Mervyn King is absolutely right – Op Ed
“Thus, Belgium’s policy is at odds with the global drive toward causing minimal collateral damage which is a cornerstone of business ethic and leadership in the developed world.” – Meir Velenski, CEO, Velenski Financial Group
The hand-wringing and dawdling which relates to the British government’s steps toward exiting the European Union and actually acting on the electorate’s wish which was made clear in June this year continues as the end of 2016 is now here, and there is still very little progress to see with regard to Article 50 of the Treaty on the European Union having been executed, that being a critical activity which would set in concrete Britain’s future as an independent sovereign state.
It is somewhat perplexing as to what the delay relates to, and why, when it has been the almost unanimous wish of City of London senior executives and the wider population, to go it alone and bring into place Britain’s absolutely first class work ethic, massive productivity in technology, manufacturing, science, engineering, all with a dose of downright British excellence, the government is dragging its heels.
Yesterday, Mervyn King, former Governor of the Bank of England and Chairman of its Monetary Policy Committee from 2003 to 2013, has, quite rightly, stated that a ‘hard Brexit’ would serve the nation well, and that Britain must leave the EU single market to realize full opportunities.
“There are many opportunities and I think we should look at it in a much more self-confident way than either side is approaching it at present” he said in an interview with the BBC.
Lord King, who was publicly ambivalent before the Brexit vote, dismissed calls for the UK to stay in the EU’s Single Market, saying it would limit the UK’s freedom to negotiate new trade deals.
He is absolutely right indeed.
With regard to Britain’s ability to excel in its own right, its credentials are clear. Britain – and for that read London – is a world leading epicenter of productivity, its financial center, which is just one square mile in the City of London, and a series of establishments in Canary Wharf, employs just 0.0009% of the European Union’s workforce, yet generates an astonishing 16% of all tax receipts.
That is what I call productivity. No siestas, corruption, idle mentality or senses of entitlement for doing nothing could possible generate such an efficient revenue-generating industry.
It is quite simply evident that Britain’s leading edge industry has been paying for a an economically defunct, socialist and idle European Union which has a continental lack of modernity and progress, is riddled with corruption and has survived on IMF and European Central Bank bail outs, which have ultimately been paid for by the fruits of the brilliant minds of the British.
Many mainstream pundits have conceded that the economic mire that Europe finds itself in can be bolstered by Germany, a nation whose supposed industrial might is able to support the vast array of economically inactive people across Southern Europe, or pay for the trade union-led militant leftism in Northern Europe.
This is absolutely the wrong way to look at it.
Germany, itself a socialist country, has a legacy manufacturing industry that is being trounced by the Americans and Chinese.
Its once proud automotive business was lean and efficient, with relatively small firms by global standards exporting expensive products to all corners of the world, is now a shadow of its former self, cannot modernize and is producing outmoded products that cannot compete.
This is evident to the point at which Volkswagen resorted to misrepresentation in order to mask the fact that its smelly diesel powered cars could match the modern hybrids and electrically powered vehicles of North America.
The bureaucracy, lack of ability to self-determine economically and the burden of delinquent EU member states is a toll too much to take.
Lord King yesterday said “I don’t think it makes sense for us to pretend that we should remain in the Single Market and I think there are real question marks about whether it makes sense to stay in the customs union.”
Indeed there are question marks. Britain’s vast financial powerhouse is underpinned by the finest market infrastructure that exists. Its connectivity via Equinix’s LD4 data center to Tier 1 banks which are all in London and access to the regions of the world which matter financially, those being Hong Kong, Tokyo, New York, Chicago and Singapore, are absolutely first class, and the synergy of business between London and those regions is absolute, and does not exist in Europe.
Freedom to operate unhindered in those regions is vital for Britain to continue to elevate itself, without the self-interested restrictions of Brussels, a non-contributor, holding it back.
“Being out of what is a pretty unsuccessful European Union – particularly in the economic sense – gives us opportunities as well as obviously great political difficulties” said Lord King.
Lord King also said that it made no sense for the UK to seek to join Norway as a non-EU member of the single market, which would allow free access for businesses but probably mean accepting freedom of movement of EU citizens.
British electronic trading firms with their own highly well honed proprietary platforms are a benchmark of world financial markets leadership, their senior executives and their middle management being extremely well-versed and sophisticated industry leaders, to the point where the industry itself leads the way, not the government.
Which is how it should be.
A lot of absolutely erroneous mainstream reporting took place last week, largely by left-leaning television channels, that inferred that British firms would seek to move to Europe if the new CFD proposals by the FCA went ahead.
Why on earth would any firm do that?
The German regulator, BaFIN, a notoriously difficult and bureaucratic entity, also released a directive on CFD products, which appears straight forward at first glance, unlike the proposed British directive which sets out stringent leverage limits and imposes very limiting restrictions on the CFD market to the point that it has sparked controversy among very well respected senior FX industry executives to the point where, as explained to FinanceFeeds over the weekend, lobbying by large exchanges and a will to move the entire business onto listed venues has been one of the suspected resons.
Quite simply, BaFin, which is ordinarily a very market-unfriendly authority, only intends to stipulate that CFD providers ensure that retail clients cannot lose more money than is deposited in their account, a functionality which is already available to CMC Markets clients in Germany, CMC Markets having some of the largest retail market share in Germany and being widely recognized as a very high quality electronic trading firm.
