Financial Times, 24 November 2001


A touch of paranoia about one's place in the world:

Despite periodic hand-wringing about Continental competition, London's financial services industry is still pre-eminent in Europe by a long way

By Martin Dickson


Every so often the City of London suffers a bout of paranoia about its place in the world: is its position as Europe's pre-eminent financial centre under serious threat from continental rivals?

There was a bad attack of hand-wringing and nightsweats when the euro was launched, with the UK outside the currency zone. Another outbreak is possible over the next few weeks.

On December 1, the Financial Services Authority, the City policeman, will finally assume its full powers after five years of gestation. The Cassandras are warning that if it acts in a draconian fashion, business will move to friendlier centres. Well, yes, obviously, but at present it is hardly foaming and frothing at the mouth.

Two days later, Euronext, the Franco-Benelux exchange, is likely to seal its takeover of Liffe, the derivatives exchange, which accepted its bid over a rival one from the London Stock Exchange. Parliament's Treasury Select Committee, apparently concerned about the implications for the City, has taken the unusual step of calling hearings on the takeover.

Victory for the LSE would certainly have been good for it, giving it greatly added bulk and a broader product range as it fights for a leading place in Europe's bourse consolidation. But the LSE did not offer the most attractive solution to the Liffe board, and Sir Brian Williamson, chairman of the latter, can be expected to argue forcefully before the select committee that the Euronext takeover is actually very good news for London.

How so? First, the terms of the deal are a huge vote of confidence in Liffe and in Connect, a sophisticated computer system it had developed for trading the most complex derivatives. Euronext is to make London the hub for all its derivatives business, under Liffe's existing management and using the Connect system. The deal means the European derivatives industry has now consolidated into two strong competing forces, one based in Frankfurt (Eurex) and one in London, and both with global reach. In this field, Europe is far ahead of America's old-fashioned derivatives exchanges.

Second, the deal could strengthen the hand of the London Clearing House, which handles the clearance of Liffe's trades, in industry consolidation. For the time being, it and Clearnet, Euronext's clearer, will continue with their separate flows of business. But customers may eventually demand the ability to offset trades between the two, pushing them closer together.

Third, by showing itself willing to accept a continental offer over a domestic one, London has underlined its openness as a financial market. That sends an important message to the world and, by linking London directly with a eurozone bourse, may help reduce the misunderstanding of the City - if not downright distrust of it - that seems a feature of the Brussels bureaucracy.

Not that being outside the eurozone has hurt the City. A report this week by the Anglo-German Foundation, based on interviews with leading figures in both London and Frankfurt, concludes that it has suffered no disadvantage. The euro is generally dismissed as a purely technical, back-office issue.

Nor is Frankfurt seen as a serious contender to London as a global financial centre. It may be making some gains, thanks to the German economy, but it remains firmly in the second league, and few expect the situation to change substantially. If anything, the report suggests, there has been more co-operation than competition between the two centres in the past few years - particularly in the legal profession, where a series of UK-German mergers has allowed London's global firms access to the local German market and given German firms access to global know-how.

These broad trends can sometimes be obscured by the City's - and the media's - obsession with the fate of the Stock Exchange, which may be significant as a symbol of financial virility, but is far from being a pillar on which the fate of London depends.

A touch of paranoia can be useful in keeping people on their toes. "Only the paranoid survive," is the healthy mantra of Andy Grove, the co-founder of Intel. But too much can be destructive and the MPs poring over the sale of Liffe should reassure themselves that the City is in good, rude shape, at least for now.




© 2002 Financial Times Limited