The UK Chancellor of the Exchequer joined leading City institutions today (18 April) at the Gherkin, 30 St Mary Axe, to launch a new initiative designed to strengthen London’s position as the leading western hub for international renminbi (RMB) business – and boost the RMB’s wider international use for trade and investment.

The City of London initiative on London as a centre for renminbi business will help deliver a private and public sector strategy for London to become a centre for RMB products and services, complementing Hong Kong and other financial centres. A new report published by the initiative today quantifies the already significant renminbi business being done in London.

The initiative is facilitated by the City of London Corporation. The current members are Bank of China, Barclays, Deutsche Bank, HSBC and Standard Chartered, with observers from HM Treasury, the Bank of England, and the Financial Services Authority. The initiative seeks to provide leadership to the wider financial markets on technical, infrastructure and regulatory issues relating to the RMB product market in London.

It also advises HM Treasury on maximising London’s capacity to trade, clear and settle RMB and articulates practical next steps and long-term aims for the further development of the RMB market in London. Additionally, the group advises HM Treasury and other UK authorities on any financial stability concerns members may perceive.

George Osborne, Chancellor of the Exchequer, said:

“I welcome this initiative, which will further strengthen London’s development as the leading Western Hub for the international Renminbi market. As the world’s leading financial centre, London is uniquely well placed to assist China in its goal of further expanding the international use of the RMB.”

Stuart Fraser, Chairman of the initiative’s Steering Committee and Policy Chairman at the City of London Corporation, said:

“As the world’s leading global financial centre, London is perfectly positioned to act as the western hub for RMB as exchange controls are gradually relaxed. London has many natural advantages, including: time-zone, a trusted legal system, a respected regulatory framework, deep pools of liquidity and a strong track record of innovation. We are also home to global institutions that have expertise in utilising RMB-denominated products and services to benefit clients by facilitating trade with China. This will increase exports and help deliver jobs and growth in the UK and Europe.”

The report published today by the initiative presents a picture of the renminbi products and services offered by London institutions and the volume of business traded in London in 2011. London: a centre for renminbi business, commissioned by the City of London Corporation and authored by Bourse Consult, demonstrates that a significant amount of renminbi business is already being done in London, including services for retail clients, services for corporate clients and interbank and institutional business. These products and services benefit clients by enabling them to conduct international transactions cost- effectively and securely and allow risk to be hedged and managed.

The total amount of London customer and interbank RMB deposits revealed in the survey is in excess of ¥109 billion. Customer deposits – deposits in accounts for personal, corporate and institutional customers – amount to ¥35 billion (compared with a total customer deposits volume in Hong Kong in December 2011 of ¥589 billion). This indicates that a pool of RMB liquidity is being established which will be valuable in developing the potential of London as a centre for RMB business, not only in forex but also in investment products and other instruments.

Click here to download a copy of the report.

Bloomberg Business week recently produced this amusing but helpful chart to explain the main implications of Dodd-Frank on various groups impacted by it.

Over the years Bourse Consult has built up a reputation for providing high level expertise in some of the more important areas of financial market infrastructure. We are sometimes asked for  examples of specific projects that we have advised on and the sort of bodies we have advised. While client confidentiality does not always allow us to give complete details of the projects we advise on, we thought it would be useful for potential clients if we gave an indication of some of the more recent projects we have been involved with. more >>

There is a high level of interest currently in “access rights” in market infrastructures – that is, the right of of one infrastructure to provide a service to its customers based on the service provided by another infrastructure, for example, to clear trades executed on a given trading platform. It has been one of the most contentious issues in the discussion of EMIR (the draft regulation covering OTC derivatives and clearing houses in Europe) and is at the heart of the the issues raised by the proposed merger of Deutsche Borse and NYSE Euronext. However, the term is often used in a broad way, whereas there are many important distinctions, which can mean that what appears to be an effective “right of access” achieves very little in practice.  This post tries to explain what to look for in judging whether a “right of access” is worth anything. more >>

The European Central Bank has just hosted a wide-ranging conference looking into the future of securities settlement. It was particularly valuable for bringing together an impressive spread of panellists from around the world, as well as the “usual suspects” from within Europe. And while Europe is focused on integrating markets, preparing for T2S and dealing with more urgent problems, it is valuable to be reminded that the rest of the world is moving forward and not always along the same track that Europe is following.

The recurring theme in discussions was the dilemma between consolidation and competition. Is it better to consolidate market infrastructures into a single entity and achieve economies of scale, even at the cost of creating a monopolistic leviathan? Or is it better to retain a (small) number of competing entities, forgoing some efficiency gains but making up for them through the stimulus of competition?

While most of the rest of the world seems to be aiming for consolidation, the consensus for Europe (at least, from the users of infrastructures) prefers competition. As the focus of the discussion was on settlement, this implies that the current settlement infrastructure ought to consolidate down to a small number, say, 3-4 CSDs that will compete with each other by holding down prices and stimulating innovation. However, if this competition is to be effective, it needs to be competition across the whole continent. Consolidation onto one CSD for north-west Europe, one for central Europe and one for southern Europe, for example, would not result in true competition. They would just divide the market rather than fight over it.

The difficulty in arriving at this result is that in order to compete head-to-head, CSDs need access to the same raw material – in their case, issues of securities. And at present access to issuers is controlled by national CSDs. If a foreign CSD wants to hold Spanish, German or French securities, for example, it needs to hold them in the Spanish, German or French CSD and pay a fee to that CSD for doing so. The “home” CSD will thus always have an advantage in offering the securities issued into it.

