London is Europe’s major financial centre and one of the world’s two leading financial hubs. This is unlikely to change following Brexit. Its main competition is with New York, Singapore, Hong Kong and other centres like Shanghai that will emerge in the coming years.
However, the headline of today’s main story in the Financial Times proclaimed, 'Amsterdam ousts London as Europe’s top share trading hub'. The article correctly reported that more shares were traded last month on 'Euronext, Amsterdam and the Dutch arms of CBOE Europe and Turquoise in January' than 'in London'.
While the data in this story is naturally correct, it needs to be put within context in order to draw the right conclusions. There are probably seventeen exchanges in western Europe. Euronext is third in size, the Deutsche Borse second and the London Stock Exchange (LSE) first. But London is not just captured in the LSE.
In fact, the bulk of trading never makes it onto these exchanges. The vast bulk of trading is carried out on what are called 'systematic internalisers' within large trading firms based in London. This is where banks and other financial firms match up trades internally between clients, such as people and institutions. Then there are block trades and 'dark pools'. The latter are private trading exchanges or forums where users have some degree of anonymity. They can be popular with institutional investors wanting to execute large orders without it becoming public and thus unduly affecting prices. So, the vast bulk of such trading, which is centred in London, is not captured on those exchanges.
Moreover, what is reported in the FT is EU trading. Naturally, this is important but it is a subset of the international trading that takes place in London. In fact, the London ecosystem is vast.
What the article doesn't make clear is that this activity does not mean that business is moving to Amsterdam. More trades are being booked within the EU because EU regulators now demand it. More importantly, though, the value in the trade for an economy remains in London — in the sense that activities such as settlement, clearing and risk management are still carried out here.
Amsterdam makes a natural choice as it was, even pre-Brexit, the centre of European options trading and has been for a long time. Of course, the City must not be complacent. It was always likely that there would be some relative increase in business in regional centres like Amsterdam.
As I and others have pointed out, firms will need to make changes post-Brexit depending upon their business model. For some, this will mean basing some staff or doing more business in the likes of Dublin, Luxembourg, Paris, Frankfurt as well as Amsterdam. That is in order to serve EU based clients within the EU. Again, this was well recognised before Brexit.
For others, though, it will mean doing more business in London. Notwithstanding Covid’s impact on London as a place to live, work and visit, the City’s position is still very strong. UK regulators, in the face of uncertainty, have granted a temporary permissions regime for three years to firms who want to carry out business here. The large number of firms that have sought to take advantage of this, reported to be 1,500, is testimony to the City’s pulling power and that many firms, given their business models, need to have access to London. This successful take-up is another positive for the UK.
The success of financial centres depends upon a combination of their natural characteristics, the regulatory environment and where clients want to do business.
Even if you are negative about Brexit, London’s inherent characteristics are acknowledged as being Brexit-proof. Others, including myself, would argue that they are actually enhanced by Brexit and that we should be optimistic about what lies ahead. These characteristics include English common law, time-zone, language, flexible workforce, its creative hubs as well as the skills, knowledge and experience based here. London has proved to be a good place to do business in, and from, hence its global appeal.
Its regulatory environment is vital — as the Governor of the Bank of England made clear last night, the UK should not be a rule taker. In fact, it has the ability to make the most of its opportunity to diverge, if needed. At the same time, the UK will continue to help set the agenda at the global level, vital for the raft of firms in the City.
Between the EU and the UK, there are about 17 types of equivalence that need to be addressed (equivalence being a recognition between states of the legal regulatory requirements for good and services), not all linked to market access. Equivalence is a nice to have, regulatory independence is a must have. That is the key.
Then, there is where clients want to do business. This too favours London given its pools of liquidity. As Mark Carney pointed out in 2017, if the EU approach forced clearing into the euro area it risked segmenting the market, with higher bid-ask spreads, resulting in more capital having to be set aside to address this, thus limiting the lending ability, not helpful to EU based banks themselves. Attention is still being drawn to that risk.
In some respects, EU regulators are trying to create a walled garden. In all likelihood, if they pursue this further, then we may well see a repeat of the trend of half a century ago when tougher regulations in the US saw business flow to London with the growth of the euro-dollar market. This time, however, it may be the euro-euro market that blossoms in London, as the place clients wish to transact business.
Importantly, the events at the start of this year highlight that the City of London currently lacks a dynamic cheerleader who can speak up for it on the global stage. Just as with the economic outlook, there needs to be a clear, long-term vision for the financial sector.
It is noticeable how the view in the City has changed. Employment in the City has risen. There is an acceptance of the benefits of the UK setting its own regulatory agenda, and diverging from the EU if needed, in order to retain our global cutting edge. Also, as we have seen, London has gained a competitive advantage in some of the key growth areas, such as green finance and financial technology, building upon its previous strong position in growth areas such as Islamic finance and the offshore Chinese renminbi.
Different European regulators are keen to steal a slice of the London cake. We need to ensure we are proactive in our response, ensuring London remains a good place to do business.