5.      INTERNATIONAL FINANCIAL CENTRES   

 

London has been one of the world’s leading international financial centres for centuries with the two other largest centre being New York and Tokyo. While this role was to some extent transferred to New York following World War II, London experienced a remarkable recovery during the 1960s and 1970s and re-established itself as the centre of a number of markets and service areas especially with Eurodollar markets and foreign exchange.

 

This process was supported by the ‘Big Bang’ in London in 1986 which transformed London into a leading international securities centre. Many of the largest integrated international banks and investment houses were to set up or conduct their main international business through London. The Big Bang, in particular, provided for the abolition of the earlier distinction between stock brokers (sellers) and stock jobbers (buyers), the dismantling of restrictions on the ownership of Stock Exchange firms by banks (including overseas institutions) and the introduction of price competition through the removal of the earlier fixed commissions in securities trading.

 

 

 

The expansion of both international and domestic financial business has continued since through the 1980s, 1990s and 2000s. London has also expanded to include a new series of significant commercial office developments especially with the construction of Canary Wharf in the Docklands area and with new investment managers, including hedge funds, moving into the West End of London more recently. The effect of this has been to create three separate ‘Cities’ with a significant amount investment banking, in particular, now being conducted through Cabot Square and other new developments in Canary Wharf, hedge funds and asset management in the West End and many of the other more traditional financial services still being conducted in the old City around the Bank of England.

 

(1)    International banking

 

London remains a leading international banking centre undertaking about one-fifth of total cross-border lending. Its revival in the international banking area began in the late 1950s when it became the focus of the rapidly expanding Eurodollar market. The absence of reserve requirements and a sympathetic regulatory system made the City attractive for doing business and especially for US firms with excess dollar funds. A large number of foreign banks quickly came to London to participate in the growing Eurodollar markets either directly or through joint ventures or consortia with other banks. This influx which was, in particular, led by US banks which moved a large part of their international dollar business outside the US through the 1960s and 1970s due to increasingly restrictive regulation at home. These included interest rate ceilings on dollar deposits by banks in the US (under Regulation Q) and high reserve requirements on dollar deposits (under Regulation D). By the mid-1980s, more than 70 US banks were active in London. The City is also the premier location for European and Asian financial institutions and especially Japanese banks during then 1980s and then the Chinese banks in the 1990s and 2000s. Major players still include Citigroup and J P Morgan Chase from the US and Deutsche Bank, Credit Suisse, UBS and Paribas from Europe.

 

(2)    Investment banking

 

Investment banking services in London were traditionally carried out through independent merchant banks although many of these were acquired by foreign banks in 1980s to allow them to establish a presence in London’s investment banking markets. The number of European banks also decided to conduct their investment banking operations through London operations in the City. Many US investment banks and Japanese securities houses also conduct their European operations out of London. These offices provide a full range of investment banking services including the issuing and underwriting of securities, corporate advisory work on mergers and acquisitions, privatisations and restructurings and foreign exchange, financial derivatives and trade finance. Large investment banks in London still include Goldman Sachs, Morgan Stanley, Bank of America Merrill Lynch, J P Morgan, Deutsche Bank, Credit Suisse, UBS and Nomura Securities.   

 

(3)    International bonds

 

Following the first Eurobond issue, which was lead by the London investment bank SG Warburg in 1963 for Autostrade to construct the Italian motorway network, London has been the centre of the Eurobond markets. Around 60% of Eurobond primary market activity, with the raising funds for borrowers through the issue of new bonds, takes place in London with the main transactions being denominated in US dollars, Yen, Euros, Canadian dollars, Sterling and Australian dollars. 70 per cent of all secondary market activity is conducted through London.

 

(4)    Equities

 

Equity business is principally conducted through the London Stock Exchange which is the world’s fourth largest market by equity capitalisation. The LSE has $2,407bn equity market capitalisation only after NYSE Euronext ($11,794bn), Tokyo Stock Exchange ($3,277bn) and NASDAQ ($3,165bn). The LSE provides listing facilities for both domestic UK equities (company shares) and international securities (shares of foreign companies with listings on their domestic market or other foreign exchanges). London is the largest market in terms of foreign equities with almost 60% of the market in international equities turnover. The LSE began in Jonathan’s Coffee House in 1760 when a group of 150 brokers formed a club to buy and sell shares.

