dom
March 30th, 2006, 12:32 PM
Okay, its not projects and construction but these articles are highly relevant to the projects and construction that have occurred in the City over the past few years.
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Thriving London is taking on the global competition
By Martin Dickson
Published: March 26 2006 21:58 | Last updated: March 26 2006 21:58
There is a certain swagger about the City of London these days – a self-confidence born of success as it has strengthened its position as Europe’s leading financial centre and as a magnet for capital and talent from around the world.
The swagger of this “New City” is manifest in the changing skyline – be it the bulbous effrontery of Swiss Re’s gherkin or Canary Wharf’s cluster of big banking towers.
It is reflected in the way the City has grown geographically, with private equity houses, hedge funds and advisory boutiques gravitating to London’s West End, and large investment and integrated banks to Dockland’s new East End.
“The City today is more a state of mind than a square mile of central London,” says one senior fund manager. The change is underlined by the dramatic interactive map in this special report showing the location of leading financial institutions.
And the swagger is visible in the people. Take Clara Furse, chief executive of the London Stock Exchange. Appointed five years ago to head a fractious organisation with a history of bungled modernisation initiatives, she got off to a hesitant start. But with equities trading booming, and having seen off three potential bids in the past year, Ms Furse and the LSE now radiate self-confidence. The latest bid approach, from Nasdaq of the US, serves to underline the value of the institution.
The Financial Times will be focusing on the New City all this week, starting with this special report. We will be examining what makes it successful, who makes it tick, and where, for better or worse, it may be heading.
For London can hardly afford to be smug or complacent. Gordon Brown, the Chancellor, appeared to recognise this last week when he announced a new initiative to bolster the City’s international position. Competition never ends – and the City still bears scars from the loss of a key European government bond futures contract to Germany in the late 1990s. We may also be close to the peak of a credit cycle, awash with cheap capital. Who knows what wreckage the ebbing tide will reveal?
All that said, London’s current bullishness stands in stark contrast to the mood ahead of the millennium. At that time there were plenty of pundits warning that the introduction of the euro could help Paris and Frankfurt, ambitious for their financial services sectors, capture substantial business from London.
n fact, the trend has been in the other direction, and the City has also closed the gap with Wall Street. “London is no longer the second city,” says James Cayne, chairman of US investment bank Bear Stearns. “Right now it is as fast as New York.”
London, of course, has long been Europe’s leading financial centre. But its market share in many of the disciplines where it has traditionally led the region has been on the rise or stable over the past five years, while it has captured a large share of some of the most important new opportunities. It now accounts for 20 per cent of cross-border bank lending, up from 16 per cent in 1992, while its share of foreign exchange turnover has risen from 27 per cent to 31 per cent over the same period. It accounts for 70 per cent of the secondary market in international bonds. Half of European investment banking activity is thought to be conducted through London.
The City’s share of derivatives traded on exchanges may have fallen over the past decade, but it has reinforced its position as the leading centre for bespoke, over-the-counter products. It is thought to account for roughly 45 per cent of the fast-growing market in credit derivatives.
London has long been the leading centre for international fund management, though the industry’s traditional focus on relative rather than absolute returns, and its high charges for retail investors, have smacked of complacency and created scope for a new breed of absolute-return investors. Yet here too London dominates Europe: over three-quarters of the region’s hedge fund assets are managed out of London, and nearly 50 per cent of private equity assets.
In quoted equities, the LSE has become Europe’s leading exchange for emerging market listings, while its junior Aim market has become the region’s most successful source of capital for small companies.
More generally, London’s pull means that an increasing number of continental financial services operations are choosing to base themselves in the City. They range in size from Deutsche Bank, Germany’s largest private-sector bank, which is now being run largely from London, to the likes of a private wealth management company with predominantly German clients who enjoy the opportunity to visit London.
So what factors are behind London’s growing competitive advantage?
The UK’s long tradition of laissez-faire capitalism and openness to competition have created an environment in which financial creativity can flourish. For example, in the 20 years since London’s Big Bang deregulated financial markets, the make-up and ownership of the City’s investment banks and broking houses has changed out of all recognition.
The first decade was characterised by the growing dominance of large, integrated American houses. The past few years have seen the emergence of a more mixed ecology. UK-owned broking houses have sprung up to serve small and mid-sized companies that are off the radar of the biggest banks. Banking advisory boutiques are being set up to meet clients’ demands for a more personal service, free of potential conflicts of interest.
Decent regulation has also been crucial to London’s success, be it self-regulation – as with the Takeover Panel, probably the world’s best referee of bids – or state-imposed rules. Over the past few years the City has undergone a fundamental change of regulatory framework with the creation of the Financial Services Authority – a single, statutory institution replacing 10 self-regulatory bodies. London is the only major financial centre to have a single regulator with such concentrated powers, and a heavy-handed FSA could have done serious damage to London’s creativity and competitiveness.
Instead, despite grumbling about its bureaucracy (some of it justified), the FSA is regarded as having struck a reasonable balance, and to be growing better at doing so. This matters in a world where strong but measured regulation, offering investor protection, is a source of competitive strength rather than weakness.
These fundamental factors – good regulation and a pro-competition orientation – have created the basis for a concentration of market liquidity and financial expertise. And once a centre captures these attributes, they tend to be self-reinforcing – in the absence of crass political interference – and create a strong client base for the sophisticated international financial consultancy sector that is also one of the City’s strengths.
London has certainly benefited from others’ mistakes. For example, America’s post-Enron Sarbanes-Oxley legislation has created a governance framework that discourages foreign companies from raising capital in the US. America’s heavy-handed response to the 9/11 terrorist attacks, including the recent row over a Dubai company acquiring US container terminals, may have made the US less attractive for Middle Eastern funds. And the collapse of Germany’s poorly regulated Neuer Markt eliminated a potential competitor to London’s Aim.
London also has softer attractions for international financiers. It is an agreeable place to live (despite high property prices and poor transport) and its increasingly cosmopolitan atmosphere is matched only by New York. Its tax regime has also been benign to foreign nationals.
Employment regulations have also been helpful to the financial services industry, allowing employers to bring in talent from all over the world. Indeed, one of the most remarkable changes in the City has been the broadening of the talent pool. Two decades ago investment bankers and fund managers would work surrounded by people like themselves – notably Oxbridge arts graduates – but now they are just as likely to be seated next to a mathematics wizard from Azerbaijan or Ukraine.
This creates another virtuous circle – the more outstanding the international talent in the City, the more it increases London’s competitive advantage, and the greater the advantage, the more it attracts fresh talent from around the world.
Technology has also played a vital role in strengthening the City. Most obviously, new computer systems have allowed London’s equity and derivatives exchanges to remain competitive with international rivals. Technology allows executives to be based in London while keeping a close eye on operations around the world. It has also democratised markets. Relatively cheap access to data means you no longer have to work for a large institution to make your mark. Set up your own hedge fund and the large, integrated investment banks will service you with leverage, stock lending, trade processing and investment ideas.
And for the successful hedge fund operator the rewards can be large. The three founders of NewFinance Capital, a fund of hedge funds set up only in 2003, will share at least £49m following last month’s purchase of the business by Schroders, the fund manager.
