Xavier Rolet is CEO of the London Stock Exchange Group.
Four months have passed since the UK voted to leave the European Union and there has been no shortage of opinion and commentary about the economic impact on the United Kingdom, from varying views about what the economic priorities and impact could, should and will be to political assertions that the UK will have lessons to learn from its democratic decision.
Well, in business, the most important lesson to learn is that the customer is always right.
The UK’s unique financial services ecosystem, as well as supporting millions of jobs and paying billions in taxes, benefitting the economy, also raises hundreds of billions of pounds for companies large and small in the UK, Europe and around the world.
Fast-growing economies like India and China need trillions of dollars to build transport, energy and telecoms infrastructure. They have to raise this on global capital markets, through instruments colloquially known as Masala or Dim Sum bonds: London issued more Dim Sum bonds than the rest of the world, excluding Greater China itself, this year and is the leading Masala bond issuer.
Our capital markets – the deepest and most liquid in the world – also continue to raise billions for companies around the world to grow and invest. We are the only country in the world to have a successful capital market specifically for SMEs, called AIM. In the 21 years since it was established, AIM has raised nearly £100 billion to help over 3,600 small and mid-size companies invest and grow. Other countries have tried, but failed to establish such a successful market.
Or take the clearing and settlement of trades. Veterans of the pre-financial crisis City may not know much about this “plumbing” of the City, but it now underpins the global financial system, ensuring millions of complex daily trades are settled in a safe and highly regulated manner, increasing financial stability, transparency and protecting investors.
Clearing houses act as firewalls or circuit breakers in the system, guarding the rest of the market against default by companies by holding collateral and monitoring transaction risk.
It became mandatory following the collapse of financial institutions during the financial crisis and London is the global leader: Interest Rate swaps are the largest financial asset class in the world – last year London’s leading clearing house, LCH, cleared 90 per cent of them globally.
All and any of this business could go anywhere in the world, but customers choose London.
This is not just because London raises precious growth capital for the world, but because its ecosystem enables customers to save on capital as well through efficiencies.
London clears all 17 major currencies through LCH, enabling it to reduce or eliminate risk. As a result, last year LCH saved its customers $25 billion in regulatory capital they have to put aside, which could be invested in the real economy instead.
One of the ‘lessons’ I have heard people say the UK must learn as a result of Brexit is that the clearing of euro-denominated products can no longer take place in London.
If the euro-denominated clearing business does leave the UK, (which, by the way, is not as simple as it sounds from legal or financial stability perspectives), you lose these efficiencies and push up customer costs.
And, not only would the wider UK and European real economies suffer through less, but more expensive, capital, but much of that business is unlikely to go to Europe anyway.
Politicians, regulators and academics have all pointed out that the likely beneficiary would be the only other financial centre in the world that could come close to centrally clearing all these currencies as efficiently – New York.
New York already clears euro-denominated securities thanks to an EU-US mutual recognition arrangement for clearing houses. I believe the UK needs to secure continued regulatory equivalence with the EU. After all why would the UK settle for less than the US already has?
It would also be in our collective interests to have transitional arrangements as the UK exits the EU, in order to provide stability to the markets – the UK and EU both have an overriding interest in a settlement that works for both economies in the long term.
The opportunity for the UK now is to put access to growth capital for UK SMEs at the heart of any post-Brexit Industrial strategy. This type of long-term finance allows companies the time and space to innovate, invest, grow and create jobs.
There is a vast amount of equity finance potentially available but, for growing companies, too many barriers to accessing it. Yet the potential is clear: independent research shows that an increase of just one per cent in the number of high-growth businesses would add two per cent to GDP – a huge multiplier.
And because, by definition, SME success tends to be based on innovation (the thousand most dynamic SMEs in Europe count over 4,000 patents and trademarks between them) rather than the strict cost control typical of large cap businesses, the jobs they create are usually higher skilled and higher paid – helping with productivity and giving the next generation the future they deserve.
So, as we negotiate the UK’s departure from the EU, we must maintain and build on this competitive, efficient and highly liquid financial ecosystem, with clearing at its heart, that does so much to support the UK, European and global economy.
But at the same time, Europe need to realise this is not a zero sum game. London acts as a money pump to the European economy. If London loses business, the European economy suffers and the business, capital and associated benefits will likely move to New York anyway.