London’s loss would not be Europe’s gain
The City is the centre of global finance – if it loses business it will be to New York, not a eurozone city
In just over 100 days since the referendum there have been plenty of assumptions by economists and international competitors about London’s future as a financial centre.
Brexit presents clear and present risks. Our financial markets – which raise billions of pounds of investment capital for UK and European economies, support 7 million UK jobs, and pay billions of pounds in taxes – must be protected. But to assume the City will automatically diminish ignores a fundamental business truth: the customer is always right.
Immediately post-referendum my colleagues visited China (with the new Chancellor) and India to discuss how London can finance their growth. These two rising economies need trillions of dollars for new infrastructure, which their banks and governments say they cannot provide. They raise this money offshore through bonds, denominated in their own currency to avoid currency risk, known as Dim Sum or Masala bonds.
This fast-growing business could go anywhere globally, but the UK is leading. This year we listed more Dim Sum bonds than the rest of the world, excluding Greater China itself. We are also the leading venue for Masala bonds. When India’s largest financial services conglomerate, HDFC, raised $450 million in London, it said London “distinguished itself by offering a wide range of financial instruments and enjoys unshakeable trust from international investors”.
A good example is clearing. It is a fundamental and mandatory part of the plumbing that keeps the global financial system going, ensuring millions of complex trades are settled in a safe and regulated way. Clearing houses act as firewalls or circuit breakers, guarding the rest of the market against default by companies by holding collateral and monitoring transaction risk. London is the world leader in this critical sector. Last year its leading clearing house, LCH, cleared 90 per cent of interest rate swaps – one of the largest asset classes.
Meanwhile, we excel in the traditional work of raising capital, finding billions for companies to invest by giving them a deep and liquid capital pool and a breadth of investors. The UK is also unique in having a successful growth market specifically for SMEs: AIM has raised £15 billion of capital for British and European SMEs this year. Other countries have tried but failed to establish similar markets.
Where London leads the world, the European economy benefits. Indeed, our range of services and asset classes mean we provide efficiencies that save customers capital across the eurozone. LCH clears all 17 major currencies, so it can also reduce or eliminate risk; last year it saved customers $25 billion in regulatory capital, which could then be invested in the real economy. Some claim euro clearing will automatically move back to the eurozone after Brexit, yet clearing euro trades separately means losing these efficiencies. This could cost firms tens of billions of dollars – taking money from the European real economy. And there is, logically, only one other financial centre that could centrally and efficiently clear all these currencies. It is not Paris, Frankfurt, or Amsterdam, but New York.
The UK financial ecosystem, with clearing at its heart, makes London the most economically attractive and stable destination for global investors and issuers. It is no longer just a few banks transacting individual products but the innovative home of global finance. Our opportunity now is to put greater access to finance for entrepreneurs at the centre of postBrexit industrial strategy.
This ecosystem must be championed and protected. The best way is to secure continued regulatory equivalence with the EU, membership of which also provides equivalency with the US. But people in Europe and the UK should realise this isn’t a zero sum game. If business leaves the UK, the European economy would suffer – and very little of that business is likely to go to Europe anyway.