The democratic dynamic is still working its way through the system. It means the fund management clients of investment banks are becoming far more diverse and fragmented; it means traditional fund managers are having to reinvent themselves with the mentality of boutiques; and it means capital can be allocated with far greater speed and flexibility – posing new challenges to companies (and their brokers) when the investor base can change with disturbing rapidity.
Hedge funds may still be small relative to the overall size of the investing market, but they wield a clout out of proportion to their size because they are active traders – accounting for up to 40 per cent of daily trading on the LSE.
Against this background, the City’s tradition of flexibility and openness should allow it to further consolidate its leadership of Europe over the next few years – if the regulatory, tax and employment frameworks remain benign.
Success in financial services has always depended on creativity. This quality enabled Siegmund Warburg, a German outsider, to overturn the complacent assumptions of the City establishment in the 1950s and 1960s. But it has never been more important than now, when the industry is changing so rapidly.
In the New City, only the innovative prosper.
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How London can close gap on Wall Street
By Peter Weinberg
Published: March 29 2006 19:59 | Last updated: March 29 2006 19:59
Peter Weinberg (Ex CEO of Goldman Sachs International)
Having worked in both the London and New York financial communities, I am often asked to compare the Square Mile with Wall Street. Which city will attain the position of global financial centre in the years ahead?
I always find this a difficult question to answer because the Square Mile, in effect, reaches across 13 time zones from Dublin to Vladivostok, as does the span of Wall Street. In addition, liquidity and the movement of capital around the world have become so ubiquitous and pervasive that it is hard to know where London or New York begins and where Tokyo, Shanghai or Hong Kong leaves off. I am not even sure it matters to the sophisticated global market participants where the epicentre is located.
I believe, however, that a number of shifts are occurring in the world that will benefit London quite significantly. Two in particular are worth discussing: the increased flow of financial capital from the Middle East to London and the impact of stock exchange mergers on the City of London.
Saudi Arabia, Iran, the United Arab Emirates, Kuwait and Qatar will generate at least $250bn of revenues in 2006 from the sale of hydrocarbons, according to PFC Energy, the consultants, in Washington. At the end of this year, foreign assets held by these countries will total $900bn, double the level in 2000. If one simplistically assumes that half of future surpluses are invested within the Gulf in infrastructure, power and additional energy development and half is invested in foreign direct investment, US Treasuries, bank deposits, liquid markets and alternative assets, these foreign assets will grow very significantly. Where this capital goes matters.
Due to the historical relationship between the regions and a cultural affinity, Middle Eastern investors have always been comfortable investing in the UK, either directly or as a gateway to Europe. The reaction in the Gulf to the controversy surrounding Dubai Ports World’s now-abandoned plan to buy five US ports has been quiet but profound. This, and other situations that will inevitably occur, will on the margin deflect capital away from the US towards the UK.
Even assuming that the chosen currency of oil remains dollars, and the Middle East continues to help fund America’s current account deficit through its purchase of US government securities, $50bn to $100bn of Middle Eastern capital could find its way to London over the next several years. The securities markets, hedge funds and private equity firms will be the beneficiaries.
The trend towards mergers of stock exchanges around the world is also likely to benefit London. There was a time when the US stock exchanges hosted the largest initial public offerings in the world. Most of the big capital raisers were based in the US and New York was the unquestioned centre of liquidity. A look at the 25 largest IPOs executed in 2005 suggests that this is no longer the case: nine were listed in Europe, nine were in Australasia, five were in London and only two were in the US. The reason for this is a mix of the geographic location of the issuer as well as the unwanted burdens of Sarbanes-Oxley compliance.
Having said this, liquidity and scale remain superior in the US. Compared with the London Stock Exchange, the New York Stock Exchange has 17 times the number of trades, four and a half times the market capitalisation and two and a half times the value traded. The size of the NYSE compared with the European exchanges is even more significant. Furthermore, the cost of clearance and settlement across Europe for equity securities is five times the cost in New York due to cross-border inefficiencies. All this points to a higher cost structure in London and higher transaction costs to investors, and therefore higher cost of equity to companies.
These two forces – a bias to issue equity outside the US and less scale among the UK and European exchanges – cry out for consolidation. The best result for London would be a merger with one of the US exchanges, which would make an already attractive market cheaper and even more appealing. The only fear would be protectionist reactions from the UK.
We should worry when certain questions are asked, such as: “How can the LSE be owned by a foreigner?” Or “Where will the headquarters of the merged entity be located?” Hopefully, the UK will not fall into the trap of believing that a national champion is good for the Square Mile. What is best for the investor is what is best for London.
The US financial markets enjoy an enormous incumbency advantage as the largest, most liquid and most transparent in the world. However, current trends present a unique opportunity for the City to take a big step forward, by making itself as appealing as possible to enormous flows of foreign investment capital, and driving down the cost of doing business through consolidation.
The writer, former chief executive officer of Goldman Sachs International, is a citizen of the UK and the US and is a partner in a new financial services firm based in London and New York.
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Square Mile must fight to stay successful
By Paul Myners
Published: March 29 2006 19:59 | Last updated: March 29 2006 19:59
Paul Myners
Big Bang, as the 1986 reform of the London Stock Exchange was named, appeared to many at the time to be an exaggeration in terminology. With hindsight it was spot on.
Sir Nicholas Goodison, then chairman of the exchange, and Cecil Parkinson, trade secretary in the early 1980s, detonated a cosmic explosion that hurled matter in all directions at accelerating velocity. Their rather limited intention was to head off an investigation by the competition authorities. They did this by bringing to an end fixed commissions and the separation of broking and marketmaking, and by permitting corporate ownership.
Neither they nor anyone else imagined the scale of change that would take place. Twenty years later not a single member of Institutional Investor’s top 20 UK equity research brokers survives by name or in meaningful form. All the big jobbers, or marketmakers, have gone the same way and no UK commercial or merchant bank succeeded in developing a profitable equity trading and investment banking business as a consequence of Big Bang.
Yet London has gone from strength to strength and is now Europe’s undisputed financial centre. Big Bang signalled the end to an equity marketplace that was clubbable and personal, with everyone knowing their place in the pecking order and with little need for risk capital or technology. The new City of London is open, transparently competitive, meritocratic and indifferent to gender, ethnicity, education or rank. An English club has given way to an international community. Technology abounds. Clients have been replaced by counterparts. Everyone must now look after himself, or look to the regulator.
Big Bang opened up the UK securities market to a wider range of bigger multicapacity firms, nearly all of which were international in parentage. This might have affronted xenophobes but it provided the platform for the emergence of London as Europe’s capital of capital.
From Big Bang we can date a significant deepening in market liquidity and prodigious growth in financial derivatives, developments that have brought benefit to issuers and investors alike. London stands on a par with New York in its reputation for financial innovation. New skills, particularly in the area of risk management, have emerged alongside new industries, of which hedge funds are the most notable.
London’s global leadership should not, however, be a source of complacency. The standing of a financial centre is driven by market liquidity, which does not shift easily but will do so if fundamental foundations are threatened.
The City needs leaders capable of establishing and holding to the highest ethical standards. The UK must sustain a competitive base for talent, in terms of both taxation and a welcoming and stimulating culture.
