The world’s 5th largest FX dealer will not move its Euro dealing operations to Europe. Let’s clear up yet another media storm (in a teacup)

A wise man once said “When you come to the last page, close the book.”

These are words that European politicians and left-leaning news reporters could do well to heed.

During the course of period following the casting of votes by the British electorate which favored the exit from the European Union of Britain, the subject of large financial institutions with significant market domination in Tier 1 FX dealing considering moving their operations to mainland Europe.

This week has begun with another array of soundbites from the non-contributing side of the English Channel, propagated by a number of mainstream news sources across Britain, insinuating that the FX industry’s largest providers of liquidity are looking to move to the European Union’s heartlands.

Hence, every few months, a small amount of political chatter surfaces around the subject of mainland Europe’s futile tug of war with an almost independent Great Britain over where the mainstays of the commercial and interbank electronic trading business will reside, and from which ‘continent’ they will operate.

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.

London’s institutional trading sector is today awash with the suggestion that Barclays, the world’s fifth largest FX dealer by market share, and whose BARX single dealer platform is instrumental to the entire global FX trading industry, may move its Euro Trading Hub to mainland Europe.

Whilst that may demonstrate a potential commercial move by the bank, it does NOT mean for one second that Barclays’ FX desks will move from their current location in Canary Wharf. Quite the contrary, in fact.

This morning’s scaremongery, which in some cases outlined a possibility that any movement of the trading hub of a major currency ‘highlights level of uncertainty in London’s position as dominant center.’

It can be absolutely taken as a given that there is no uncertainty whatsoever surrounding London’s position as not only a dominant center, but the dominant center for FX trading.

Indeed, it may be a last ditch attempt at clutching the straws that are falling from the grasp of the anti-capitalist European Commission whose member states in many cases are unable to sustain themselves and have no technology to speak of, however the moving of one Euro Trading Hub from London will not mean that Euro Trading will be exclusive to Europe – quite simply, Euro trading – or the trading by interbank desks of any other major currency for that matter – cannot survive without London for several very important reasons.

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.

This week, a further soundbite has been circulated by the European Central Bank, the sponsor of defunct EU member states which operate their treasury with the aplomb of a casino member with an addictive personality, that being a supposition that the European Union’s hopes of bringing London’s financial markets sector to the mainland are 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.

Once this is taken into account, there is the matter of trade clearing. Unlike equities, bonds or derivatives, the $1.7 trillion per day cash foreign exchange markets are not risk-managed through clearing houses but instead settled via London-based CLS International Bank.

The European Central Bank acknowledges that investors and companies have been empowered since the 1980s in London’s financial markets, as Britain began laying submarine fiber optic cables in the 1980s which now carry the majority of internet traffic.

Indeed, the shackles of cost and bureaucracy as London’s Square Mile funds the vast majority of an entire continent’s flagging and lethargic economies, its ultra-modern, highly skilled and plate glass enterprises a bastion of business suit work ethic and leading edge technological prowess compared to mainland Europe’s corruption, siesta culture and absolute lack of modernity or industry leadership, has been shrugged off, however due to London’s absolute dominance over every other city in most areas, European investors and institutions rely on it for all manner of services, both retail and institutional.

This, therefore, is a double-edged sword when it comes to navigating a Britain-European Union relationship post Brexit, and as a result, the City is looking exercise its control via diplomatic engagement with EU Member states.

Led by TheCityUK, which is a private-sector membership body and industry advocacy group promoting the financial and related professional services industry of the United Kingdom.

TheCityUK is often referred to as the financial sector’s most powerful or “most prominent lobbyists with close links to the UK Government and to policymakers in Brussels and Washington.

Although ‘The City’ in the UK usually refers to the City of London, one of the world’s foremost financial centres, the organisation also represents the industry throughout the UK.

As a business-led body, TheCityUK is distinct from the City of London Corporation which is the local government administrative body for the district of London which contains the traditional heart of the city’s financial services industry.

Its board of directors and advisory council includes various senior executives from some of the largest FX interbank dealers in the world, including John McFarlane, who is the Chairman of Barclays Bank, and presides as Chairman of TheCityUK. If that is not concrete enough, then who knows what is.

If the internal decision by Barclays can be considered to be accurate, Barclays may prepare to split its euro rates trading team and move part of the division that trades in eurozone government bonds and interest rate swaps from its London trading floor, allowing Barclays continue to trade euro securities with clients on the continent’s mainland even if the U.K. leaves the European Union next March with no trade deal or transition agreement to keep access to the single market, according to the FT.

This is more likely to represent how it will actually pan out, with London remaining the base for the actual trade execution and clearing.

Whilst on the subject of clearing, Europe already has its anti-business strategy in place which, if the continent’s lack of talent and connectivity to world markets is not enough, should put paid to any notion that ‘uncertainty’ about London’s standing as a mainstay of the financial markets economy globally is even remotely at risk.

