Monthly Regional Update: Great Britain

London has for quite some years not only played a part in the global financial industry, but  taken a vital

London has for quite some years not only played a part in the global financial industry, but  taken a vital role in shaping the economic landscape of the world.

Although ensconced within the European Union, Britain enjoys financial independence by retaining its sovereign currency and is home to a large institutional forex sector which comprises liquidity providers, banks and technology companies. The diversification and strengthening of Britain’s economy was accelerated during the 1980s which was a decade of huge growth whilst under the leadership of Prime Minister Baroness Margaret Thatcher, elevating London to financial superpower status and ensuring a gilt-edged reputation among investors. Baroness Thatcher passed away this month aged 87, marking the end of an era.

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Regulation

This month the Financial Services Authority (FSA) was consigned to the history books after a 28 year lifespan. Its impending demise was announced two years ago, and on April 1 2013 it was replaced by the Financial Conduct Authority (FCA), which is responsible for overseeing and regulating all aspects of the financial services industry in Britain.

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Whereas the FSA was the sole financial regulatory body, overseeing the policymaking and banking sector as well as enforcement, the FCA is purely a conduct authority by name and nature, enforcing the regulations. Responsibility for ensuring a stable economy has been transferred to a new Prudential Regulation Authority which is part of the Bank of England. This organization will carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies.

These two organizations supplant the outgoing FSA, and as part of its mandate, the new FCA is going to be more proactive in its approach, especially toward the conduct of large companies.

Institutional Forex

Executing venue LMAX, a company of interest which stands alone in the industry as the only regulated multilateral trading facility for forex, entered a partnership with Californian software company Azul Systems. The objective of this partnership is for LMAX Exchange to use Azul’s Zing Java Virtual Machine (JVM) for continuous performance optimization of its low latency execution venue.

CME Group has been on a program of expansion in Britain, and this month selected Equinix as its London datacenter. The CME Globex hub is located at Equinix’s LD4/LD5 campus which gives CME a vantage point from which to ensure close proximity to European traders. According to CME, 25 percent of the company’s electronic trading comes from the EMEA region, making this an important move to support such a client base and future-proof the company’s infrastructure as the client base in the region grows.

Bespoke Mobile Platform

iPad applications are now ubiquitous among MT4 brokers, however it can take longer to get such mobile applications to market if the platform is bespoke. ETX Capital launched its in house iPad application early this month, enabling the company to cash in on the extra volume that can be traded while customers are on the move.

Government Approval Granted to LCH.Clearnet

April saw London-based multi-asset clearing house LCH.Clearnet granted approval by the Australian government to clear energy, commodity and environmental derivatives listed on Australia’s Financial and Energy Exchange, FEX Global. The Asia Pacific region is an important territory especially with the recent establishment of many new exchanges in Asia. LCH.Clearnet will leverage its extensive risk management and clearing capabilities across multiple asset classes to provide commodity market participants in Australia and the broader Asia-Pacific region with enhanced liquidity and transparency.

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London Capital Group

Following London Capital Group’s search for a suitor during the early part of this year, all talks of mergers and acquisitions failed, leaving the company to go it alone after City Index, the last in a line of potential suitors, dropped interest. The company completed 2012 with a loss of £200,000 compared with a £7.1 million profit the previous year.

City Index

City Index furthered its global footprint by opening an office in Israel recently. The company also has operations in Australia where a contretemps with Australian regulator ASIC resulted in an enforceable action this month.

Technology

ASIC were able to accept an enforceable undertaking from City Index as a result of new surveillance software which the Australian regulator sourced from British software company First Derivatives. The Delta Stream system allows regulators to conduct deep surveillance of companies which is more effective than conducting random inspections or acting on complaints. The adoption of the technology by ASIC took place in December 2012, and in April this year it began to prove its worth by highlighting not only irregularities in City Index’s handling of client funds, but also Halifax Securities’ risk management procedure, resulting in another enforceable undertaking to comply being accepted by ASIC.

General Overview and Direction

The dialog within Britain’s forex industry currently focuses around a few hot topics, centered on technological innovation, corporate streamlining and how to remain competitive.

The most notable of such conversation topics are:

1) Interface ergonomics and development, social trading technology along with the need to evolve trading platforms. MetaQuotes begun its restrictions on third party applications which is encouraging a push toward other platforms.

2) Consolidation amongst established names with big overheads who are struggling to compete. There is discussion around mergers and acquisitions in order to reduce the overheads and ensure that the “dinosaur effect” does not hamper the operational progress within established forex companies with high overheads.

3) Pressure on spreads and commissions as big names try to compete with new leaner brokers.

4) Although speculative because there is no conclusive outcome, there is much talk on where the next base for brokers will be post Cyprus bailout. Will London become an attractive place to do business for the European market without the risks of operating in the troubled Eurozone?

5) The Tobin Tax (FTT) is a subject of interest to British forex brokers, as it was recently trialed in other European countries including France, where it drove numbers of traders in France toward forex because all classes of investment are affected by Tobin Tax with the exception of spot forex transactions.

A further effect of this is that the tax is applied to the location where the person taking part in the trade is based, therefore, as an example, a French broker trading any item on a London market except for spot forex still must pay the tax, even though it doesn’t apply in Britain. If the trial in France proves successful, it will be rolled out across the entire EU by 2015. The British government has stated that it is not going to adopt the tax, however forex companies based in Britain are interested in soliciting clients on the Continent who are being driven toward spot forex as a means of trading without being affected by the tax if implemented in their home countries.

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