News & Analysis

French Tier 1 FX dealers point finger at British fintech sector

Andrew Saks, Thursday, 22 April 2021

It is rather odd that a French bank which has a substantial share owned by the French government would share its opinion in the public domain with regard to British financial technology.

London is the absolute leader in global financial technology across all areas right the way from the very top tier including the single dealer FX execution platforms within the major banks of Canary Wharf, across every area of the spectrum down to the innovative startups in which young whizz kids form the future of the retail financial services world from former railway arches in Shoreditch.

Perhaps even more ironically, the French bank concerned is a Tier 1 FX dealer, and conducts the vast majority of its prime brokerage and OTC derivatives business from London.

The UK has had a proud history of leading the way in financial innovation, from its global reputation for regulation and rule of law, to the launch of the first-ever regulatory sandbox, the opinion from France today that British FinTech is at a post-Brexit crossroads is a rather complex one to decipher.

This morning, an opinion from inside one of the French banks' technology division was aired across British media, lauding Britain's leadership position in Financial Technology and acknowledging that Britain's contribution to the global market share of such technology is 10%, worth over £11 billion in revenue.

One point made is that after the UK's exit from the European Union, British firms should also forge and nurture strong relationships with other financial centres and fintech contributors in other regions.

Alternatively, a view could be taken that Britain will always be the focal point among every financial markets participant globally, and that being an independent nation is of no consequence. After all, the other institutional financial centers are Hong Kong, New York, Chicago (for listed derivatives), Tokyo and Singapore, none of which are in Europe and all of which have extremely well refined and longstanding commercial relationships with London.

In fact, all of the major British and American banks that use London as their FX dealing base have large offices in all of the major centers and are served by the same hosting companies as in London - mostly Equinix whose colocation sites transmit the vast majority of global trades and financial markets transactions between those American and South East Asian cities to and from London.

Back in 2017, Eurex Clearing said its 10 most active participants will be eligible for a “significant share” of the returns from its multi-currency interest rate swap offering, as well as being offered seats on its board.

Deutsche Boerse had boldly claimed that Bank of America Merrill Lynch, Citigroup, Commerzbank, Deutsche Bank, JP Morgan and Morgan Stanley had all signed up to the program, adding to the existing 200 clients which Deutsche Boerse claims Eurex currently has on board.

Indeed, these are major Tier 1 FX dealing banks, and yes they may well have signed up to the program, but that absolutely does not indicate a priority to clear all their trades in Germany.

No Tier 1 bank would even consider doing that, and LCH Clearnet’s firm, London-based OTC FX clearing customer base will remain absolutely undiminished.

The MiFID II rulings, which were about to be implemented at the time of these talks between Deutsche Boerse and LSE, set forth by pan-European regulatory authority ESMA require all venues, Deutsche Boerse being one of them, to report their trades as Regulated Marketplaces (RM), and will ensure that favorable advantages such as the sharing of the revenues of a trading venue with its participants, or offering shares in an RM to its customers are not permitted, as it creates the possibility of not providing the same terms to each participant, thus is not able to operate as an impartial centralized marketplace or counterparty.

That aside, Eurex already handles the vast majority of continental European trade clearing, yet is absolutely insignificant when compared to LCH.Clearnet’s clearing volumes in London.

Thus, even the infrastructure is London-centric.

Outside of the corporate investment banking sector, in just a seven year period since FinTechs became a major focus around London’s Shoreditch area, FinTech startups in London have outperformed the entire national economy of the entire country of France, with start ups which have been established over the past four years now totaling over £50 billion in value across all sectors of financial services.

Fintechs have disrupted the financial services sector by providing new services and product propositions, with better customer engagement and better quality services and a disruptive force to this extent attracting such vast investment is no mean feat.

For all of these reasons, it is a point of great importance that London's CFD and FX companies represent the top level of retail trading environments.

Britain's government even commits its own resources toward FinTech development in London, with talent such as Adam Afriyie MP having represented the Conservative Technology Forum at its inception. Mr Afriyie, MP for Windsor and a successful businessman in his own right had been a member of the Science and Technology select committee from 2005 until its abolition in July 2007, has been the President of the Conservative Technology Forum and Chair of the Parliamentary Office of Science and Technology since 2010.

Having a trading account with a company that is part of the Square Mile's accomplished capital markets ecosystem and which operates its own in-house developed highly sophsiticated trading infrastructure represents a huge advantage over the plethora of retail FX white labels which do not have their own trading systems and therefore are affiliate marketers rather than genuine electronic brokerages.

Thus, for European financial institutions with a vested interest in the FX markets, it is clear that Britain's outreach to the mainland post-Brexit is not the issue at all. The main issue is that in order for European Tier 1 financial institutions to keep toehold in the very upper echelons of electronic capital markets, they need to be in Britain.

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