Tier 1 liquidity is here to stay: London will always be the world center, as Deutsche Bank signs for 21 Moorgate

The political diatribe that continues to emanate from the left-leaning European Commission in the advent of Britain’s exit from the European Union often made reference to how large companies would likely up sticks and move from London to the mainland.

To suggest that such a thing would happen is rather akin to suggesting that fish would soon begin riding bicycles.

Under no circumstances will any large institution based in London move its operations to the economically defunct and technologically barren European mainland, including Tier 1 banks which are themselves of European origin yet operate their business from London’s Square Mile.

The European Parliament has for far too long had a golden goose insofar as Britain’s enormous and incomparable monetary contribution to a technologically and industrially defunct European mainland with which it has absolutely no alignment socially or commercially massively outstrips the entire continent.

For this reason, Britain – and for Britain read London – will soon jettison the burden of a giant, archaic, socialist juggernaut which controls its markets and simply takes and does not give.

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.

The case in point here is Deutsche Bank, which although has suffered a market share decline which toppled it from its long-held position as number two globally in terms of FX volume, is still the fifth largest interbank FX dealer in the world with 5.68% of all FX order flow going through its books.

Today, Deutsche Bank very quietly signed the lease for a new London headquarters at 21 Moorfields despite threatening to sack staff in the City due to Brexit, demonstrating that nationalistic politics may be a generator of interest for Europhile mainstream media, but that when it comes to sensible business, London is home.

Deutsche Bank, along with other Tier 1 banks, must realize that their core business activity is the provision of prime brokerage services to electronic financial markets participants.

Mainland Europe does not have a developed electronic trading sector 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.

During the summer of 2016, Deutsche Bank began to realize that, despite the credit restrictions that are in place within most prime brokerage divisions of banks, it had to bolster that side of the business.

In July last year, the bank began a drive toward encouraging hedge funds to place more capital at its prime brokerage division, as part of a campaign to reassure investors of its worthiness as a counterparty.

Prime brokerage capital, according to Deutsche Bank, was “supported by higher client financing revenues due to increased client balances”, citing tough market conditions as a reason for flat overall incomes.

Flat incomes? Corporate spin for astonishing losses to which the German government had to respond.

In the spring of 2016, Deutsche Bank Co-CEO John Cryan stated publicly that institutional investors should trust the counterparty credit rating the lender has from Moody’s Investors Service (!!), rather than the cost of insuring Deutsche Bank’s debt, which grew dramatically during the early parts of this year.

The prime brokerage gained client balances even as hedge funds suffered their worst withdrawals since the financial crisis.

“When we focus clients on the A2 rating, I think they’re more than satisfied with us as a counterpart,” Mr Cryan said on a call with analysts during the summer of last year. “In our prime finance and the repo business, they like the service level, they like the products we offer, and we are keen to grow balances there.”

“We’ve made a lot of progress with most of our major institutional counterparts in communicating to them” on total loss-absorbing capital, Mr. Cryan also said, despite the firm having not provided a summary of quarter on quarter earnings for the first part of 2016.

This outmoded commercial attitude toward providing good quality Tier 1 liquidity to the top quality non-bank prime brokerages of this highly advanced industry must stop, and it appears that, demonstrated by the bank’s wish to remain in London and specifically in Moorgate among all of the large institutional OTC firms which would take its FX liquidity.

The sooner that banks such as Deutsche Bank, which will lick its wounds for a considerable amount of time if it continues to focus on its defunct home market rather than its standing as one of the top liquidity providers in the world’s financial capital of London, the sooner they will not only drag themselves out of the financial mire, but they will end their paranoia toward extending credit to the very OTC derivatives firms that are their most lucrative and least risky commercial customers.

Deutsche Bank must make, and is quietly making, a priority that London’s institutional sector is the place to do business, and the place which will haul it out of the financial mire, not its native Germany, for reasons that are quite apparent indeed.

Image: London’s Square Mile. Copyright FinanceFeeds