It’s nearly impossible to talk about England without talking about history at one point or another. And so it is with this report’s look at London as a financial center and what’s kept it at the top.
When former Prime Minister Margaret Thatcher died in April, much of the conversation was about her policies – some good, some controversial and some that resonate to this day.
Her legacy is still felt in London’s financial markets, as her government ushered in the
Big Bang in 1986, a major deregulation policy that would propel the City into the next era of financial market growth and expansion. It ushered in major changes: eliminating fixed commissions, moving stock trading off the exchange floor and the abolition of designations for stockjobbers (market makers) and stock brokers. It also opened London up to the world’s banking system, including US banks who were allowed to purchase UK securities dealer firms.
That new competition fostered by the Big Bang is widely believed to have reestablished London as the leading financial center. It still holds that title today, despite the 2008 financial crisis, subsequent political and popular fallout with the financial services industry, massive regulatory overhaul and the LIBOR scandal.
Average Daily Foreign Exchange Turnover
Source: Bank For International Settlements, as of April 2010 (most recent BIS survey)
“What London seems to be able to do is ‘go with the flow,’” said David Setters, senior associate at Contango Markets. “That doesn’t mean London is not buffeted by change and by events. It is. Just look at what Big Bang did to the British merchant banks. They’ve all but disappeared. But London seems to be able to take the blows and re-emerge as strong as before. And in the exchange traded derivatives world decisions like CME Group’s to base their new exchange, CME Europe, in London, can only be seen as a vote of confidence.’
Fresh Exchange of Ideas
Indeed, London is the most competitive exchange landscape in the world with established but still active exchanges and a slew of upstart markets, each looking to grab a piece of, or add to the massive securities and derivatives marketplace.
Most recently, NASDAQ OMX NLX launched on May 31, jumping into the fixed income space dominated by NYSE LIFFE and Eurex. Exchange executives see an opportunity to bring more competition to that category, offering futures on 3-month EURIBOR, 3-month Sterling, Long Gilt, 2-year Schatz, 5-year Bobl and 10-year Bund, with LCH.Clearnet as its clearinghouse. (See video with Charlotte Crosswell)
2012 UK Market Interest Rate Volume
Source: FIA Annual Volume Survey
CME Group is also chomping at the bit to get its own futures exchange going, with an initial product offering of 30 forex futures that will be phased in. The exchange is awaiting regulatory approval, which reportedly could come in September.
In May 2011, CME Clearing Europe was launched to clear more than 200 OTC products in commodities. In March, it offered clearing on interest rate swaps, marking its foray into financial derivatives in Europe, a move that includes 14 of the top banks and brokers in the space.
The question now is whether such upstart exchanges can convince customers to trade on their platforms or trade new products, said Bill Templer, managing director of Faventus Consulting Services.
“History has shown that new exchanges struggle unless they have a fundamentally differentiated proposition,” Templer said. “It is not obvious to me that those outside the well established existing exchanges and clearing houses are certain to achieve success. Do the clients really want a plethora of new exchanges and product launches given cost reductions and limited resources?”
Meanwhile, NYSE LIFFE is prepping for its move over to the Intercontinental Exchange (ICE) starting with the migration of its clearing to ICE Clear Europe, a move that was already in the works when ICE shook the exchange world with the announced purchase of NYSE Euronext in December 2012. ICE Clear Europe might be feeling old among the newcomers, as it’s been running in London since 2008, clearing ICE Futures Europe as well as European credit default swaps and energies. What ICE and NYSE Euronext will become once the deal is cleared by regulators and completed is still unknown but will enable ICE to become one of the most diverse exchanges in the world.
All of that new blood has injected excitement into London’s markets, including the London Stock Exchange (LSE), which bought the Turquoise equity platform in 2010, a majority stake in LCH.Clearnet in March 2012, and has stated that it plans to enter the derivatives space at some point. LSE also is fending off challenges from BATS Chi-X Europe, which was granted securities exchange status in May, and Aquis Exchange, an equity platform which was established in October 2012 and is awaiting for a regulatory green light. And even though Eurex wears the Frankfurt label, much of its business comes from London and the exchange has long had a strong presence there.
Finally, in June 2012, the Hong Kong Exchanges bought the London Metal Exchange for a whopping $2.2 billion. Now a year later, HKEx is beginning to implement its plans at the LME, with major ramifications for global metals markets.
Crossing the Channel – LIBOR, Tax and Regulation
But all of this does not come without challenges for the City, which has been wracked by the LIBOR fixing scandal. The ordeal has drawn massive fines of top tier banks and dozens of firings, including Barclays’ CEO Bob Diamond.
The damage to the City’s image from the LIBOR scandal that began in 2008 has continued to drag on as governments decide how to prosecute those involved. Charges are reportedly expected this summer, about a year after Barclays settled charges over rigging the London Interbank Offered Rate. UBS and Royal Bank of Scotland pled guilty to criminal charges in the United States, but US and British investigations are ongoing into Barclays employees and potentially individuals at other banks. And even the European Union has proposed taking on the oversight of LIBOR.
The UK is also trying to deal with the impacts of the European financial transaction tax, which many in the industry have opposed out of concern it will drive down volumes. The UK government has strongly opposed the tax in the EU, where 11 countries plan to implement a 0.1 percent tax on stocks and bonds and a 0.01 percent tax on derivatives. A recent study by investor group ICI Global estimated that such a tax, even without the UK’s participation, would take 0.1 percent from every trade executed in the UK, costing the industry $35 billion per year.
The City contributes £129 billion annually and generates £1 out of every £9 of taxes raised in the UK.Source: UK Trade & Investment
“Many things such as the financial transaction tax look very concerning when you first see them, but in fact, when they’ve gone through the full political process and you see them being applied, they often tend to end up as more moderate as well as more delayed than what we first think,” said Richard Berliand, managing director at Richard Berliand Limited and non-executive director at Deutsche Borse, in London.
Regulation, as in the US and other major markets, has been at the forefront of conversation for the past five years in the UK. Templer said it is “consuming significant cost and resources and will continue for some time yet.”
Berliand added that markets are indeed adjusting to the regulatory framework being set by the EU. That has sometimes left London at the mercy of EU politicians, a difficult pill to swallow for some in the financial services sector.
“So while London may wish to benefit from the integration of Europe from a trade point of view, it doesn’t necessarily benefit from the integration from a financial services point of view if the rules impact London negatively,” Berliand said. “The thing to remember is that we have a very high concentration of financial services but only one vote when it comes to deciding the outcomes politically for the new landscape from a regulatory point of view.”
In the end, London still serves as the strongest gear in the global financial markets and likely will continue to for the foreseeable future.
“London has a number of huge advantages as a financial center, not least in terms of time-zone,” Templer said. “As Asia becomes increasingly important, London is the best placed to service across the 24 hour time-zones. The talent pool remains strong and significant, the tax environment and regulatory environment relatively benign compared with other European countries and exchanges, banks, hedge funds and asset managers are well established in London.”