The key to creating an environment in which there is true competition between CSDs across the continent, therefore, lies in opening up access to issuers. Fortunately, there is a provision in the consultation paper on CSD legislation that would give issuers freedom of choice over the CSD into which their shares are issued. The practical implementation of the proposal, is of course, horribly complicated, because of differences between countries which are rooted in company law, such as whether or not shares or registered, whether they are immobilised or dematerialised and so on. In a separate discussion paper, the Commission has suggested that the freedom to choose CSD could be limited to issues traded on a regulated market and they would still need to comply with the requirements of the governing law of the issue.

In spite of the practical difficulties, however, this seems an admirable objective worth striving for, both to open the door to competition among CSDs and, not least, to bring benefits to issuers, who generally gain least from developments in financial markets, even though without them the markets could not exist.

As news comes that the shareholders of both NYSE-Euronext and Deutsche Borse have approved their proposed merger, leaving the decision firmly in the hands of the European competition authorities, the UK’s Office of Fair Trading has published its report on the proposed BATS-Chi-X merger.

It notes that the LSE/Turquoise, Chi-X and BATS are the only platforms with a market share greater than 1% in trading of UK-listed equities. Chi-X made a profit for the first time in 2010 and BATS is expecting to make a profit for the first time in 2011.

The OFT’s decision to refer the proposed merger to the Competition Commission is based on its concern about the consequences for competition if the number of effective rivals was reduced from three to two. Interestingly, it arrives at this conclusion in spite of the fact that few customers were opposed to the merger and many, indeed, were in favour.

The next step is a review by the Competition Commission, expected by December (assuming the merger is still on by then, as some shareholders in CHi-X are reported to be looking at alternatives).

The news that Deutsche Borse and NYSE Euronext have today notified their proposed merger to the European merger authorities starts a critical decision-making process for financial markets.

It comes at a point when the approach to competition seems mixed. On the one hand, the proposed combination between ICE and Nasdaq to bid for and break up NYSE Euronext was blocked by the US Department of Justice on the grounds that a merger of Nasdaq and the NYSE would be unacceptable. In the UK the proposed acquisition of Chi-X by BATS has been referred to the Competition Commission for a deeper review.

At least in the US and the UK, the competition authorities seem to be serious about preserving competition among trading venues. However, simply blocking mergers between trading platforms is not enough to ensure that there is real competition. For trading platforms to be able to compete, they need access to the same post-trade infrastructure. This means either using the same clearing house or using clearing houses that interoperate with each other.

Here the picture is more mixed. After years waiting for regulatory approval of the interoperability arrangements (which was finally granted), BATS Europe has announced that it will start a three-way clearing arrangement with LCH.Clearnet, EuroCCP and SIS x-clear for BATS Europe. But at the same time, EMCF, which is the default CCP for BATS Europe, is reported as stating that it no longer supports interoperability and will not be joining these arrangements. And the latest version of EMIR limits its requirements on market access to OTC (not exchange-traded) contracts. Interoperability for derivatives is postponed pending a review by ESMA, due by the end of 2014.

The reason the decision on the Deutsche Borse-NYSE Euronext merger is so important is that it simultaneously touches all the most important issues in European market infrastructure: a merger of the two most important derivative exchanges, a merger of two major equity exchanges and the ownership of a leading clearing house (Eurex Clearing) – one which has so far declined to enter into any interoperability arrangements with other clearing houses.

It is no exaggeration to say that the decision in this case will shape the European financial infrastructure.

As I (eventually) predicted, the LSE finally failed to convince enough of the TMX shareholders to support their bid to “merge” with (i.e. take over) TMX and the deal has now fallen through. In the end this looked fairly inevitable. Informed opinion in Toronto was convinced the deal would not work and stories about the way in which the LSE had treated the Italians after the takeover of the Borsa Milan (my last blog) will not have helped.

Does this mean that the Maple deal will now succeed? Not necessarily. Canadian competition regulators will want to look very carefully at the implications of merging the Alpha Trading alternative trading system with TMX. Ironically one of the most likely outcomes will be the retention of the status quo, with neither the Maple bid nor the LSE bid winning. But the Canadian banks in the Maple consortium will be happy. Their main objective was to block the LSE bid, and in this they have succeeded.

Where does this leave the LSE? Rather exposed, I think. Watch out for further speculation that Nasdaq OMX might revive its interest in the London exchange. The LSE is now in play.

While all the recent headlines about oil and refined products have been regarding OPEC’s inability to agree an increase in production and the IEA’s decision to release 60 million barrels from its strategic reserve, a far more important announcement, with potential long term implications, has received little, if any, attention.

China has announced it will review its retail pricing formula. So why is this so important? Well, global oil demand growth is lead by India, Saudi Arabia and China with their growing economies and subsidised energy prices. That means that their industries and retail consumers are not exposed to the full force of international, free market prices. Since they do not feel any financial pain when prices go up there is no incentive for them to reduce consumption.

At present the Chinese pricing mechanism is designed to adjust the price of gasoline, diesel, and jet-kero if the price of a basket of crudes rises or falls by 4pc over a trading month (20 – 22 days). The proposed change reduces the amount the basket has to rise or fall, by an as yet undisclosed amount, and reduces the period down to 10 days. If China does alter their pricing mechanism to make it more responsive to market forces, and at the same time removes the management of the system away from the politicians and into the hands of the energy companies, we could see a dramatic reduction in demand from the Chinese consumer as they start to feel the effect of high international oil prices. That is as long as it does not lead to social unrest!

My last blog suggested that the best outcome for LIFFE would be a tie up with ICE. At which point ICE and Nasdaq OMX withdrew their bid. In the latest demonstration of my powers of prediction I circulated a presentation last week in which I concluded that the LSE bid for TMX in Canada had a 60/40 chance of succeeding. The latest gossip from Toronto suggests that these proportions should perhaps be reversed. more >>