London: An Enduring Financial Center
London — from the mainstay Square Mile area to the more recent hotspot Canary Wharf, located a few miles east along the Thames — is possibly the foremost city to conduct global capital markets business.
The capital of and largest city in the U.K. wields outsized influence as a hub for institutional buyers and sellers of securities, with trade orders coming in from and routed to Europe, North America and Asia. Barclays, J.P. Morgan and Morgan Stanley are a few of the ‘bulge bracket’ brokers that handle trades; London Stock Exchange Group is one of the world’s largest exchange operators; Legal & General and HSBC Holdings are among Tier 1 buy-side firms with capital to deploy.
But Brexit has cast doubt on London’s future. Can the storied city — home to the House of Rothschild and the birthplace of modern banking — vigorously compete on the global stage after the U.K. departs the EU?
The answer is yes, but in ways that aren’t fully known at this time. At least that’s the view of some market participants and London observers.
“The City will remain a premier trading site globally,” said William Fenick, strategy and marketing director, financial services for Interxion, a provider of European colocation data-centre services. “London’s financial services has always had a fantastic ability to reinvent itself. That tradition will continue — what we’re unsure of is how it will continue.”
“What will London do to combat the loss of some European business, and then be a little bit more free to follow its own path?” Fenick said. “It will have to adhere to different regulations, but might it become a center for settling in dollar products? It will have the freedom to reinvent itself to be even more robust, on the edge.”
In 2016, London was the top global financial city in the closely watched Global Financial Centres Index (GFCI), topping New York, Singapore and Hong Kong. Criteria for the index include business environment, financial sector development, infrastructure, human capital, and reputational factors. Save for 2013 and 2014, when New York took top honors, London has been #1 for the past nine years.
But importantly, the Brexit referendum of June 24, 2016 was not reflected in last year’s GFCI rankings, suggesting that next year’s report may show some changes up top.
“London has every potential to remain arguably the global financial center,” said Michael Mainelli, executive chairman of Z/Yen Group, the commercial think tank that publishes the GFCI rankings. “But it is going to have to work at it, as opposed to having it by rights.”
One determinant of potential change will be whether big U.S., Chinese and Japanese banks meaningfully reduce their London footprint. Currently, a primary advantage of London is its clearing facilities, which provide liquidity in securities trading, noted Jan Toporowski, professor of economics and finance at SOAS University of London.
“Since most of this liquidity is US dollars, swapped against Euros, London is convenient for US banks to obtain access to clearing in the Euro area,” Toporowski said. “But once Britain is out of the European Union, trades will have to find some other European centre in which to clear Euros.”
At least publicly, some of the biggest banks that are key to London’s future have said they are committed to London remaining a top financial centre. “It has one of the most stable legal systems in the world, a brilliant workforce and deep, liquid capital markets unmatched anywhere else in Europe, all of which are underpinned by world class regulators,” banks including Goldman Sachs, J.P. Morgan, Morgan Stanley, and Bank of America Merrill Lynch said in a July 2016 statement.
London is no stranger to financial upheaval. One major change was the departure from the gold standard in 1931, between World Wars I and II. “In effect, the British government had to take on the job of keeping the financial markets going, manipulating the liquidity of the markets by open market operations,” Toporowski said. “This continued right up to the 1980s.”
More recently, the ‘Big Bang’ of 1986 abruptly deregulated London’s financial markets and resulted in an upsurge of market activity and a redrawn market structure.
“The City will retain its position as a leading financial centre,” said Forrest Capie, professor emeritus of economic history at Cass Business School in London. “It has more than 200 years’ experience across a greatly changing world.”
Added Fenick: “You don’t go from one night as the most powerful city in the financial world to the next as an underdog in the second league. You just don’t do that. Too much has been built up in terms of settlements, legal infrastructure, and accounting. There’s just so much around the business.”
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