Dodd-Frank – Extraterritoriality guidelines under Dodd-Frank will give the CFTC oversight of European financial institutions and rare insight into European bank balance sheets, by virtue of the registration requirement. This is being resisted by European regulators who are arguing for effective equivalence, or substitutive compliance as it is called by Chairman Gensler. Effective equivalence will allow for the mutual recognition of the rules between the two regions, so that one does not attempt to supercede the other. But Europe is losing the battle. Should the extraterritoriality guidelines remain as they stand, it will massively enhance the CFTC’s ability to oversee and regulate Europe’s financial institutions. On the flip side, the idea that European institutions may be competitively advantaged compared to their US peers because of the more aggressive US implementation timeline, is a mirage. As we discuss in our research, The Global Risk Transfer Market II, extraterritoriality benefits will not be realized since most global banks do not see enough of a window of opportunity to exploit. The time gap may be one or two years – not enough to justify the effort. In other words, the clearing and transparent trading mandate for OTC derivatives as outlined by the G20 will march to a Dodd-Frank beat, not to one set by EMIR or MiFID II/MiFIR. This said, Wednesday’s vote on MiFID II by the European Parliament Economic and Monetary Affairs Committee curbing High Frequency Trading will also harm London. Europe, it seems, is not only shutting down the OTC market, but the exchange-traded one as well. London’s only real hope now is that Mitt Romney wins the US election and rolls back Dodd-Frank, in turn undermining European zeal. But this is an unlikely scenario. Even if the Republicans win the election, they will not win enough support in Congress to repeal Dodd-Frank.
Basel III– New, more stringent capital requirements will apply first and foremost to European institutions which have traditionally implemented Basel rules sooner than US banks. The reason for this tradition is unclear but well-established. US banks are notorious for dragging their feet on Basel compliance, with many firms still not up to speed with Basel 2.5, let alone Basel III. The capital requirement directive does call for more uniform international implementation but we expect US banks to delay. The capital requirement is only a directive, not a law, and slow compliance in the US will place European banks at a distinct disadvantage.
The Volcker Rule – US Restrictions on bank proprietary trading will massively impact the ability of US banks to make markets and compete with their European competitors, which is why US firms continue to lobby heavily against it. Rather than concede, however, US regulators appear to be pursuing international unanimity on Volcker through the Liikanen Report, which has been initiated by European Commissioner Michel Barnier and proposes a hybrid approach between Volcker and the UK alternative – the Vickers Report. Vickers only advocates for ring fencing between deposit-taking banks and investment banking operations, but does not prevent banks from proprietary trading. Recent comments by Paul Volcker make it clear that the US does not see ring fencing under Vickers as sufficient. We see the Liikanen Report as an attempt to extend the Volcker rule into the UK over Vickers. The findings are due this month.
The problem facing London is two-fold. The first is that it has patronized and courted the OTC derivative markets which, under the G20 mandate of 2009, are now being forced into a transparent, exchange traded environment. The US sees a huge opportunity to win significant market share under an exchange-traded model. It is home to the largest exchange in the world, the CME. It sees product standardization as the future. Bespoke, tailored financial instruments can remain in the “London Loophole”, as it is known in the US. This is a shrinking market. Second, the US regulatory landscape is relatively uniform. Many bemoan the fact that Dodd-Frank missed an opportunity in failing to merge the Securities and Exchange Commission (SEC) with the CFTC and end the long-standing battle between the two agencies, but the fact is US oversight is rational compared to Europe with its 27 member national regulatory bodies, the European Parliament, the European Commission, the European Council, the European Central Bank and the European Securities and Markets Authority.
US banks have regulatory fatigue. They are coming to see lobbying and compliance as expensive and pointlessly defensive. They want to build out for the future and they are turning their attentions forward. The attitude is: “We don’t care what the rules are, just hurry up and write them so we can get on with business.” Meanwhile Europe’s London-based banks are obsessed with lobbying, struggling for amendments and delays, and further fragmenting the regulatory process by encouraging internecine Continental fighting. This strategy will only secure the City’s dismal fate.