London’s leadership will require continuing investment in payment and settlement systems, infrastructure and transport. Stamp duty on securities transactions will have to be abolished if the UK wants to be competitive in terms of cost of capital. Recent initiatives by Gordon Brown, the chancellor of the exchequer, to promote dialogue with the City are his recognition of the importance of the financial community to the UK economy. London is the only financial centre in the world that punches above its domestic economic power.
Over the next 20 years the City will adjust to cyber trading platforms, possibly hosted by the likes of Ebay and Google. Investment institutions will aggressively pursue direct access to liquid markets, wherever they exist. Risk capital to facilitate trading will be offered by new investors, including hedge funds. Investment banks will cease to publish company research, which will be either in-sourced by investors or out-sourced on a commissioned basis to specialists. In this respect we are reverting to the pre-Big Bang model, with marketmaking separated from advice and execution. But this is now at the behest of clients rather than mandated by rule.
Clients, informed by new disclosure, will drive a greater focus on transaction costs. And hedge funds and feeder funds will grow and grow as the traditional investment institutions and insurers lose business to indexation, derivatives and talented managers who can deliver the goods.
The march of commoditisation will not abate. The experience of spot foreign exchange today will be the fate of structured derivatives *tomorrow.
Alongside the big providers of risk capital we will see a proliferation of advisory boutiques – independent of view and convivial in style.
Heavy-handed regulation in the US, particularly Sarbanes-Oxley, will drive international capital market activity to London. No other European centre can now hope to compete. Frankfurt and Paris lost their last opportunity when they turned their backs on hedge funds.
Other financial sectors will have their own Big Bang. Insurance will wake up to a new business model based around origination of products, packaging and distribution. Investment banks and hedge funds will be to the fore in driving that change.
The City will meet these challenges provided participants behave themselves, a sensible regulatory balance is maintained and the government shows necessary restraint. And we will all continue to be baffled by how such a competitive market can produce such high returns to those who provide it with capital and talent.
The author is chairman of Marks and Spencer but writes in a personal capacity.
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Innovation: Financial inventors underpin success
By Andrew Hill
Published: March 26 2006 21:58 | Last updated: March 26 2006 21:58
New CityThe fact that BNP Paribas has its London base neither in the Square Mile nor in Canary Wharf but in NW1 – next door to Marylebone station – is, to a degree, a quirk of London real-estate history. But it is no fluke that BNP’s fixed-income operation, considered among the more innovative in the expanding and increasingly complex field of structured finance and derivatives, is the only part of the corporate and investment bank to be headquartered in London.
The presence of innovative “clusters” – highly skilled people, backed by state-of-the-art technology and reliable telecommunications systems – is one of the main attractions of London for the financial services community and has provided a foundation for the growth of the most creative and risk-hungry constituents of the New City, such as private equity houses and hedge funds.
As Man Group, the listed UK hedge fund company, grew, it was able to draw on a pool of graduates from British universities who pursued higher maths and physics degrees. Equally helpful, according to Stanley Fink, Man’s chief executive, was “the presence in London of financial markets, particularly currency, and the growth in derivative instruments here, which nearly equals the US”.
‘If you don’t innovate and improve and constantly raise the game, you create an opening for another platform to come in’
Financial innovation has been at the heart of the City’s success for centuries. The first marine insurance contract, underwritten at Lloyd’s coffee house, was the product of a cluster of financial interests and expertise already based in London. More than 300 years on, the key elements of financial innovation remain the same: problems are solved with a combination of new ideas and techniques to the mutual benefit of customers and their financial backers and advisers. The fuel for innovation is competition as much as it is collaboration.
London-based banks and fund managers have recently sought to tackle the problem of UK pension fund deficits – brought into sharp relief by regulatory and accounting changes – by devising techniques that allow pension funds to match investments to liabilities in portfolios often rich in derivatives.
Alan Brown, head of investment at Schroders, the fund manager, says the next big prize in this area will be “coming up with a decent defined contribution offering which produces some of the attributes of a defined benefit scheme”.
The challenge is most acute in the UK, so the solution is also likely to be found from among the UK’s innovators before it is adapted and taken up elsewhere.
But the City has also frequently demonstrated its capacity to adapt others’ innovations to its clients’ ends. Terri Duhon, managing partner at B&B Structured Finance, a training and consulting firm, recalls that during the late 1990s US firms such as JPMorgan, where she used to work, moved teams across the Atlantic to London, where they adapted simple structured credit techniques, first developed in the US, for customers as varied as German Sparkassen (state-owned regional savings banks) and Dutch private investors.
“We were taking the basic products and applying them to a larger and more diverse group. As a result, the development of the business really took off in Europe. By 2001-02, it became very obvious that the growth of what we were calling a structured credit market was really centred on the London market.”
Mr Fink agrees: “In some cases, the US – and New York in particular – have been the original innovators but, unusually, London has been the best implementer.”
In the past few decades, however, the speed, scale and scope of financial innovation have increased. The advantage that comes from devising a new product or a new technique in corporate finance or mergers and acquisitions can be eroded more quickly.
Nasdaq’s attempt to take over the London Stock Exchange is also a reminder that, as trading goes global, advances in technology and innovation will flow more easily around the world.
Interviewed before the Nasdaq approach was made public, Martin Graham, director of market services at the LSE and head of Aim, the highly successful smaller companies market, said: “Competition has forced us to be at the leading edge of innovation; we are also far more customer-focused [than we were].“ He pointed to the success of the SETs electronic trading platform, which has reduced spreads by 80 per cent in nine years, and cut “latency” – the time taken to send information from the platform to the market – to a few milliseconds. That is vital if London is to attract its share of the algorithmic trading – computer-generated orders triggered automatically at specified price levels – that now forms the backbone of many big investment banks’ dealing strategies.
Technology advantage shifted notably away from the City in 1997 when Eurex, the Frankfurt-based derivatives exchange, stole a march on its London-based rival Liffe, then still based on “open outcry” floor trading, by prompting a mass exodus of traders to its screen-based system for trading the 10-year German Bund contracts.
“Does the City have a God-given right to all this wonderful business?” asks Charles Roxburgh, leader of McKinsey’s financial industries practice in London. “No. If you don’t innovate and improve and constantly raise the game, you create an opening for another platform to come in.”
Nearly nine years on, however, the battle of the Bund looks less significant. The magnetic attraction of London for the best-qualified people in European and world markets remains strong – wherever the trading platform or technology is located. For instance, Man’s futures brokerage business – the biggest in Europe – does most of its trading on Eurex from screens in London. That could work both ways, as Mr Fink points out in relation to hedge funds: “We’re a totally transportable business. Small hedge funds can move five traders and a few screens to any town in the world that has broadband.”
The roots of London-based innovation now go deep, however. As BNP Paribas’s experience suggests, clients ask London-based teams not just to invent new products, but also to manage them. Grouping the skills and technology to handle product development, trading, marketing and sales in one place makes sense. What is more, as Mr Graham of the LSE suggests: “As technology gets more important, relationships get more important.” Sophisticated systems may free skilled bankers and fund managers to meet more frequently and come up with more innovative products and investment techniques.
That would represent a return to the model of the 17th-century coffee house – but with a high-technology twist that could sustain London through the 21st century and beyond.
