brokerage agreement anyone? Thought not….

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.

Sensationalist warblings that adorned the tabloids last year such as “Deutsche Bank is shifting business out of London hinting at troubling post-Brexit future for $1 trillion industry” are all very well, except for one very important factor: this is quite simply not true.

What Deutsche Bank had actually been planning was 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 Boerse, revealed its program to award its largest customers 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).

One short sighted opinion from across the Channel is the supposition that the European Union’s hopes of bringing London’s financial markets sector to the mainland is as easy as taking business from London to Europe.

It is not that simple, as it would be 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.

For those who still have doubts, it may be worth asking Lord Myners how the proposed merger between London Stock Exchange and Deutsche Boerse worked out. Or you could ask me. I said from the beginning that it would never happen, and I was right.