The pundits are wrong! US and UK trade deal will increase FX opportunities

Don’t believe the mainstream media. FX and electronic trading will benefit massively from US and UK trade deal

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Scaremongery surrounding the US and UK’s long overdue trade deals that should have always been in place, could well be misjudged and the work of the biased, left-leaning mainstream news channels.

The United States and Great Britain are long-standing allies to the point of almost having a brotherly relationship which extends far beyond the anglophone language commonality, and the two great, world-leading nations share the same incredibly diverse, highly developed markets for every sector in global industry.

This morning, there has been some media-led tittle-tattle which insinuates that a free trade deal between Britain and the United States would somehow lead to a drop in the value of the UK’s financial services sector, as other parts of the UK economy begin to expand.

Hogwash of the highest order.

Reports at government level this morning focus on one specific aspect of a report issued by the US Department For International Trade that states “This reflects a reallocation of resources towards other sectors in the economy as they expand following the free trade agreement [FTA]. It does not indicate that the financial services sector would be smaller in the long run than it is today.”

It also insisted that the sector would be “more productive” as a result of the FTA, pointing to “a positive impact for consumers derived from lower prices and increased consumption”.

The mandate also warned that the impact of an FTA on financial services was “uncertain”, stressing that the modelling should not “be taken to reflect the level of ambition expected in financial services in the FTA or any financial regulatory agreements or arrangements which could be negotiated separately to an FTA”.

Rather oddly, the British government has been highlighted to have stated that financial services would be less of a priority than fishing, which it sees as integral to the question of the UK’s sovereignty, even though proportionately it is much smaller, contributing just £1.4bn or 0.12 per cent to the UK’s economy.

This viewpoint omits quite a considerable aspect, that being the now unified ability for British and American clearing of FX to be done in both financial centers of New York and London, without any impedance from the European lobby, and without continual wranglings between Frankfurt and London as to where FX – especially Euro-led FX – should be cleared.

Mainland Europe has absolutely no place on the global electronic trading and financial services stage at all, and is in chaotic turmoil with regard to banking, EU member state economies, and lacks the infrastructure, modernity and talent to rival London, New York and the major centers in South East Asia such as Singapore.

The main centers also are completely aligned in terms of which companies conduct trade clearing, execution and order routing, as well as hosting – Equinix, for example, concentrates its global financial hosting in London, New York, Tokyo and Hong Kong, all of which are going to have a far more comprehensive and unitary business once a US and UK trade deal is in place.

The EU-centric and anti-Brexit liberal media have their perspectives tangled in political views rather than pragmatism, and these incorrect views can be corrected by looking at the current infrastructure.

Germany has made several attempts to try to bring exchange and OTC clearing to Frankfurt, including a failed attempt to merge Deutsche Boerse with London Stock Exchange, a deal that FinanceFeeds said would never go ahead, right from the outset, for good reasons.

“A merger of equals”, boasted Frankfurt’s pro-acquisition elite in the overly sensationalized attempts by Deutsche Boerse to create the largest margin pool in the world by joining commercial forces with London Stock Exchange.

Throughout the entire negotiation period, which was peppered with inabilities to come to an agreement on both sides of the English Channel, as well as extreme differences in opinions from major political entities in Germany and England, FinanceFeeds continued to maintain categorically that no merger would take place.,,, and it did not.

The next move by the continental socialists was to attempt to bring clearing to Frankfurt with an attempt by EUREX to move the interbank and institutional clearing of FX to Germany from its absolute global heartland, Central London.

At the time, which was back in 2017, there would have been two potential responses to such a preposterous presumption, the first being to disregard it and banish it from memory, the second being to consider it an attempt at humor, intended by the kind gentleman of Fleet Street to brighten up the daily commute on an autumnal Monday morning.

Eurex, which is a Frankfurt-based clearing house owned by, yes, you’ve guessed it, Deutsche Boerse, revealed its program to award its largest customers a share of its revenues, which was 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.

In a statement in Autumn 2017, Eurex Clearing said 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 also 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.

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 at the time.

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.

So, bribery does not work, because here we are, over two years later, and the status quo is unchanged. Indeed, we are now post-Brexit and the thoughts of London being a truly open global center for every business sector permeate the thriving air in the Square Mile and Canary Wharf.

This did not deter the attempts to force matters away from London, however, but this time the trade unions in Germany stopped it. Surprise surprise, workers unions in a socialist country? Who would have thought?…

Any notion of a continental European assault on British domination of the Tier 1 banking sector can now 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 in November last year 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.

So, now we see why the banks and the exchanges have no chance of thwarting the anglophone domination of the electronic markets.

The third and equally important tenet is infrastructure.

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.

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.

These companies are Anglo-American in every way, including the manufacturers and installers of cabling, the hosting providers and the venues, and to a large extent the Tier one banks.

And that is before we consider that XTX Markets, an American non-bank market maker with a major center in London, is now the number one Tier 1 FX dealer in the world by market share.

Whilst the media is focusing on the non-existent negatives, the City of London has responded very positively to the potential agreement.

Miles Celic, chief executive of TheCityUK, said: “The UK has the largest net trade surplus in financial services in the world, but we cannot take this for granted. Britain must constantly review its global competitiveness if we are to hold our lead.

“Deepening the UK’s wider trade and investment relationship with the US will strengthen one of our most important economic relationships, and this has the potential to deliver wide benefits.

“Measuring and modelling trade in services is notoriously hard to do – evidenced by the fact that in recent years, the UK and the US have both simultaneously reported a services trade surplus with each other. These challenges often lead to the value of services trade being underestimated compared to goods trade.”

Catherine McGuinness, chair of the City of London Corporation’s Policy and Resources Committee, added:“The UK and USA are the world’s leading exporters of financial services and are each other’s biggest services trading partners, so these negotiations are an opportunity to set a new global standard on what is possible on cross border financial services trade.

“As the biggest contributor to the UK’s trade surplus in services and as a key driver for the prosperity of businesses and households on both sides of the Atlantic, the financial services sector should be a top priority in any future free trade agreement” she concluded.

And quite right she is.

 

 

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