 

Following the Big Bang in 1986, the traditional floor trading (with face-to-face dealing between brokers and market makers on the Stock Exchange floor) was replaced by the screen-based dealing with the ‘Stock Exchange Automated Quotations System’ (SEAQ) and SEAQ International. While the SEAQ screens provided necessary price information, trading was still conducted between dealers by telephone during the early transitional stages. A new automated screen-based dealing system (called SETS) was introduced in October 1997 which provides for the electronic matching and settlement of all of the main trades dealt with on the exchange. SETs operates on the basis of fully automated order matching system with trades being settled through the London Clearing House (and now LCH Euronext). SEATS Plus (the Stock Exchange Alternative Trading Services) is a separate order matching system for AIM (Alternative Investment Market) shares and remaining official listed shares. Shares can also be dealt with through the Alternative Investment Market (AIM) or the techMARK market

 

(5)    Foreign exchange

 

With the removal of exchange controls and increased cross-border investments at the end of the 1970s, foreign exchange dealing expanded dramatically in 1980s and 1990s. This was also driven by the continuing growth of international trade and by huge international movements in funds facilitated by the removal of capital restrictions in many parts of the world. Despite the loss of its earlier dominance under the gold standard until the early 1930s, London and re-emerged as the world’s largest centre for foreign-exchange trading following the adoption of floating currency regimes after the collapse of the Bretton Woods system of managed currencies in 1971-1973. This is supported by London’s central time zone advantage and position in other international wholesale markets.

 

 

 

(6)    Financial derivatives

        

Futures trading has since the early 1970s been dominated by the Chicago Board of Trade (BOT) and the Chicago Mercantile Exchange (MERC) which will merged in 2007 (Section 3(4)). The London International Financial Futures Exchange (LIFFE) was opened for business in September 1982 and has since grown to become Europe’s leading futures and options exchange. LIFFE was acquired by Euronext in January 2002 which merged with the New York Stock Exchange in April 2007. LIFFE shifted from its traditional trading ‘open-outcry’ system to screen based trading in 1998 due to the cost savings generated and with price the competition from other European rivals and has taken forward a number of other technical and trading innovations since. LIFFE had an initial out of hours electronic trading platform (Automated Pit Trading or PIT) and later introduced LIFFE CONNECT. Euronext LIFFE provides a full range of financial, equity and commodity based derivative contracts including in short-term euro denominated interest rate EURIBOR derivatives. The London Metal Exchange (LME) and the International Petroleum Exchange (IPE) are also based in London which are  both recognised investment exchanges to the extent that they deal in commodity related derivatives as well as pure commodity contracts.  

 

(7)    Asset management

 

London is the world’s leading financial centre for fund management with the industry being highly concentrated. London’s fund management services are principally provided to large institutional clients, including insurance companies and pension funds, rather than private clients as on the European Continent. A number of UK fund managers were acquired during the 1990s and 2000s by overseas firms to benefit from their international asset management expertise. Major firms include Mercury Asset Management (acquired by Merrill Lynch in 1997), the Gartmore Group, the Henderson Group, Schroders, Morgan Grenfell & Co Aberdeen Asset Management and Barclays Wealth.

 

(8)    Gold bullion

 

London has been the world’s leading bullion trading centres since the nineteenth century with the famous London ‘fix’ (Section 3(6)). Representatives of the world’s leading bullion dealing firms meet at Rothschilds merchant bank twice a day to fix the official price for gold which it then used as a global benchmark for gold transactions.

 

(9)    Insurance

 

London insurance industry is concentrated in the areas of marine, aviation, international reinsurance and large commercial risks most of which are of international nature. Apart from insurance companies, general insurance business is conducted through Lloyd’s of London which is still considered to be the largest single insurance market in the world (Section 3(6)). The share capital of Lloyd’s has traditionally been provided through its large number of individual members although companies have also been allowed to join recently. Individual members assume unlimited liability for claims relying on their own personal financial resources to support any liabilities that arise. Lloyd’s itself does not itself provide insurance for these claims although it does maintain a fund to support syndicates that might otherwise default and consequently damage the reputation of Lloyds.

 

(10) Marine services

 

International shipping services are principally conducted through the Baltic Exchange which deals with marine insurance, ship broking, ship classification and accounting and other legal and consultancy. The exchange originally operated out of a number of separate coffee houses in London, including the Jerusalem Coffee House and the Virginia and Maryland Coffee House which later amalgamated. It was originally set up in 1744 wit its name shortened to the ‘Baltic’ in 1810 and with 'Baltic Club' regulations being produced in 1823. It now has around 550 members and operates a number of leading shipping indices. London’s involvement with marine services dates from its importance as an international trading centre and with Great Britain being pre-dominantly a shipping nation. This allowed London to develop a leading expertise in maritime law and to act as a centre for other marine services with many of the main ship owning companies or families of the world operating out of London.