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EU share and derivative trading – the truth revealed
By Professor Daniel Hodson, 28 Mar 2021
A golden opportunity… not a disaster
Recent business headlines have been full of the unforeseen calamity of EU share trading moving lock and stock to Amsterdam. Yet nothing could be further from the underlying reality of the post Brexit reorganisation of cash and derivative trading in EU based products.
It’s time to answer once and for all the key relevant questions: was the City prepared, where are the decision makers now located, where will future value added and profitability be achieved, and what more does the future hold?
The truthful answers in every case are, contrary to the prevailing media messaging, both reassuring and positive – and symptomatic of the massive global opportunity the UK financial services can now enjoy in exploiting the parallel market development gifted by prevailing EU policy.
No surprises here…
The Amsterdam situation was foreseen and anticipated – it was an old story for market participants. City firms are never slow to react to protecting their markets and franchise, and, for the most part, quietly and efficiently used the doldrums of the post referendum years to ensure that their business remained as little harmed as possible whatever the outcome of Brexit negotiations. Trading platforms were established on the Continent and appropriately regulated subsidiaries set up, springing into accelerated action on 1st January 2021.
The transactional core remains in the City
The heart and soul of the underlying United Kingdom based on exchange EU securities business has stayed, on the whole, in the City and the UK financial services industry. Institutional share trading is conducted through an eco system that spans UK decision makers, a.k.a. fund managers and sales traders, not to mention the more technical value added aspects of transaction processing, such as so-called algorithms and smart order routers.
The notion that share trading has moved to Amsterdam considers just one element of this: the nationality of the exchange licence, not the traders, nor the systems engineering behind the trading. It also ignores the fact that the Amsterdam Stock Exchange, as a part of Paris based Euronext, operates in a data centre in Basildon, Essex whilst the London Stock Exchange’s Amsterdam platform has a similar facility in the City of London itself.
And EU derivatives trading is still UK directed
Modern financial markets spawn volumes of derivatives (transactions for future settlement) which are a multiple of their underlying cash basis and represent highly complex systems.
The same decision making/process ecosystem applies, and sophisticated EU related derivative products continue to be traded as before. The more restrictive EU regulation associated with venues for plain vanilla derivative trading, such as for “Interest Rate Swaps”, just requires a simple and cheap workaround: the basic trade can now take place on an EU permitted platform, in this case in the US in the form of what are called “Swap Execution Facilities” (SEFs). The fact that these deals could have been, until 31st December 2020, done on a UK venue is a minor technical difference.
A foundation for future City prosperity?
Bottom line, the underlying practical effect on both cash and derivative markets is little changed. Superficially speaking, substantial turnover has indeed emigrated across the Channel and even the Atlantic, but the decision makers, the sales traders, their customers and, importantly, the location of the real value added remain largely the same.
Yes, a change in process and the site of the movement of mere digital electrons associated with execution, but not the massive and painful upheaval so graphically but inappropriately portrayed.
A glimpse of future opportunities for City growth and prosperity in its reinvigorated global positioning?
All change leads to opportunity, fuelled by the law of unexpected consequences and its commercial exploitation. The Amsterdam conundrum could be a classic example.
- Daniel Hodson, Sunday 28 Mar 2021
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About Professor Daniel Hodson:
Chairman, The CityUnited Project, formerly CEO of LIFFE, Deputy CEO of Nationwide Building Society, a director of the London Clearing House, Chairman of the Association of Corporate Treasurers and Gresham Professor of Commerce.
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About The City United Project
Against the background of so much negativity, the launch of ‘The CityUnited Project’ in mid-February 2021 might appear well-timed to many people in the Square Mile and beyond. As the CityUnited’s Chairman Daniel Hodson put it:
“The post-Brexit City and the UK financial services industry stand at the gateway of their greatest era of prosperity and global leadership.”
Daniel is available for interview on any of the above subjects.
The CityUnited Project: https://www.cityunitedproject.com/
Our Advisory Board includes:
- Sir Bernard Jenkin MP (Chairman)
- The Rt Hon David Jones MP
- The Rt Hon The Lord Lamont of Lerwick PC
- The Rt Hon The Lord Hannan of Kingsclere
- Anne Marie Morris MP
- David Campbell Bannerman (former MEP)