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Action may be needed to maintain competitive advantage
By Peter Thal Larsen, Banking Editor
Published: March 26 2006 21:58 | Last updated: March 26 2006 21:58
New CityCanary Wharf is probably the best symbol of London’s recent development as a financial centre. Today, the complex is a bustling hub for the world’s financial services industry. Its skyscrapers, which house more than 60,000 workers, include the global headquarters of two the world’s largest financial institutions and the European head offices of several US investment banks. Law firms and ratings agencies have moved there, as has the Financial Services Authority, the City’s main regulator. Bankers rave about the quality of its buildings, and the benefits of bringing all their employees together under a single roof.
To the casual observer, Canary Wharf may look like a model of far-sighted planning. In fact it is the opposite. Opened at the beginning of a recession, Canary Wharf spent its first five years struggling with poor transport links and an absence of tenants. The Corporation of London, which is responsible for the City’s traditional power base in the Square Mile, lobbied furiously to prevent banks from moving there. Its developer, the Canadian group Olympia & York, filed for bankruptcy in 1992.
This laissez-faire approach has long defined London’s development as a financial centre. To its fans, the City’s strength is affirmation of the power of free markets. Others are less starry-eyed: “Much of what has happened in London has been an accident,” says the head of one UK-based investment bank. “There has been a total lack of planning.”
As the balance of global economic and financial power shifts to Asia, the question is whether this approach will serve London as well in the future. The City has many strengths, but there are legitimate concerns that its position could be eroded. “We must not think that all we need to do is sit on our hands and assume the advantages we have will enable us to keep the lead,” warns Jonathan Taylor, director-general of the London Investment Banking Association.
Arguably London’s greatest strengths are beyond its control. The City’s place at the centre of the world’s time zones makes it a natural hub, linking Asia, Europe and the US. As the rest of the world embraces English, its native tongue is another advantage.
London has also benefited from economies of scale. Its pool of bankers, traders, lawyers, accountants and computer programmers acted as a magnet for banks, brokerages and asset managers, who in turn attracted more prospective employees.
Over time, technology may make physical location less important. But as long as the providers and users of capital still want to meet face to face, the chances are they will do so in the City.
London stands out from other financial centres because it relies so little on its home market. Ever since the birth of the eurobond market in the 1960s, the modern City has been a magnet for foreign capital. “London is an operating platform that connects to the rest of the world,” says Jeremy Isaacs, chief executive of Lehman Brothers in Europe and Asia. “That is its distinct advantage when compared to other financial centres.”
Yet some bankers question whether London will continue to attract foreign capital indefinitely. As Asian economies accumulate increasing financial surpluses, it seems likely that they will begin to invest these in local securities rather than US government bonds. When they do, the beneficiaries will be local financial centres such as Shanghai, Hong Kong and Singapore.
London’s reliance on the rest of the world’s financial resources also requires openness. The City has benefited from the protectionist climate in the US. Yet London’s welcoming stance is not assured. A large-scale terror attack or serious conflict could strain foreign ties.
Even leaving aside geopolitical concerns, there are other ways in which London could make itself less attractive. One common gripe is the government’s crackdown on personal tax loopholes, which some see as evidence of the government’s lack of appreciation for a critical industry. Others are less worried. “If we woke up one day and there was no tax advantage for French, German and Italian citizens to be in London, a lot of people would leave,” says Bill Winters, co-chief executive of the investment banking division of JPMorgan Chase. “But London would still retain its status as the leading financial centre.”
Another area where the authorities could become less welcoming is in regulation. Most bankers admit the FSA does a reasonable job of maintaining orderly markets. But finding the right balance can be hard. Over the next few years, the FSA will have to decide on the appropriate level of scrutiny for hedge funds and private equity groups. Too much regulation could drive activity offshore. Too little could open up scope for abuse.
Moreover, the government does not fully control the regulatory environment. Most recent regulatory initiatives started in Brussels, where the European Commission is pushing ahead with changes such as the Markets in Financial Instruments Directive. So far, these moves play to London’s strengths.
But some observers worry that the government would have no way of stopping a co-ordinated attack on London’s position by other member states. This also raises the question of London’s control over its financial infrastructure. Until now, the City has taken a relaxed view of ownership of its financial institutions. But the likely takeover of the London Stock Exchange has prompted some to think again.
Despite these concerns, most people at work in the City today are optimistic about London’s prospects as a hub of global finance.
But most participants also recognise that the laissez-faire approach of the past will no longer be enough.
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Hedge funds: London wins prize for nurturing fast-rising star
By Stephen Schurr in London
Published: March 26 2006 21:58 | Last updated: March 26 2006 21:58
New CityIt is still in its infancy, but the hedge fund industry has played a central role in London’s renaissance as a financial centre. Now that hedge funds are going global, they are making London the sector’s new headquarters.
A decade ago, hedge funds were a disparate fraternity of money managers scattered around a half-dozen points on the globe with little interaction between the groups. Today, hedge funds have become a trillion-dollar industry, with the top 50 funds exerting a profound influence in virtually every market in the world.
And the industry now has a distinct centre of gravity that is in London. US funds still hold more than two-thirds of the industry’s assets, but London is growing far more rapidly. In 2002, London funds held $61m, or 10 per cent of global hedge fund assets. Three years later, London held $225m, or 20 per cent of the global assets.
“The UK hasn’t been at the vanguard of many developing industries in the past decade, but how London has built a vibrant hedge fund industry has been an extraordinary success story,” says Stuart Bohart, global head of prime brokerage at Morgan Stanley. “This industry has helped make London a magnet for international talent and capital, enriching the UK in the process.”
UK-based funds such as Man Group, Barclays Global Investors, GLG Partners and Lansdowne Partners have joined the elite ranks of hedge funds that manage more than $10bn. Meanwhile, virtually every major US hedge fund has established a London office in the past few years as a base for European operations.
ChartIn part, the reasons for this clustering are the same reasons why European hedge funds decided to domicile in London 10 years ago: the remarkable talent pool, the financial-services and prime-brokerage infrastructure provided by the investment banks and the friendly regulatory climate. The London hedge fund community likes to trumpet its relationship with the UK’s Financial Services Authority, which has won high marks for taking a rational approach to regulation.
“I think London will inevitably take a greater share of the hedge fund assets because this is where the talent pool is,” says Rod Barker, director of business development at RAB Capital, a publicly traded hedge fund multi-strategy firm. He notes that the liberalisation of European countries such as Italy and Germany has not given rise to booming local hedge fund industries. This is partly because these countries lack London’s robust investment banking and asset management industries.
However, there are crucial new reasons for the inflow of US hedge funds: the perception of greater market opportunities in the UK and Europe, as well as London’s role as an unofficial midway point between emerging Asian markets and the Americas.
“The lingua franca in the hedge fund industry is English, but London is also the perfect place for us to straddle the major world markets,” says Michael Hintze, founder of the $5bn London hedge fund CQS, which also has a Hong Kong office. Mr Hintze, an Australian who has been in London since 1994, also notes that London has drawn hedge fund skill from around the globe. “There’s so much talent and so many different cultures,” he says, “it’s like the United Nations in our office.”
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nternational talent: World’s brightest look to London
By Joanna Chung in London
Published: March 26 2006 21:58 | Last updated: March 26 2006 21:58
New CityRaymond Ng, chief trader of European spot foreign exchange for Citigroup, needed little convincing to relocate to London last year after 15 years in Singapore.
