There was probably some celebrating in Amsterdam this week as it was announced that ‘Amsterdam ousts London as Europe’s top share trading hub’ during January 2021. The subheading claimed that the UK’s departure from the EU prompted the shift in dealing locations. However, it was an EU regulation that EU shares traded in euros must be traded on an EU exchange or in countries granted “equivalence” by the European Commission, coupled with the fact that the EU has not granted the UK equivalence, which caused the move – rather than any inherent Dutch competitive advantage.
While many outside the financial services industry may assume that regulatory equivalence means ‘the same in substance or quantity’, it is now becoming obvious that for Brussels ‘equivalence’ is simply a matter of political expediency; for the UK presently has not only equal, but identical, financial regulations to the European Union. The Commission claims that equivalence has been withheld because the UK could change its regulations in the future. However, the Commission could withdraw equivalence with only 30 days’ notice, so this is hardly a rational excuse. In reality, the Commission has refused to grant trading platforms located in the UK equivalence to trade Euro denominated EU shares with the aim of forcing business to relocate from London. This makes a mockery of EU claims about level playing fields and seems to breach WTO Most Favoured Nation rules.
However we mustn’t forget that the three trading platforms in Amsterdam where these equities were traded are: Turquoise, majority owned by the London Stock Exchange Group in partnership with 12 investment banks; CBOE Europe, owned by CBOE Global Markets (CBOE stands for Chicago Board Options Exchange); and Euronext, a third of which is owned by a group of eleven European financial service companies, predominantly French and Belgian banks. So these trading platforms may be sited in Amsterdam in order to comply with EU regulations, but they are not exactly Dutch.
The same is true for the reported drop in Euro-denominated swaps trading in London which fell from almost 40% of the market last July to 10% last month, while trading on US platforms doubled to 20%. At the end of the article it mentions that the move in swaps trading was mainly due to changing behaviour among interdealer brokers, such as TP ICAP and Tradition. What they didn’t mention is that TP ICAP is headquartered in London and that Tradition is listed in Switzerland. Trading platforms, interdealer brokerages and investment banks are all multinational companies and can easily shift their transactions across borders as required.
So why are we getting this information now? And why are journalists who have ignored the City for so long suddenly so interested in this? It is probably an EU PR exercise to try to scare UK politicians into signing up for EU equivalence at any cost, given that the UK refused to do so in the recent trade talks. The EU wants the UK to agree to mirror EU regulations indefinitely, even when those regulations don’t suit the UK’s massive financial markets and in some cases appear to have been specifically designed to hobble it. However, the reason London has remained a centre of international investment for so long is precisely why the UK must leave the EU regulatory stranglehold. Divergence from EU rules is already happening – the UK needs to become a nimble regulator to ensure that financial firms can bring new products to market in the City.
I must stress that while EU equity trading moving from London to some trading platforms in Amsterdam is real, this doesn’t mean that the City is bereft of business. According to TheCityUK, UK financial services transactions in 2019 included $5.8 trillion in bond trading, while UK assets under management totalled $12.6 trillion. The UK did 43% of global foreign exchange transactions. British and international companies raised £20.8 billion in issues of shares on the London Stock Exchange, and loans to UK businesses totalled £490.8 billion at the end of 2019. And let’s not forget the insurance and reinsurance markets, commodity trading, fintech, peer-to-peer and crowd-funded lending as well as legal and accounting services. The demise of the City has been somewhat exaggerated.
But while EU equity trading is a small part of the UK financial services industry, that doesn’t mean that the UK regulators, the Corporation of the City of London, or the Treasury can afford to be complacent. If anything, this shift shows how easy it is to move electronic trading from one country to another. And while today it is the tiny EU share trading sector that has been forcibly moved to Amsterdam by the EU, tomorrow it might be a larger section of the market, and it might be moving because there are better regulations, lower taxes or some other real competitive reason for doing so.
Financial services are not static; whole industry sectors have developed in the last thirty years – hedge funds, OTC derivatives, fintech, carbon trading, etc. Investment strategies or hedging positions that are popular now won’t necessarily be next year, or even next month. The City of London has held its leading position for so long because it is innovative, adaptive and flexible. Or used to be before the EU strangled it with regulatory compromises. The City needs to rediscover its innovative spirit. Just as it invented the Eurodollar market in the 1970s, maybe now it is time to develop an offshore euroEuro market. The EU, and the French in particular, have made no secret of their desire to smother the UK in red tape to prevent it becoming ‘Singapore-on-Thames’. Simple business logic suggests that the best way to forge a successful future is to make the EU’s nightmare come true.
So, not only should the UK not align its regulations with the EU, it should be actively jettisoning EU regulations that don’t suit it. The first EU regulation to go should be MiFID II’s Double Volume Caps, that limits the amount of trade that can happen each year outside of the public exchanges. This rule has hurt UK trading more than any other EU country because the UK has a larger and more heavily traded listed capital market than any other EU country. The very idea that you could have a one-size-fits-all limit across 28 differently sized markets, with different attitudes to share trading and listed companies, was always a nonsense. But as the UK had assets under management worth over $12 trillion in 2019, it is time that the UK regulators made it easier for larger funds to trade in the UK without showing their hand to the market or massively increasing market volatility.
This also raises another issue. Off-market trading doesn’t just facilitate larger transactions, it is also popular because it is cheaper. Both the exchanges and the government should be looking at reducing the costs of doing business in London – exchange fees, Stamp Duty, the 8% Bank Surcharge, the Bank Levy and employment costs are areas for reform. There is a reason why trading moved to Amsterdam rather than to Paris, despite rumours of large incentives to do otherwise.
But maybe we should bypass the EU entirely and move on to doing more business in fast developing global markets. According to the World Bank, the total market capitalisation of listed domestic companies measured in current US$ has more than doubled since 2000, from almost $31 trillion in 2000 to $68.7 trillion in 2018. But the EU’s proportion of world market capitalisation has fallen, from 18.7% in 2000 to only 8.4% in 2018. So, tying the UK financial markets to the EU’s regulation would be as big a mistake as imagining that there are no investment opportunities beyond the EU’s borders.
There are lots of changes in the regulatory pipeline: dropping the requirement that an initial Public offering (IPO) must have 25% of its free float in the EEA is one regulation that could open up the UK stock market to more listings from the developing world.
The UK shouldn’t be frightened of real competition. In other parts of the world there are competing financial service centres –Singapore, Hong Kong, Shanghai, Tokyo and Sydney are all in similar time zones and still survive. Admittedly they have carved out their own areas of expertise, and bankers get to choose the lifestyle that suits them. It is to be hoped that there will eventually be real competition in European financial markets, but at the moment the EU believes that it can win only by excluding the competition. The UK therefore needs to think smart, make itself as attractive to new business as possible and move on to greener pastures.