Like the US, London’s banks should instead be looking to the future. They need to throw their weight behind Martin Wheatley, head of the recently-established Financial Conduct Authority (FCA). The FCA is the best chance that London has to show that the UK can get tough on finance. Wheatley is co-chair of the Libor review, alongside Chairman Gensler. This alliance should be fostered in the hope that it supplants the current close relationship between Chairman Gensler and Commissioner Barnier, whose negative views on London as a financial centre are well-documented. London also needs to focus less on the OTC derivative market and build up FX. Few financial centres can compete with London’s position in the world time zone. The more it does to develop itself as the hub for global FX flows, the stronger its position as a financial centre will be.
Should London’s banks fail to formulate and implement a unified industry response to the challenges they face, the City they helped to build will be left behind.
Comments | Post a Comment
17 Comments to "The End of London":
Anonymous
28 September 2012
drivel.
Anonymous
28 September 2012
Hopefully this puts the willies up Westminster and serves to focus efforts
crammond1964
28 September 2012
good article ; sadly the boards of these departments are filled with ex bankers who focus on the present rather than the future . Since 1997 our regulation has been forgotten and ignored for all the wrong reasons ; now we are embarrassed as the guilty mount up
Comments (256)
Anonymous
28 September 2012
Is the author a New Yorker by any chance?
williamrhode
28 September 2012
actually, I'm a Londoner.
Comments (88)
crammond1964
28 September 2012
however usa is wrong time zone
Comments (256)
davidm
28 September 2012
Good summary, Will, & a depressing one for us Londoners. I had to smile at your MiFID 2 in a sentence: 'not only shutting down the OTC market, but the exchange-traded one as well'. Tragically true, I fear.
I'm not sure what you mean by 'London needs to... build up FX'. The London FX market is pretty well built already: 30+% of global activity at the last count, still growing of late. And so far this is one area that the European regulators have left relatively unharmed. A 30% share means limited room for further growth, however, so we'd better keep looking elsewhere. The insurance biz was still doing OK, last time I looked....
Comments (20)
prowady
28 September 2012
great compilation of the all the tranches of rules. great to know about the new GRTM report, too. I'll take a look! ;-)
one final word: singapore...
Comments (87)
crammond1964
28 September 2012
only problem with singapore is a total lack of regulation ! If you start by allowing abuse the rot will set in .
Comments (256)
marketnanny
28 September 2012
Londons acquiescence par for the course London
Comments (5)
barney
28 September 2012
lot's of juicy rules will not attract business, other than to law firms. this article fails to understand what drives business.
Secondly, if the proposed future-order rule set were so superior, surely the US will not hesitate to go it alone on higher capital requirements (implemented Basel 2 yet?), margin for un-cleared swaps, Volcker, transparency etc? ...... I thought so.
Comments (16)
Anonymous
30 September 2012
Wishful nationalistic thinking by the author with an interpretation of the evidence to suit his article.
Anonymous
30 September 2012
"Wishful nationalitic thinking"? Anonymous, actually, if truth be told, I believe that Rhode is a British citizen, recently transferred to New York. You were saying?....
nigelwoodward
01 October 2012
Will
Very interesting. With increasing "e" who needs borders and hence the greater role of international regulation - like networks and computing, financial services becomes virtual. This is a good indication of the statements around regulatory arbitrage - but I guess will take some time to evolve, during which other drivers will kick in. Michael Mainelli's ZYen global financial centre index will make interesting reading in this context
Comments (2)
Cap'n Jack
01 October 2012
The breakdown of where the Libor culprits come from is an almost exact match for the distribution of where the banks that constitute the USD Libor panel come from. In his testimony, Gensler included the Libor Submission Activity data for all the USD Libor panel members (see Chart F).
williamrhode
02 October 2012
The Liikanen review calls for Europe’s biggest banks to create a separate entity for their trading activities
Comments (88)
williamrhode
09 November 2012
MPs to assess cause of shrinking City
http://www.ft.com/intl/cms/s/0/a587890e-29c4-11e2-a5ca-00144feabdc0.html#axzz2BjwWXrMu
Comments (88)