“Doing forex in London is a dream job,” says the 41-year old Singaporean. “London is the biggest financial centre in the world in terms of forex volumes. It is also the best time zone because you get a portion of Asia, a portion of New York and all of Europe.”
This allows Mr Ng to fulfil his professional ambitions, but helps his personal life too. “I have more time for family,” he says, showing off pictures of his two small daughters on his mobile phone. “In Singapore, I would often be at work until midnight to capture a good part of the US market.”
He breaks off to shout across the room, noisy with chatter, the clatter of keyboards, ringing phones and the occasional peal of laughter. Some 550 people work on this floor of one of Citigroup’s two office buildings in Canary Wharf, churning out fixed-income trades, products and deals for the world’s largest financial services group.
It is a microcosm of the New City. The opportunity to be at the centre of the action – while having a life outside the job – has drawn people from all corners of the globe.
“London is the financial centre of Europe,” says Killian Tracey, 27, who moved to London after finishing his degree in actuarial and financial studies at University College Dublin and now trades cash bonds and credit default swaps. “London has a lot of energy about it and everything is going on here so you have to be here.”
Mr Tracey is one of two Irishmen in the European credit team that also includes people originally from Italy, France, Ukraine, South Korea and China. Down the aisle, a Texan twang can be heard.
Mr Ng’s diverse team is a dozen-strong and includes a New Zealander and an Australian. Gaurang Chadha, 37, a few rows away, was born in Bombay, but grew up in Holland. Aside from English, he speaks six languages, including Dutch, German, Latvian (his wife is Latvian), and basic Japanese.
One floor below, amid a similar hubbub on the equities trading floor, sits 28-year-old Caroline Duriez, a Frenchwoman who trained as a lawyer at the European Court of Justice in Luxembourg. She now works in equity finance, supporting the prime brokerage sales team in London, a city she “fell in love” with.
There are complaints, of course. Elio Manca, director of equity derivatives, rides a motorbike to work. “I avoid public transport, I suffer every time I use it,” the 32-year old Italian says. Biting into a late morning sandwich of eggs and bacon, he adds: “You miss the good food.”
But the positive aspects seem to outweigh the annoyances. Cornelia Gibrand, a 25-year-old Swede who deals with Nordic corporate sales, says: “I like the 24-hour life. I like being able to do anything at any time of the week.”
It is also easy to get away. “It takes two-and-a-half hours to get into Paris, it’s a one-and-a-half hour flight to Lyon, or I can easily spend a weekend in Spain if I wanted,” Ms Duriez says.
Stavros Siokos, 37, has been based in London for a decade. He studied electrical engineering in Greece and earned a masters in computer science and a PhD in operational research at the University of Massachusetts. He is responsible for all types of alternative cash trading within equities, including program and algorithmic trading.
He says: “I like the mix of the European understanding of life and the American way of working. It is a mixture you don’t find in any other place in the world.
“London is a unique place in that it is entrepreneurial but people are expected to live their lives, have a family. In the US, you feel guilty about taking a holiday.”
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Hope you enjoyed the articles. As you would expect from the FT they are superbly written.
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Thriving London is taking on the global competition
By Martin Dickson
Published: March 26 2006 21:58 | Last updated: March 26 2006 21:58
There is a certain swagger about the City of London these days – a self-confidence born of success as it has strengthened its position as Europe’s leading financial centre and as a magnet for capital and talent from around the world.
The swagger of this “New City” is manifest in the changing skyline – be it the bulbous effrontery of Swiss Re’s gherkin or Canary Wharf’s cluster of big banking towers.
It is reflected in the way the City has grown geographically, with private equity houses, hedge funds and advisory boutiques gravitating to London’s West End, and large investment and integrated banks to Dockland’s new East End.
“The City today is more a state of mind than a square mile of central London,” says one senior fund manager. The change is underlined by the dramatic interactive map in this special report showing the location of leading financial institutions.
And the swagger is visible in the people. Take Clara Furse, chief executive of the London Stock Exchange. Appointed five years ago to head a fractious organisation with a history of bungled modernisation initiatives, she got off to a hesitant start. But with equities trading booming, and having seen off three potential bids in the past year, Ms Furse and the LSE now radiate self-confidence. The latest bid approach, from Nasdaq of the US, serves to underline the value of the institution.
The Financial Times will be focusing on the New City all this week, starting with this special report. We will be examining what makes it successful, who makes it tick, and where, for better or worse, it may be heading.
For London can hardly afford to be smug or complacent. Gordon Brown, the Chancellor, appeared to recognise this last week when he announced a new initiative to bolster the City’s international position. Competition never ends – and the City still bears scars from the loss of a key European government bond futures contract to Germany in the late 1990s. We may also be close to the peak of a credit cycle, awash with cheap capital. Who knows what wreckage the ebbing tide will reveal?
All that said, London’s current bullishness stands in stark contrast to the mood ahead of the millennium. At that time there were plenty of pundits warning that the introduction of the euro could help Paris and Frankfurt, ambitious for their financial services sectors, capture substantial business from London.
n fact, the trend has been in the other direction, and the City has also closed the gap with Wall Street. “London is no longer the second city,” says James Cayne, chairman of US investment bank Bear Stearns. “Right now it is as fast as New York.”
London, of course, has long been Europe’s leading financial centre. But its market share in many of the disciplines where it has traditionally led the region has been on the rise or stable over the past five years, while it has captured a large share of some of the most important new opportunities. It now accounts for 20 per cent of cross-border bank lending, up from 16 per cent in 1992, while its share of foreign exchange turnover has risen from 27 per cent to 31 per cent over the same period. It accounts for 70 per cent of the secondary market in international bonds. Half of European investment banking activity is thought to be conducted through London.
The City’s share of derivatives traded on exchanges may have fallen over the past decade, but it has reinforced its position as the leading centre for bespoke, over-the-counter products. It is thought to account for roughly 45 per cent of the fast-growing market in credit derivatives.
London has long been the leading centre for international fund management, though the industry’s traditional focus on relative rather than absolute returns, and its high charges for retail investors, have smacked of complacency and created scope for a new breed of absolute-return investors. Yet here too London dominates Europe: over three-quarters of the region’s hedge fund assets are managed out of London, and nearly 50 per cent of private equity assets.
In quoted equities, the LSE has become Europe’s leading exchange for emerging market listings, while its junior Aim market has become the region’s most successful source of capital for small companies.
More generally, London’s pull means that an increasing number of continental financial services operations are choosing to base themselves in the City. They range in size from Deutsche Bank, Germany’s largest private-sector bank, which is now being run largely from London, to the likes of a private wealth management company with predominantly German clients who enjoy the opportunity to visit London.
So what factors are behind London’s growing competitive advantage?
The UK’s long tradition of laissez-faire capitalism and openness to competition have created an environment in which financial creativity can flourish. For example, in the 20 years since London’s Big Bang deregulated financial markets, the make-up and ownership of the City’s investment banks and broking houses has changed out of all recognition.
The first decade was characterised by the growing dominance of large, integrated American houses. The past few years have seen the emergence of a more mixed ecology. UK-owned broking houses have sprung up to serve small and mid-sized companies that are off the radar of the biggest banks. Banking advisory boutiques are being set up to meet clients’ demands for a more personal service, free of potential conflicts of interest.
