Lon­don could lose its Euro trad­ing

The Pak Banker - - OPINION - Mark Gil­bert

LON­DON'S fu­ture sta­tus as the fi­nan­cial cap­i­tal of Europe is a key fac­tor in the de­bate about whether the U.K. should leave the Euro­pean Union. It would be a mis­take for ei­ther side of the ar­gu­ment to un­der­es­ti­mate quite how ag­gres­sively Lon­don's com­peti­tors would at­tempt to wrest trad­ing rev­enue away from the U.K. cap­i­tal should the June 23 ref­er­en­dum vote in fa­vor of what's known as Brexit.

Tim Martin, the chair­man of U.K. pub op­er­a­tor JD Wether­spoon, is a sup­porter of aban­don­ing the EU. In a let­ter ac­com­pa­ny­ing his com­pany's earn­ings re­port last week, Martin sug­gested an am­i­ca­ble di­vorce was likely: Clearly, if the U.K. de­cides to leave the EU, it would be in the eco­nomic and other in­ter­ests of this coun­try and our Euro­pean neigh­bors to have friendly re­la­tions, strong busi­ness links, in­clud­ing free trade and, I be­lieve, free move­ment of la­bor.

That view is very likely too op­ti­mistic. The af­ter­math of an anti-EU de­ci­sion would be any­thing but friendly, not least be­cause Ger­many and France in par­tic­u­lar would seek to de­ter other coun­tries from con­tem­plat­ing life out­side of the Union. The world of fi­nance would of­fer an ir­re­sistible op­por­tu­nity for the euro core to make an ex­am­ple of Bri­tain by at­tack­ing the crown jewel of the U.K. econ­omy.

Lon­don has more than 40 per­cent of the global mar­ket for cur­rency trad­ing. Al­most half of the world's in­ter­est-rate swaps busi­ness takes place in the City, as does a third of Euro­pean equity trad­ing. And al­though the U.K. has suc- cess­fully chal­lenged ef­forts to mi­grate eu­ro­de­nom­i­nated trad­ing and set­tle­ment to euro zone coun­tries, that po­si­tion might be hard to sus­tain af­ter a Brexit -- a point for­mer Bank of France Gov­er­nor Chris­tian Noyer made force­fully ear­lier this month: It is al­ready very dif­fi­cult for euro mem­bers to ac­cept that our cur­ren- cy is largely traded out­side the cur­rency area, be­yond the con­trol of the Euro­pean Cen­tral Bank and of euro-area in­sti­tu­tions such as mar­ket reg­u­la­tors. That can be ac­cept­able only if, and as long as, the U.K. is a mem­ber of the EU, and ac­cepts the in­volve­ment of, and co-op­er­a­tion with, the Euro­pean reg­u­la­tory agen­cies.

It's not the first time political and eco­nomic dif­fer­ences with the rest of Europe have threat­ened to di­min­ish the City's stand­ing. Back in 1991, the talk was all about an ar­ti­fi­cial cur­rency called the Euro­pean cur­rency unit, the fore­run­ner of the euro, which was start­ing to gain trac­tion in fixed-in­come and de­riv­a­tives mar­kets. So the Bank of Eng­land did a clever thing; It is­sued 2.75 bil­lion Ecu of 10-year bonds at an in­ter­est rate of 9.125 per­cent (yes , back in the olden days govern­ment bonds had yields close to dou­ble dig­its rather than below zero).

It was the big­gest se­cu­rity avail­able in the cur­rency, ce­ment­ing Lon­don's role as the cen­ter for Ecu trad­ing and paving the way for it to be the dom­i­nant mar­ket for the euro (even though Bri­tain wasn't join­ing the com­mon cur­rency, much of the tech­ni­cal work about its in­tro­duc­tion was done by the Bank of Eng­land prior to the ECB com­ing into ex­is­tence). If Bri­tain hadn't been in the EU, though, that trick might have been a lot harder to pull off.

If Europe's "coali­tion of the will­ing" is suc­cess­ful in in­tro­duc­ing a Tobin Tax on se­cu­ri­ties trad­ing, Lon­don may ben­e­fit, al­though the 10 coun­tries still try­ing to in­tro­duce the levy have failed so far to reach an agree­ment. But if the EU suc­ceeds in build­ing a cap­i­tal mar­kets union, cre­at­ing a seam­less cross-bor­der arena for small- and medium-sized en­ter­prises to raise money by sell­ing eq­ui­ties and bonds rather than re­ly­ing on bank fi­nanc­ing, then it's hard to see how Lon­don could at­tract that mar­ket away from ei­ther Paris or Frank­furt.

Rather than re­main­ing con­cen­trated in Lon­don, Brexit may mean Euro­pean trad­ing splin­ters across sev­eral cities. Ger­many's Deutsche Bo­erse is in the midst of try­ing to merge with Lon­don Stock Ex­change Group; the com­bined en­tity would be the big­gest eq­ui­ties ex­change in Europe, so it's not hard to en­vis­age euro-de­nom­i­nated stock trad­ing mi­grat­ing to Frank­furt. It would also have the world's largest clear­ing house for swaps, which could also spur more of that busi­ness to move to Frank­furt.

The big­gest man­ager of new cor­po­rate bonds in Europe, mean­time, is HSBC, a bank that's al­ready flirted with mov­ing its head­quar­ters out of Lon­don and which has said it might move 1,000 bankers to Paris if the EU splits. If you com­bine HSBC's 35 bil­lion euros of cor­po­rate bond un­der­writ­ing with third-placed BNP Paribas's 25 bil­lion euros and fifth-placed So­ci­ete Gen­erale's 21 bil­lion euros, you can just about see how al­most a fifth of com­pany fundrais­ing could end up in France. And if a post-cri­sis mar­ket for com­pli­cated de­riv­a­tives ever comes into vogue, the math­e­mat­i­cal/en­gi­neer­ing bent of much of the top-tier tal­ent at French in­vest­ment banks may well steer that re­nais­sance.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.