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19 April 2017

A Gin before Lunch



This article was written by John Wolff. All views and opinions expressed are strictly his own.


There is much discussion about the outcome of the Brexit negotiations and what they will mean for the future of the City of London.

What services and trading will City firms be allowed to perform for European clients, under what new regulations and at what extra cost? 

I expect we shall have a longish wait to find out, which will be further complicated by the fact that some European parties in power today may not still be in power when all the member States have to ratify the final agreement.

However, I wonder if we have become a too bit fixated about the future of the City being dependant on what the future regulations and extra costs might be. They are certainly important, but if we look at the history of the City and examine why it succeeded in different eras, we find its success was due to its ability to evolve, adapt, and  create, in the face of continually changing circumstances.

What is interesting to observe is how some of the significant drivers for the City’s success in finance and commerce over different periods of time during the last two hundred or so years either disappeared or considerably changed, and yet the City did not disappear with them.

Consider how vital the following were to the empowerment and success of the City in their time:

  • The Royal Navy quite literally ruling the international waves after Trafalgar in 1805.
  • The trading possibilities opened up by the global outreach of the British Empire.
  • The Industrial Revolution in Britain making it the major importer of raw materials and exporter of manufactured goods.
  • In the late Victorian and Edwardian period the City’s position as by far the main provider of capital to finance the rapid expansion of railways and infrastructure projects right around the world. 
  • The importance of the Port of London and its warehousing facilities.
  • Sterling’s role as the reserve currency for international trading.
  • Britain’s place on the Gold Standard.

 All the these factors helped influence the creation and expansion of the great City institutions such as the Clearing and Merchant Banks, the Stock Exchange, Lloyds Insurance Market, the Baltic Exchange, the LME and the Soft Commodity Exchanges, the Bank of England and the establishment of many international banks in the City.

But…..

  •  How big is the Royal Navy now?
  • Where is the Empire now?
  • Where do we rank today in the world manufacturing league?
  • Are we still the only serious international provider of capital? 
  • The port of London and its warehouses have become apartments.
  • Sterling is no longer used much as a currency for international trade.
  • We have long since come off the gold standard.

All these have disappeared. 

But has the City of London disappeared? No, it is still there and thriving.

There are many reasons for this – the City’s critical mass of expertise, the value of our time zone, trust in our institutions, our legal system, the presence of hundreds of international banks, our government. 

And behind all these has been the City’s ability to see and grasp new opportunities as old ones disappear, enabling it to continue and prosper. Two good examples in my time have been the City becoming the centre for the Eurodollar market and world’s leading foreign exchange centre.

In our own sphere of metals, the LME, which in 1877 was originally created by metal merchants for metal merchants at a time when Britain was the industrial centre of the world, adapted and evolved to become the world pricing bench mark, gradually replacing producer price systems. Forward thinking led to the creation of the Aluminium, Nickel, and Special High Grade Zinc contracts, broadened delivery points outside Europe, extended the prompt dates beyond three months, allowed trading in additional major currencies, created a clearing system and added option contracts. It is this kind of proactive mindset the City needs most to survive.

All this leads me to believe that the future of the City will be far more reliant on its people and institutions continuing to read the signs of the times, seeing new opportunities, coping with the cyber challenge, and offering services to the world that are needed, than the small print in whatever the new Brexit regulations to trade in Europe might become.

My own prediction is that the City will lose some business round the edges but will retain its place as a major world player. Fortunately for the City, alternative European centres are quite provincial by comparison and it is difficult to see anywhere else being able to replicate the entire City complex.

Whatever the final outcome, I am not optimistic that red tape will reduce in the City as hoped for by the Brexiteers. I lived through the gestation and birth of ‘Regulation’ in the City in the mid 1980’s, moving from being self regulated under the watchful eye of the Bank of England, first to the AFBD, then the SIB, and then successor bodies.

Our then Government thought the LME was incapable of self regulation, unable to monitor and control itself. Surely elected Board and Committee members would only ever vote in the interest of their own company? Surely individuals could not be trusted to put the Exchange before their own self interest ? 

Well, we had been doing it pretty well for 100 years. And just as we were deemed to be incapable, what was going on in an international consortium of 22 Member States, which included including the UK and most of the richest nations, called the International Tin Council? There was a total loss of control and lack of monitoring of trading of their Buffer Stock Manager, culminating in losses of 500 million pounds. It took six months for them eventually to agree to pay the disgraceful amount of 33 pence in the pound! Who needed regulating? 

I learned the hard way then that when it comes to money, Governments are expedient not moral.

Where did our new regulators go to learn how to regulate?

Across the Atlantic to the CFTC and SEC. Brussels only came in to it later, adding a layer of irritation, but the main foundations were US influenced. The long arm of the US regulatory and legal system will continue to be there even if we break free from Brussels.  If we add to that Central Banks working much more closely together, coordinated international action against money laundering, the past sins of the bankers, and the probable requirement to have regulatory equivalence to other financial locations, I am sadly doubtful that we shall see  a reduction in red tape in the City.

On a lighter note and looking further ahead, if we are to believe that Mr. Branson and Mr. Musk will succeed in making space travel commercially viable, perhaps the biggest challenge to the LME won’t be from Asia or America, but the OME - The Orbital Metal Exchange. I wonder under which regulatory authority that might trade?

Interesting place for Board Meetings though. Great views, but nowhere much for a gin before lunch! 




 

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