Decent regulation has also been crucial to London’s success, be it self-regulation – as with the Takeover Panel, probably the world’s best referee of bids – or state-imposed rules. Over the past few years the City has undergone a fundamental change of regulatory framework with the creation of the Financial Services Authority – a single, statutory institution replacing 10 self-regulatory bodies. London is the only major financial centre to have a single regulator with such concentrated powers, and a heavy-handed FSA could have done serious damage to London’s creativity and competitiveness.
Instead, despite grumbling about its bureaucracy (some of it justified), the FSA is regarded as having struck a reasonable balance, and to be growing better at doing so. This matters in a world where strong but measured regulation, offering investor protection, is a source of competitive strength rather than weakness.
These fundamental factors – good regulation and a pro-competition orientation – have created the basis for a concentration of market liquidity and financial expertise. And once a centre captures these attributes, they tend to be self-reinforcing – in the absence of crass political interference – and create a strong client base for the sophisticated international financial consultancy sector that is also one of the City’s strengths.
London has certainly benefited from others’ mistakes. For example, America’s post-Enron Sarbanes-Oxley legislation has created a governance framework that discourages foreign companies from raising capital in the US. America’s heavy-handed response to the 9/11 terrorist attacks, including the recent row over a Dubai company acquiring US container terminals, may have made the US less attractive for Middle Eastern funds. And the collapse of Germany’s poorly regulated Neuer Markt eliminated a potential competitor to London’s Aim.
London also has softer attractions for international financiers. It is an agreeable place to live (despite high property prices and poor transport) and its increasingly cosmopolitan atmosphere is matched only by New York. Its tax regime has also been benign to foreign nationals.
Employment regulations have also been helpful to the financial services industry, allowing employers to bring in talent from all over the world. Indeed, one of the most remarkable changes in the City has been the broadening of the talent pool. Two decades ago investment bankers and fund managers would work surrounded by people like themselves – notably Oxbridge arts graduates – but now they are just as likely to be seated next to a mathematics wizard from Azerbaijan or Ukraine.
This creates another virtuous circle – the more outstanding the international talent in the City, the more it increases London’s competitive advantage, and the greater the advantage, the more it attracts fresh talent from around the world.
Technology has also played a vital role in strengthening the City. Most obviously, new computer systems have allowed London’s equity and derivatives exchanges to remain competitive with international rivals. Technology allows executives to be based in London while keeping a close eye on operations around the world. It has also democratised markets. Relatively cheap access to data means you no longer have to work for a large institution to make your mark. Set up your own hedge fund and the large, integrated investment banks will service you with leverage, stock lending, trade processing and investment ideas.
And for the successful hedge fund operator the rewards can be large. The three founders of NewFinance Capital, a fund of hedge funds set up only in 2003, will share at least £49m following last month’s purchase of the business by Schroders, the fund manager.
The democratic dynamic is still working its way through the system. It means the fund management clients of investment banks are becoming far more diverse and fragmented; it means traditional fund managers are having to reinvent themselves with the mentality of boutiques; and it means capital can be allocated with far greater speed and flexibility – posing new challenges to companies (and their brokers) when the investor base can change with disturbing rapidity.
Hedge funds may still be small relative to the overall size of the investing market, but they wield a clout out of proportion to their size because they are active traders – accounting for up to 40 per cent of daily trading on the LSE.
Against this background, the City’s tradition of flexibility and openness should allow it to further consolidate its leadership of Europe over the next few years – if the regulatory, tax and employment frameworks remain benign.
Success in financial services has always depended on creativity. This quality enabled Siegmund Warburg, a German outsider, to overturn the complacent assumptions of the City establishment in the 1950s and 1960s. But it has never been more important than now, when the industry is changing so rapidly.
In the New City, only the innovative prosper.
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How London can close gap on Wall Street
By Peter Weinberg
Published: March 29 2006 19:59 | Last updated: March 29 2006 19:59
Peter Weinberg (Ex CEO of Goldman Sachs International)
Having worked in both the London and New York financial communities, I am often asked to compare the Square Mile with Wall Street. Which city will attain the position of global financial centre in the years ahead?
I always find this a difficult question to answer because the Square Mile, in effect, reaches across 13 time zones from Dublin to Vladivostok, as does the span of Wall Street. In addition, liquidity and the movement of capital around the world have become so ubiquitous and pervasive that it is hard to know where London or New York begins and where Tokyo, Shanghai or Hong Kong leaves off. I am not even sure it matters to the sophisticated global market participants where the epicentre is located.
I believe, however, that a number of shifts are occurring in the world that will benefit London quite significantly. Two in particular are worth discussing: the increased flow of financial capital from the Middle East to London and the impact of stock exchange mergers on the City of London.
Saudi Arabia, Iran, the United Arab Emirates, Kuwait and Qatar will generate at least $250bn of revenues in 2006 from the sale of hydrocarbons, according to PFC Energy, the consultants, in Washington. At the end of this year, foreign assets held by these countries will total $900bn, double the level in 2000. If one simplistically assumes that half of future surpluses are invested within the Gulf in infrastructure, power and additional energy development and half is invested in foreign direct investment, US Treasuries, bank deposits, liquid markets and alternative assets, these foreign assets will grow very significantly. Where this capital goes matters.
Due to the historical relationship between the regions and a cultural affinity, Middle Eastern investors have always been comfortable investing in the UK, either directly or as a gateway to Europe. The reaction in the Gulf to the controversy surrounding Dubai Ports World’s now-abandoned plan to buy five US ports has been quiet but profound. This, and other situations that will inevitably occur, will on the margin deflect capital away from the US towards the UK.
Even assuming that the chosen currency of oil remains dollars, and the Middle East continues to help fund America’s current account deficit through its purchase of US government securities, $50bn to $100bn of Middle Eastern capital could find its way to London over the next several years. The securities markets, hedge funds and private equity firms will be the beneficiaries.
The trend towards mergers of stock exchanges around the world is also likely to benefit London. There was a time when the US stock exchanges hosted the largest initial public offerings in the world. Most of the big capital raisers were based in the US and New York was the unquestioned centre of liquidity. A look at the 25 largest IPOs executed in 2005 suggests that this is no longer the case: nine were listed in Europe, nine were in Australasia, five were in London and only two were in the US. The reason for this is a mix of the geographic location of the issuer as well as the unwanted burdens of Sarbanes-Oxley compliance.
Having said this, liquidity and scale remain superior in the US. Compared with the London Stock Exchange, the New York Stock Exchange has 17 times the number of trades, four and a half times the market capitalisation and two and a half times the value traded. The size of the NYSE compared with the European exchanges is even more significant. Furthermore, the cost of clearance and settlement across Europe for equity securities is five times the cost in New York due to cross-border inefficiencies. All this points to a higher cost structure in London and higher transaction costs to investors, and therefore higher cost of equity to companies.
These two forces – a bias to issue equity outside the US and less scale among the UK and European exchanges – cry out for consolidation. The best result for London would be a merger with one of the US exchanges, which would make an already attractive market cheaper and even more appealing. The only fear would be protectionist reactions from the UK.
