SINGAPORE (Aug 27): The UK has extended its lead in the global currency trading business in the two years since it voted to leave the European Union, in another sign that London is likely to continue to be one of the world’s top two financial centres even after Brexit.
Leaving the EU was supposed to deal a crippling blow to London’s position in global finance, prompting a mass exodus of jobs and business. But with eight months to go, the city has tightened rather than weakened its grip on foreign exchange trading, a Reuters analysis shows.
Forex — the largest and most interconnected of global markets, used by everyone from global airlines to money managers in transactions worth trillions of dollars a day — is the crown jewel of London’s financial services industry.
Reuters’ analysis, based on surveys released by central banks in the five biggest trading centres, shows forex trading volumes in the UK had grown 23% to a record daily average of US$2.7 trillion ($3.7 trillion) in April 2018 compared with April 2016.
That was double the pace of its nearest rival, the US, which was up 11% to US$994 billion, mostly out of New York.
That means about two-fifths of all trades are handled in the UK, nearly all of them in London — a daily volume almost equivalent to the annual economic output of the UK.
The next three biggest markets are Singapore, which fell 5% to US$523 billion; Hong Kong, which grew 10% to US$482 billion; and Japan, which increased 2% to US$415 billion.
London has dominated the forex market for nearly half a century. Investment banks earned US$4.2 billion in revenues from forex business globally in 1Q2018, about 12.5% of all revenues in their global markets divisions, according to data from industry analytics firm Coalition.
While forex trading reaps relatively low margins, it brings in other business, allowing lenders to cross-sell other services such as interest-rate products, equity and bond issuance and advice on mergers and acquisitions, says former currency trader Keith Pilbeam, now a professor at the Cass Business School.
“It is all about getting people in,” Pilbeam says. “Selling forex is the best introduction to a company because you are talking to the treasurers of these companies.”
Bankers and traders attribute an overall growth in trading to global political uncertainty, including around Brexit itself. They also cite the presidency of Donald Trump and the threat of trade wars involving the US, China and the EU.
London’s time zone between the US and Asia means it is well placed in times of global turbulence, they say.
Increased volumes help the biggest players because investors want to buy and sell in markets that have the capacity to absorb large deals without significantly affecting prices.
Finally, London’s advanced forex trading hardware and high-speed sub-Atlantic cables to New York make it costly and troublesome for forex operations to move, they say, especially given that banks have a tendency to want to group together.
“The luck of geography has helped because most of the big market-moving news, whether in the US or Europe, has occurred during London’s trading hours,” says Neil Jones, London-based head of hedge fund sales at Japan’s Mizuho Bank. “You may have all the uncertainty around Brexit, but this is outweighed by London’s time zone, its language and the advantages that come from having the biggest market.”
The forex industry has emerged as a battleground between the UK and the EU in negotiations on what will replace current treaties and agreements after Brexit day on March 29, 2019.
Some EU leaders want to strip banks in the UK of the right to sell forex derivative products, which allow investors to hedge against swings in the price of currencies, to EU-based clients. These products, the largest part of the UK’s currency market, are sold to customers around the world, not just the EU.
Banks in the UK, including the London operations of global players, are moving some staff to European cities on expectations that they will lose the automatic right to sell services to EU investors after Brexit.
Companies that run trading platforms, such as Thomson Reuters — the parent company of Reuters News — and NEX Group, are shifting parts of their businesses to Dublin and Amsterdam to prepare for life after Brexit.
But Brexit supporters say the threat of job losses in the UK’s financial services industry has been exaggerated.
Tokyo, Hong Kong and Singapore had been eroding London’s dominance before the June referendum, the Bank for International Settlements said in its last major three-year survey of global forex activity in September 2016.
The city’s tightening grip on forex trade does not prove London will not suffer from Brexit, but it does underscore the attractiveness for banks of maintaining large international operations in the city, industry experts say.
“In order for London to be replaced, there needs to be an alternative venue, and there isn’t one,” says Alexander McDonald, CEO of industry group European Venues and Intermediaries Association. “The forex market is effectively an offshore dollar market, and offshore dollars are always going to be looking for an international home — and that’s London.”