On the basis of the consultation paper, there are no other requirements from BaFin including no leverage limits, and where retail clients’ risk is limited to their deposits, there is no prohibition on marketing, distribution and sale of CFDs.
This really only leads to one important matter, that being the subject of how to mitigate negative client balances.
In its consultation paper, BaFin states that firms should insure their clients against exposure to negative balances, and therein lies the most peculiar byproduct of the regulator’s intentions.
Following the Swiss National Bank’s removal of the 1.20 peg on the EURCHF pair in January 2015, many retail brokerages were exposed to substantial negative client balances, which in the vast majority of cases could not be collected from clients, whether brokers realized that the legal costs of recovering the funds or the potential lambasting by the consumer protection associations and mainstream press would have been worse than writing off the losses, or whether they weren’t able to withstand the losses and actually went bankrupt as in the case of Alpari UK and LQD Markets to name just two.
BaFin’s stipulation against negative client balance exposure will by default encourage all CFD firms offering service to German clients to simply operate a b-book execution model, and even worse, a b-book execution model that does not even take a price feed from a live market via aggregation of liquidity providers from a prime of prime brokerage.
FinanceFeeds maintains that there is absolutely nothing wrong with internalizing some trades on the grounds of risk management and limiting exposure to the company and its clients as long as the market prices are followed. This is prudent risk management and is common practice and completely normal.
The main difficulty with Germany’s proposals is that BaFin will likely insist that all retail traders are insured against negative balance exposure, which in turn means that brokers will not even be able to internalize trades by following the correct market price feed because that could also send them into a negative on their trading account and would have to be ‘written off’ in theory because although the order was internalized, a broker’s terms and conditions usually stipulate that traders can lose more than they deposit which means that even if the trade was internalized and the account ran into negative, this remains a negative balance on a client account until a further deposit is made.
This all means that any move to Germany would require turning away from client bases which in most cases are 70% British, having to continue to adhere to FCA rules, but end up in a tax-unfriendly, business-unfriendly socialist heartland of the EU, with its own set of rules which clearly demonstrate that the local regulator does not understand the FX business properly.
When a FX firm, large and established, or small, wants a European MiFID-compliant license, they go to CySec, not BaFIN.
Many European countries are actively banning OTC FX altogether, one particular example being Belgium, home to the actual EU Commission itself.
Speaking to FinanceFeeds in August this year in London, Francois Nembrini, Global Head of Sales & Liquidity Management at Quantic Asset Management said “I would say that it is part of the general trend by regulators to restrict OTC trading. Whatever the structure of OTC firms, I believe regulators are pushing the retail business to exchanges step by step.”
“The trend is especially clear in the USA for instance where the CME FX volumes keep on growing while there is only 3 OTC firms left. I would not be surprised if the OTC retail industry disappears altogether under its current format in the years ahead” – Francois Nembrini Global Head of Sales & Liquidity Management Quantic Asset Management
Meir Velenski, CEO of Velenski Financial, a senior industry professional with over 25 years of international electronic trading experience, today explained to FinanceFeeds “If Belgium was as good and reactive toward its own domestic economic and security issues as it is now being toward the CFD and FX, markets, then such policies would perhaps serve the public somewhat better.”
“Secondly” continued Mr. Velenski, “The focus that the Belgian regulatory authorities have taken by categorically wiping out hundreds of millions of dollars worth of potential legitimate international trade with Belgium is causing collateral damage when the world is looking for minimal collateral damage with regard to politics, economy and world business”.
“Thus, Belgium’s policy is at odds with the global drive toward causing minimal collateral damage which is a cornerstone of business ethic and leadership in the developed world.” – Meir Velenski, CEO, Velenski Financial.
Looking toward other good quality jurisdictions that have successfully rooted out nefarious companies and engendered a very good reputation for quality regulatory structure, for example Australia, a nation in which the national regulator, ASIC, has an automated surveillance system that ensures real time monitoring of all FX and CFD firms, thus ensuring that the good companies prosper.
Today, Australia is a shining example of a region in which the FX firms that operate there are of the very highest quality.
On this point, Mr. Velenski stated “Would it not be wise to implement systems that monitor the activities of brokerages, rather than ban them all completely, therefore ensuring that the good quality firms prevail and serve the Belgian customers with good products. They could do well to copy the Australian model. The global economy is suffering to the degree in which people want flow of money, not to restrict it.”
“Global liquidity shortages are presently the main cause of global economic slowdown, and Belgium is doing the opposite to what is economically sensible by restricting the flow of money in Europe, therefore this draconian measure is affecting everyone” – Meir Velenski, CEO, Velenski Financial.
“At a time when banks are introducing flows of capital to sustain markets, Belgium has decided to counteract this which will result in more liquidity difficulties long and short term” concluded Mr. Velenski.
Thus, why go to a region with no infrastructure, no modernity, no place on the global stage of electronic financial markets, and absolutely no credentials, to be subjected to this kind of government-level anti-business mentality?
Instead, Singapore, the largest institutional FX center in Asia, Hong Kong, gateway to mainland China, Australia, a bastion of top quality business ethic, and North America, home to the world’s largest proprietary trading houses and listed derivatives giants, all await business with the UK.
Lord King, when all is considered, is right.