We should worry when certain questions are asked, such as: “How can the LSE be owned by a foreigner?” Or “Where will the headquarters of the merged entity be located?” Hopefully, the UK will not fall into the trap of believing that a national champion is good for the Square Mile. What is best for the investor is what is best for London.
The US financial markets enjoy an enormous incumbency advantage as the largest, most liquid and most transparent in the world. However, current trends present a unique opportunity for the City to take a big step forward, by making itself as appealing as possible to enormous flows of foreign investment capital, and driving down the cost of doing business through consolidation.
The writer, former chief executive officer of Goldman Sachs International, is a citizen of the UK and the US and is a partner in a new financial services firm based in London and New York.
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Square Mile must fight to stay successful
By Paul Myners
Published: March 29 2006 19:59 | Last updated: March 29 2006 19:59
Paul Myners
Big Bang, as the 1986 reform of the London Stock Exchange was named, appeared to many at the time to be an exaggeration in terminology. With hindsight it was spot on.
Sir Nicholas Goodison, then chairman of the exchange, and Cecil Parkinson, trade secretary in the early 1980s, detonated a cosmic explosion that hurled matter in all directions at accelerating velocity. Their rather limited intention was to head off an investigation by the competition authorities. They did this by bringing to an end fixed commissions and the separation of broking and marketmaking, and by permitting corporate ownership.
Neither they nor anyone else imagined the scale of change that would take place. Twenty years later not a single member of Institutional Investor’s top 20 UK equity research brokers survives by name or in meaningful form. All the big jobbers, or marketmakers, have gone the same way and no UK commercial or merchant bank succeeded in developing a profitable equity trading and investment banking business as a consequence of Big Bang.
Yet London has gone from strength to strength and is now Europe’s undisputed financial centre. Big Bang signalled the end to an equity marketplace that was clubbable and personal, with everyone knowing their place in the pecking order and with little need for risk capital or technology. The new City of London is open, transparently competitive, meritocratic and indifferent to gender, ethnicity, education or rank. An English club has given way to an international community. Technology abounds. Clients have been replaced by counterparts. Everyone must now look after himself, or look to the regulator.
Big Bang opened up the UK securities market to a wider range of bigger multicapacity firms, nearly all of which were international in parentage. This might have affronted xenophobes but it provided the platform for the emergence of London as Europe’s capital of capital.
From Big Bang we can date a significant deepening in market liquidity and prodigious growth in financial derivatives, developments that have brought benefit to issuers and investors alike. London stands on a par with New York in its reputation for financial innovation. New skills, particularly in the area of risk management, have emerged alongside new industries, of which hedge funds are the most notable.
London’s global leadership should not, however, be a source of complacency. The standing of a financial centre is driven by market liquidity, which does not shift easily but will do so if fundamental foundations are threatened.
The City needs leaders capable of establishing and holding to the highest ethical standards. The UK must sustain a competitive base for talent, in terms of both taxation and a welcoming and stimulating culture.
London’s leadership will require continuing investment in payment and settlement systems, infrastructure and transport. Stamp duty on securities transactions will have to be abolished if the UK wants to be competitive in terms of cost of capital. Recent initiatives by Gordon Brown, the chancellor of the exchequer, to promote dialogue with the City are his recognition of the importance of the financial community to the UK economy. London is the only financial centre in the world that punches above its domestic economic power.
Over the next 20 years the City will adjust to cyber trading platforms, possibly hosted by the likes of Ebay and Google. Investment institutions will aggressively pursue direct access to liquid markets, wherever they exist. Risk capital to facilitate trading will be offered by new investors, including hedge funds. Investment banks will cease to publish company research, which will be either in-sourced by investors or out-sourced on a commissioned basis to specialists. In this respect we are reverting to the pre-Big Bang model, with marketmaking separated from advice and execution. But this is now at the behest of clients rather than mandated by rule.
Clients, informed by new disclosure, will drive a greater focus on transaction costs. And hedge funds and feeder funds will grow and grow as the traditional investment institutions and insurers lose business to indexation, derivatives and talented managers who can deliver the goods.
The march of commoditisation will not abate. The experience of spot foreign exchange today will be the fate of structured derivatives *tomorrow.
Alongside the big providers of risk capital we will see a proliferation of advisory boutiques – independent of view and convivial in style.
Heavy-handed regulation in the US, particularly Sarbanes-Oxley, will drive international capital market activity to London. No other European centre can now hope to compete. Frankfurt and Paris lost their last opportunity when they turned their backs on hedge funds.
Other financial sectors will have their own Big Bang. Insurance will wake up to a new business model based around origination of products, packaging and distribution. Investment banks and hedge funds will be to the fore in driving that change.
The City will meet these challenges provided participants behave themselves, a sensible regulatory balance is maintained and the government shows necessary restraint. And we will all continue to be baffled by how such a competitive market can produce such high returns to those who provide it with capital and talent.
The author is chairman of Marks and Spencer but writes in a personal capacity.
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Innovation: Financial inventors underpin success
By Andrew Hill
Published: March 26 2006 21:58 | Last updated: March 26 2006 21:58
New CityThe fact that BNP Paribas has its London base neither in the Square Mile nor in Canary Wharf but in NW1 – next door to Marylebone station – is, to a degree, a quirk of London real-estate history. But it is no fluke that BNP’s fixed-income operation, considered among the more innovative in the expanding and increasingly complex field of structured finance and derivatives, is the only part of the corporate and investment bank to be headquartered in London.
The presence of innovative “clusters” – highly skilled people, backed by state-of-the-art technology and reliable telecommunications systems – is one of the main attractions of London for the financial services community and has provided a foundation for the growth of the most creative and risk-hungry constituents of the New City, such as private equity houses and hedge funds.
As Man Group, the listed UK hedge fund company, grew, it was able to draw on a pool of graduates from British universities who pursued higher maths and physics degrees. Equally helpful, according to Stanley Fink, Man’s chief executive, was “the presence in London of financial markets, particularly currency, and the growth in derivative instruments here, which nearly equals the US”.
‘If you don’t innovate and improve and constantly raise the game, you create an opening for another platform to come in’
Financial innovation has been at the heart of the City’s success for centuries. The first marine insurance contract, underwritten at Lloyd’s coffee house, was the product of a cluster of financial interests and expertise already based in London. More than 300 years on, the key elements of financial innovation remain the same: problems are solved with a combination of new ideas and techniques to the mutual benefit of customers and their financial backers and advisers. The fuel for innovation is competition as much as it is collaboration.
London-based banks and fund managers have recently sought to tackle the problem of UK pension fund deficits – brought into sharp relief by regulatory and accounting changes – by devising techniques that allow pension funds to match investments to liabilities in portfolios often rich in derivatives.
Alan Brown, head of investment at Schroders, the fund manager, says the next big prize in this area will be “coming up with a decent defined contribution offering which produces some of the attributes of a defined benefit scheme”.
The challenge is most acute in the UK, so the solution is also likely to be found from among the UK’s innovators before it is adapted and taken up elsewhere.
But the City has also frequently demonstrated its capacity to adapt others’ innovations to its clients’ ends. Terri Duhon, managing partner at B&B Structured Finance, a training and consulting firm, recalls that during the late 1990s US firms such as JPMorgan, where she used to work, moved teams across the Atlantic to London, where they adapted simple structured credit techniques, first developed in the US, for customers as varied as German Sparkassen (state-owned regional savings banks) and Dutch private investors.
