Would Brexit really put the City’s FX powerhouse status at threat?
As UK prime minister David Cameron continues his lobbying mission to win over European leaders to his “renegotiation” plans, investors are understandably weighing up the pros and cons of Britain’s place inside/outside the EU.
The good news for Cameron is that the in campaign appears to be gathering momentum – thanks in large part to high profile cash injections from the likes of Goldman Sachs and JP Morgan.
With London firmly placed as a leading FX centre, investors could be forgiven for thinking that this institutional banking support is reason alone to go with the in-crowd. After all, London’s FX traders currently buy and sell more than twice as many euros than the entire eurozone and more dollars than the US. Why would investors want to put London’s leading position in euro trading under threat going against the consensus of the political and financial elite?
It’s a strong argument but there is a view to the contrary – one that doesn’t centre around nationalistic connotations often associated with the out campaign.
As investors and FX market participants know, London accounts for well over 40 per cent of global FX turnover. However, one of the city’s closest European rivals is Switzerland – a country outside the EU – accounts for around 3 per cent of global FX turnover. The fact that this is small in comparison to London isn’t the point; the Swiss franc is used as a reserve currency around the world – currently positioned just behind the US dollar, Canadian dollar, yen, sterling and of course, the euro. As we witnessed this time last year following the SNB debacle, the strength of the Swiss franc has a huge impact on other currencies, including emerging ones, many of which are still to recover fully from this event. The point here is that if an important FX influencer such as Switzerland remain a fiscal power outside a centralised political union, why can’t a major player such as the London?
However, it’s not just about the value of sterling – there are logistical and operational factors to consider here.
Unlike Switzerland, London offers the deepest pool of capital in the time zone between Asia and the United States, and London time is often quoted in international business settings. This logistical benefit is unique to the City and would not change regardless of the referendum result.
On top of this, there is the infrastructure factor. London’s trading infrastructure means that any move of currency flow to mainland Europe would come at a huge cost. The links that connect electronic trading, which now accounts for over half of the daily $5.3trn FX market globally, are all in London. Therefore, any move from the UK to Europe would not be quick and would require infrastructure spending the likes of which the majority of European countries would be unable to commit to.
David Cameron will certainly be going all out to win over the remaining countries before next month’s crucial European council meeting, and political and financial lobbyists will no doubt continue to push the narrative that London would not hold the same influence outside.
As tempting as it may be for undecided investors to go with the flow they should consider this – these were exactly the same voices that said London would collapse as a global FX centre if Britain didn’t join the euro. A five-year eurozone debt crisis and the near bankruptcy of Greece later is surely reason enough for investors to think again.
When all is said and done, regardless of the referendum outcome, it is hard not to see a future without the City at the operational and logistical heart of global FX trading.
Tim Focas is financial services director at City think tank Colloquium