Mark Carney, Governor of the Bank of England last summer highlighted the impracticality of clearing trades outside London by quite rightly stating ”Fragmentation of such global markets by jurisdiction or currency would reduce the benefits of central clearing. Fragmentation is in no-one’s economic interest.”

Mr Carney, in a speech at Mansion House in July, said: “Industry estimates suggest that a single basis point increase in the cost resulting from splitting clearing of interest rate swaps could cost EU firms €22bn per year across all of their business.

“Moreover if the large stock of existing trades of EU firms – tens of trillions of euros in size- was trapped at a CCP which was no longer recognised by the European Commission, those EU firms would face capital charges as much as ten times higher than today unless and until they could move them.”

However, the governor welcomed parts of the proposals that would see co-operation arrangements between the EU authorities and their overseas counterparts, including potential provisions for deference to the rules to which a clearing house is subject in its home jurisdiction.

Mr Carney said: “The UK houses some of the world’s largest CCPs. For example, LCH in London clears swaps in 18 currencies for firms in 55 jurisdictions, handling over 90% of cleared interest rate swaps globally and 98% of all cleared swaps in euros.

“All currencies, products and counterparties benefit from the resulting economies of scale and scope” said Mr Carney.

This is a good case in point.

Germany’s attempts to take control of the London Stock Exchange were scuppered by exactly this.

LCH.Clearnet, owned by London Stock Exchange, is a large multi-asset class clearing house, serving a broad number of major exchanges and platforms as well as a range of OTC markets, its London operations being a mainstay of the OTC clearing ecosystem, however in the approach to the fraught proposed merger between Deutsche Boerse and London Stock Exchange, so much legal wrangling, political discourse and concerns from both Germany and England’s leading figures has resulted in a full investigation by the European Commission into the details of the merger having been launched.

FinanceFeeds reported last year that as a result of research by the European Commission, a merger would create the world’s largest margin pool with a value of 150 billion euros, therefore could impede competition for smaller trading venues that rely on LCH.Clearnet as well as other firms that offer similar collateral settlement services.

On that basis, London Stock Exchange’s response was poised last year to make a quick attempt to sell LCH SA in order to address proactively any anti-trust concerns. LCH Group which holds the European subsidiary LCH SA is 57% owned by the London Stock Exchange, with the remainder being owned by other users of the service.

It is ironic that the concerns of Lord Myners and other senior London officials with lifelong careers in the exchange traded derivatives sector in the largest financial center in the world were ignored by Germany, and that it has taken a report by the anti-business and staunch socialist European Commission whose interests are anti-British to stifle a potentially harmful merger which would have placed the control one of London’s fine institutions in Frankfurt, which is absolutely nowhere on the world’s financial markets and electronic trading stage.

The desperation that came about was sensed by Euronext, which is one of the key suitors for the purchase of LCH SA, for which London Stock Exchange wants £430 million, and had to sell it in order to put paid to the investigation into any potential anti-competitive nature of the proposed deal, and quite frankly to just get on with it.

In late October 2016, JPMorgan Cazenove was enlisted to oversee the sale of LCH SA, and all looked set to head to market and find a suitable acquirer, with Euronext being in the lead because it contributes around half of the revenue of LCH SA in clearing business from France, Holland, Portugal and Belgium.

Euronext appeared at the time to realize its position of strength in that it is strategically and operationally the most suitable acquiring party, and the shortlist of alternatives that would buy LCH SA is dwindling, however, Euronext has made it clear that it will not pay one penny for LCH SA.

In January this year, Euronext made an all cash offer to buy LCH SA and then canned it in March, not proceeding because of the failed merger between Deutsche Boerse and the London Stock Exchange, aligning exactly with FinanceFeeds predictions a year earlier that none of these deals would have a chance of proceeding. It would be like a New York entrepreneur going into business with Hugo Chavez.

In particular, Lord Myners, along with senior regulators in London, had concerns relating to how clearing operations can be expanded across both exchanges.

According to laws in America and Europe, notably the Dodd-Frank Wall Street Reform Act and the EMIR (European Market Infrastructure Regulation), exchange-traded swap contracts must be cleared through specific electronic clearing houses, a process which engenders greater transparency and in the case of London Stock Exchange, its own subsidiary LCH.Clearnet is used for this purpose.

The case in point here is that nowadays, with large banks better capitalized, transactions are now being passed to institutions with very little capital at all therefore if large trades went wrong, there could be massive exposure, and as a result, a question mark hangs over the corporate governance of a new entity consisting of the London Stock Exchange and Deutsche Boerse with its head offices in two separate countries, which could lead to a shirking of responsibilities by British and European regulators, or a degree of buck-passing. Counterparty risk is, after all, a very important subject post SNB EURCHF peg removal.

When considering all of these factors, there is no way that any such proposal to split the Euro trading hub yet retain the control of the currency clearing and dealing in London is anything like a creator of ‘uncertainty’, more like a reinforcement of London’s certainty.