Friday 12 March 2021 9:00 am

Parallel markets: The City must push back against Europe's protectionist financial walls

Governments, however enlightened and visionary, can so often make two fundamental errors of  judgement about global financial service markets: they grossly underestimate their multi trillion dollar power and manoeuvrability. They forget their close attention to competition, cost and risk, and the pursuit of liquidity.

In continuing to raise protectionist walls around its internal financial markets, the EU has gifted a massive opportunity to the City of London to exploit these inalienable characteristics. Developing a series of parallel markets in a diverse range of euro denominated cash securities and derivatives would build on the City’s innovative history. 

The UK is and has always been both an adept and a suitable location for parallel markets, particularly to take advantage of the shortcomings of internal EU financial centres. It has massive liquid and diverse markets and deep related skill sets. Now, bolstered by its new freedom to diverge from the Continent, the framework is even stronger. 

The City’s multi-currency and multi-product clearing stands in contrast to the fractionalised and mainly Euro based clearing houses across the EU. 

There is ever increasing global recognition of the legal and regulatory advantages of the  predictability and flexibility of Common Law as followed throughout the AngloSphere nations, compared to the Napoleonic basis of the bloc’s jurisprudence.  

This is not reinventing the wheel, nor is it a new phenomenon. 

Recent financial history is full of examples of highly successful and attractive parallel markets across the world created in response to protective  measures in the relevant domestic markets. In the 60s and 70s, the Eurodollar market provided a huge boost to the City, based on a measure which made taking bank deposits in USD far cheaper in London than in America. 

Later, in the 80s, a Swedish Financial Transactions Tax (FTT) drove virtually all the Swedish cash equity and derivative market to London; depositary receipts tradeable on global exchanges relating to Russian shares in its emerging economy were considered a safer and more profitable way to  invest. In today’s world, a sophisticated and substantial market in so called Japanese Yen “swaps” has developed offshore against a more costly but protected domestic equivalent.  

The immediate reaction, both in London and New York, to the EU’s current restrictions on EU venue-based trading was the focus on and growth if “dark pools” of liquidity, of block trades between wholesale securities traders and of transactions internal to major firms, all taking place off official platforms and outside the EU. 

The European parallel markets are already established in the City on a scale that has yet to be fully revealed statistically and will likely grow, in contrast to the superficial stories of gloom of apparent volume loss to EU-based financial centres. 

The securities market is leading the way. Market aficionados, however, are chattering about a plethora of new Euro based products with names more familiar to insiders than interested onlookers, such as  “non-deliverable forwards”, “total return swaps”, and “contracts for differences”. 

More will emerge as the City moves into a new Big Bang 2.0 gear, enthusiastically casting off its EU regulatory shackles, re-evaluating listing rules, striking down such debilitating rules as bonus caps and short selling restriction, as well as being supported by a more sympathetic and imaginative tax regime. 

It will watch and gratefully accept a continual flow of cross-Channel business as its EU-based competitors struggle with the protectionist, over-prescriptive and disproportionate regulation. Perhaps the icing on the cake for Britain, is the EU wide Financial Transactions Tax

Another chapter in the millennium long history of the City of London opens as never before to restore it to  its rightful global position. Perhaps Eurodollar history may even repeat itself. What price on the emergence  of a euroEuro? 

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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