French regulator demonstrates sour grapes and a very unusual view on post-Brexit electronic trading. What are they talking about?
French securities regulator the AMF has told the EU that it should fix its derivatives trading rules to avoid damage to its own financial sector once the UK finally leaves the European Union on January 1, 2021.
Robert Ophele, the AMF’s chair, said that if rules were not amended it would penalise European banks trading in London, which is absolutely preposterous.
This smacks of a last ditch attempt to sway opinion that somehow Britain will be compromised by the exit from the European Union, when in reality it will be the other way round.
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.
These are just some reasons why the entire mainland cannot hold a candle to London, just one city, in terms of financial markets capability.
France’s AMF says that Under current rules, EU banks trading in London must use an EU-based or EU-approved system for trading, however British rules oblige UK counterparties to trade on a UK approved platform, making cross-Channel deals impractical.
Mr Ophele’s comments came after the European Securities and Markets Authority (ESMA) said that it would only monitor the situation.
“If we do so it will be too late. The harm will have been done”, he said. “I do hope that the European DTO can still be rapidly adjusted” he said.
The bulk of the trading that the rules cover, he pointed out, is in London, meaning that 70 per cent of volumes handled by EU banks there was at risk of being lost.
Attempting to create a deep capital market from scratch to avoid reliance on London without a “critical mass” of players would be “detrimental” to the EU, he added.
Interesting, considering that the vast majority of the entire trading cycle for any transaction worldwide takes place on an end-to-end basis in London, with mainland Europe being absolutely irrelevant. It would be fairer to consider that AMF is more concerned that Brexit will render most European entities invalid worldwide, the only reason they are currently is that they’re able to filter some of the profitability from London as they’re part of the same political bloc which will come to an end in January.
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.
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 two years ago 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.
In October 2018, Eurex Clearing said that 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 at the time 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. Since then only a small percentage of clearing has taken place in Europe compared to existing business in London (probably to maintain compliance with having Euro clearing in Europe to a certain extent of the entire global business).
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.
For those who still have doubts, it may be worth asking Lord Myners how the proposed merger between London Stock Exchange and Deutsche Boerse worked out. Or you could ask me. I said from the beginning that it would never happen, and I was right.