London will always be the world's financial and electronic trading capital - FinanceFeeds

London will always be the world’s financial and electronic trading capital

Andrew Saks

There has been a huge increase in the number of European financial services companies applying for permission to operate in the UK, reinforcing the knowledge that London is the top destination for global finance post-Brexit.

Nearly 1,500 EU-based financial services firms have applied for permission to operate in the UK, with around 1,000 of those planning to establish their first UK office, according to a freedom of information request.

More than 100 retail and wholesale banks plan to move to or boost their presence in the UK, as well as over 400 insurance and insurer intermediary firms.

Ireland, France and Germany were the countries with the largest number of firms to apply for permission to operate in the UK.

Bovill managing consultant Mike Johnson said the numbers suggested London would remain a “key global financial centre”.

“Since many of these European firms will be opening offices for the first time, this is good news for UK professional advice firms across multiple industries including lawyers, accountants, consultants and recruiters. Business from these firms should provide a welcome boost to the service sector – the powerhouse of the UK economy.”

Mr Johnson said reaching a decision on financial services equivalence between the EU and the UK was important, noting that Amsterdam recently overtook London as Europe’s largest share trading centre.

He continued: “The numbers from the FCA suggest that financial services firms across Europe recognise London’s potency as a global financial centre and want to be able to conduct business here. Regulatory equivalence decisions would therefore benefit businesses on both sides of the channel.”

Aside from the talent, leadership and corporate mettle that exists in London and is unrivalled anywhere globally, the infrastructure in the United Kingdom is set up to facilitate the world’s largest financial centre.

The voice of reason is Peter Hargreaves, co-founder of Hargreaves Lansdown, said: ‘I voted to leave the EU. Fully out. There was no way we would get a sensible deal because that would finish the EU because then every other country would want one. In my opinion, it should only ever have been a free trade area. All this political union is absolutely ridiculous. I think over the next five years we’ll leave completely even with this deal.”

“We should remember that we are a resilient bunch. The Covid virus has caused a lot of grief in this country and laid to waste the hospitality and tourist industry. It’s been terrible for them but they will come back stronger but we have adapted to the situation and we would have done exactly the same thing had we come out of Europe. So I don’t care what this deal is, it’s a bad one.” said Mr Hargreaves.

Looking at the full component system of the financial services industry should be enough to demonstrate that no government interference in London’s financial sector is necessary.

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 that 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 in mid-2019 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 favoured 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 bailouts 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 centre, 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 were 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 associated 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 is one of the largest electronic trading data centre 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 of 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 centre, which will be pretty much as long as the financial services industry exists, ie: forever.

The acceptance of English law and widespread use of the 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. One just has to look at the records and reports from LCH. Clearnet to understand this magnitude.

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 clearinghouse owned by Deutsche Boerse, revealed its program to award its largest customers a share of its revenues in late 2018, 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 2018, 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 an 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 are 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 that 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 neighbours, 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, are 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 centre 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 truly free market, with no controls on which banks and non-bank entities (Thomson Reuters, Currenex, Hotspot all have centres in London) operate there, yet that is the de facto centre 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 the 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.

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