Financial nationalism means being closed, financial patriotism requires being open

Financial nationalism means being closed, financial patriotism requires being open

by Catherine McBride
article from Friday 26, February, 2021

MANY PEOPLE get upset when a company established in Scotland or the UK is sold to a foreign investor, even if there is no loss of jobs or investment. They often demand the government must stop the sale even when there is no strategic or defence reason for doing so. Yet these financial nationalists give little thought to the entrepreneur who has toiled for years to establish the company, with little to no government assistance.  

It would appear this nationalism also extends to EU-listed equity trading even though the returns that fall to the public-at-large, via the duties and taxes charged on this business, are very minor. Recently the UK’s army of amateur virologists discovered the Amsterdam trading platforms: Turquoise, CBOE Europe and Euronext, and they are outraged. How dare the Dutch make more transactions in EU-listed companies in January than the City of London! (Don’t they know who we are?)   

But the Dutch are not out-trading the UK due to their market making skills, nor their better prices, their narrower spreads or greater market depth. Investors are merely trading in Amsterdam because they have to. The EU has not granted equivalence to the UK trading platforms. But unless there is a genuine reason for investors to trade in the EU, any loophole that gets around equivalence will see this trading volume dissipate back to the market with the best prices and the largest bid and offer volumes.   

The panic over trade in Amsterdam also overlooked the fact that the three platforms that were measured are not even Dutch.  

Turquoise is majority owned by the London Stock Exchange. The CBOE Europe is owned by CBOE Global markets, the parent company of the Chicago Board Options Exchange in the US. While the third Amsterdam platform is Euronext with a quarter of its capital owned by a consortium of four French and Belgian financial service companies, Euroclear, BNP Paribas Fortis, Caisse des Dépôts, and the Belgian Federal Holding and Investment Company. While ABN Amro, the only Dutch bank in the Reference Shareholders, owns only 0.55% of the shares.  

So should the man on the Clapham omnibus be worried about EU-listed shares trading on platforms based in the Netherlands but owned by international investment firms including the London Stock Exchange? Probably not.   

The tax take by the UK chancellor may dip by a tiny amount but EU denominated equity trading is not a big part of The City. The City’s largest markets are Asset Management, Bond Trading, Foreign Exchange, Over The Counter (OTC) Derivatives, Commodity Trading, Insurance and Reinsurance. And we shouldn’t forget all of those off-exchange equity transactions by Systematic Internalizers, Periodic Auctions, “Large in Scale” waivers, OTC trading and the Dark Pools that annoyed the EU so much that they capped them under the MiFID II regulations. Unsurprisingly, the EU’s Double Volume Caps on Dark Pool trading mainly limited UK and Scandinavian equity trading as they had the most actively traded equity markets in the EU.  

But the City of London, the Corporation of the City of London, the Bank of England and the Treasury should not be complacent about losing the EU equity business. Just as any market leading business should resist losing market share to a rival. The UK should be reviewing the cost of doing financial business in the UK as well as reviewing all of the EU regulations that were designed for smaller EU markets.   

Competition is good for business. It should be spurring the City on to raise its game even though the only reason people are trading in the EU is because the European Commission has refused to grant UK trading platforms equivalence. It would be better if the increased volume was due to investor choice because of lower dealing prices, larger bid /offer volumes or better customer service rather than coercion. These things might exist in the EU but that is not why the trading has moved there.  

But the EU has taken a large risk by forcing people to trade on EU based platforms.  There is always a chance that people will get sick of dealing with this protectionist regime, with its quaint rules and restrictive practices, and just invest elsewhere. There are many reasons for avoiding EU-listed shares: the lack of free floats; the unequal voting structure; the many regulations that can keep a failing management team or inept board in place; or even the fact that there are so few listed companies. But now the EU has added another reason to avoid them. Investors like to be able to get out of an investment as easily as they can get into one. Limiting the number of secondary markets where investors can sell their EU equities is unlikely to produce the best price or even allow them to sell the quantity they want. That could make many investors wary of taking up new EU based issues.   

Let’s face it, the EUropeans have never liked ‘Anglo Saxon Capitalism’. They are wary of investing in a company that someone else is willing to sell to them; they dislike public capital raising preferring plain vanilla bank borrowing; and they dislike granting shareholders equal voting rights.  

The UK should definitely not be hankering after equivalence.   

The UK has much more in common with the Anglo-Saxon capitalist world than it does with the EU. The UK has allowed EU banks and investment firms to remain operating in London because they are our clients, and unlike the EU – the UK is not terrified of competition. It is probably worth reminding the financial patriots that the majority of the taxes raised on financial services come from those paid by the highly remunerated employees. In the financial year 2019/20, the PAYE contribution of the UK banking sector was over £21 billion, more than double the total amount that the banks paid in Corporation Taxes, the Bank Levy and the Bank Surcharge. The UK exchequer should be concentrating on keeping these employees working in the UK and not be worrying about any lost revenue from an internationally owned trading platform.  

There are so many positives about being outside the EU. For a start: as UK local banks no longer have the possibility of opening a branch office in the EU, the Bank of England no longer needs to require that they meet the Basel III capital requirements that were only ever intended for ‘internationally active banks’. It was always a nonsense that the EU made all EU banks, no matter how small, comply with this Basel regulation. A savings bank in a small Italian hilltop village is unlikely to ever open an office in the Czech Republic, or Finland or even Rome for that matter, yet still they had to hold enough capital to be ready to do so.  

The real benefit of UK national and regional banks no longer needing to meet the Basel III capital requirements would be these banks should then have more money to lend to local businesses. This should be welcome as the economy tries to restart itself after a year of Covid Lockdowns.   

There are a myriad of other EU regulations that didn’t suit either London’s massive financial centre nor the requirements of the UK’s regional banks nor its small and medium sized enterprises. Hopefully, the UK regulators will be jettisoning the EU’s one-size-fits-all regulations as quickly as they can, rather than signing up for EU regulatory vassalage.  

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Catherine McBride is an experienced economist, working in corporate governance, competition economics, global trade, financial regulation and public policy. Catherine gained her bachelor’s degree from the University of Sydney in the mid 80s, was a trader in equities, derivatives and commodities during the 90s and noughties, and following the EU referendum worked for the Financial Services Negotiation Forum, Legatum Institute and the Institute of Economic Affairs, before becoming freelance.    

Photo of Bank of England in the City by from Adobe Stock.   

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