“We were taking the basic products and applying them to a larger and more diverse group. As a result, the development of the business really took off in Europe. By 2001-02, it became very obvious that the growth of what we were calling a structured credit market was really centred on the London market.”
Mr Fink agrees: “In some cases, the US – and New York in particular – have been the original innovators but, unusually, London has been the best implementer.”
In the past few decades, however, the speed, scale and scope of financial innovation have increased. The advantage that comes from devising a new product or a new technique in corporate finance or mergers and acquisitions can be eroded more quickly.
Nasdaq’s attempt to take over the London Stock Exchange is also a reminder that, as trading goes global, advances in technology and innovation will flow more easily around the world.
Interviewed before the Nasdaq approach was made public, Martin Graham, director of market services at the LSE and head of Aim, the highly successful smaller companies market, said: “Competition has forced us to be at the leading edge of innovation; we are also far more customer-focused [than we were].“ He pointed to the success of the SETs electronic trading platform, which has reduced spreads by 80 per cent in nine years, and cut “latency” – the time taken to send information from the platform to the market – to a few milliseconds. That is vital if London is to attract its share of the algorithmic trading – computer-generated orders triggered automatically at specified price levels – that now forms the backbone of many big investment banks’ dealing strategies.
Technology advantage shifted notably away from the City in 1997 when Eurex, the Frankfurt-based derivatives exchange, stole a march on its London-based rival Liffe, then still based on “open outcry” floor trading, by prompting a mass exodus of traders to its screen-based system for trading the 10-year German Bund contracts.
“Does the City have a God-given right to all this wonderful business?” asks Charles Roxburgh, leader of McKinsey’s financial industries practice in London. “No. If you don’t innovate and improve and constantly raise the game, you create an opening for another platform to come in.”
Nearly nine years on, however, the battle of the Bund looks less significant. The magnetic attraction of London for the best-qualified people in European and world markets remains strong – wherever the trading platform or technology is located. For instance, Man’s futures brokerage business – the biggest in Europe – does most of its trading on Eurex from screens in London. That could work both ways, as Mr Fink points out in relation to hedge funds: “We’re a totally transportable business. Small hedge funds can move five traders and a few screens to any town in the world that has broadband.”
The roots of London-based innovation now go deep, however. As BNP Paribas’s experience suggests, clients ask London-based teams not just to invent new products, but also to manage them. Grouping the skills and technology to handle product development, trading, marketing and sales in one place makes sense. What is more, as Mr Graham of the LSE suggests: “As technology gets more important, relationships get more important.” Sophisticated systems may free skilled bankers and fund managers to meet more frequently and come up with more innovative products and investment techniques.
That would represent a return to the model of the 17th-century coffee house – but with a high-technology twist that could sustain London through the 21st century and beyond.
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Action may be needed to maintain competitive advantage
By Peter Thal Larsen, Banking Editor
Published: March 26 2006 21:58 | Last updated: March 26 2006 21:58
New CityCanary Wharf is probably the best symbol of London’s recent development as a financial centre. Today, the complex is a bustling hub for the world’s financial services industry. Its skyscrapers, which house more than 60,000 workers, include the global headquarters of two the world’s largest financial institutions and the European head offices of several US investment banks. Law firms and ratings agencies have moved there, as has the Financial Services Authority, the City’s main regulator. Bankers rave about the quality of its buildings, and the benefits of bringing all their employees together under a single roof.
To the casual observer, Canary Wharf may look like a model of far-sighted planning. In fact it is the opposite. Opened at the beginning of a recession, Canary Wharf spent its first five years struggling with poor transport links and an absence of tenants. The Corporation of London, which is responsible for the City’s traditional power base in the Square Mile, lobbied furiously to prevent banks from moving there. Its developer, the Canadian group Olympia & York, filed for bankruptcy in 1992.
This laissez-faire approach has long defined London’s development as a financial centre. To its fans, the City’s strength is affirmation of the power of free markets. Others are less starry-eyed: “Much of what has happened in London has been an accident,” says the head of one UK-based investment bank. “There has been a total lack of planning.”
As the balance of global economic and financial power shifts to Asia, the question is whether this approach will serve London as well in the future. The City has many strengths, but there are legitimate concerns that its position could be eroded. “We must not think that all we need to do is sit on our hands and assume the advantages we have will enable us to keep the lead,” warns Jonathan Taylor, director-general of the London Investment Banking Association.
Arguably London’s greatest strengths are beyond its control. The City’s place at the centre of the world’s time zones makes it a natural hub, linking Asia, Europe and the US. As the rest of the world embraces English, its native tongue is another advantage.
London has also benefited from economies of scale. Its pool of bankers, traders, lawyers, accountants and computer programmers acted as a magnet for banks, brokerages and asset managers, who in turn attracted more prospective employees.
Over time, technology may make physical location less important. But as long as the providers and users of capital still want to meet face to face, the chances are they will do so in the City.
London stands out from other financial centres because it relies so little on its home market. Ever since the birth of the eurobond market in the 1960s, the modern City has been a magnet for foreign capital. “London is an operating platform that connects to the rest of the world,” says Jeremy Isaacs, chief executive of Lehman Brothers in Europe and Asia. “That is its distinct advantage when compared to other financial centres.”
Yet some bankers question whether London will continue to attract foreign capital indefinitely. As Asian economies accumulate increasing financial surpluses, it seems likely that they will begin to invest these in local securities rather than US government bonds. When they do, the beneficiaries will be local financial centres such as Shanghai, Hong Kong and Singapore.
London’s reliance on the rest of the world’s financial resources also requires openness. The City has benefited from the protectionist climate in the US. Yet London’s welcoming stance is not assured. A large-scale terror attack or serious conflict could strain foreign ties.
Even leaving aside geopolitical concerns, there are other ways in which London could make itself less attractive. One common gripe is the government’s crackdown on personal tax loopholes, which some see as evidence of the government’s lack of appreciation for a critical industry. Others are less worried. “If we woke up one day and there was no tax advantage for French, German and Italian citizens to be in London, a lot of people would leave,” says Bill Winters, co-chief executive of the investment banking division of JPMorgan Chase. “But London would still retain its status as the leading financial centre.”
Another area where the authorities could become less welcoming is in regulation. Most bankers admit the FSA does a reasonable job of maintaining orderly markets. But finding the right balance can be hard. Over the next few years, the FSA will have to decide on the appropriate level of scrutiny for hedge funds and private equity groups. Too much regulation could drive activity offshore. Too little could open up scope for abuse.
Moreover, the government does not fully control the regulatory environment. Most recent regulatory initiatives started in Brussels, where the European Commission is pushing ahead with changes such as the Markets in Financial Instruments Directive. So far, these moves play to London’s strengths.
But some observers worry that the government would have no way of stopping a co-ordinated attack on London’s position by other member states. This also raises the question of London’s control over its financial infrastructure. Until now, the City has taken a relaxed view of ownership of its financial institutions. But the likely takeover of the London Stock Exchange has prompted some to think again.
Despite these concerns, most people at work in the City today are optimistic about London’s prospects as a hub of global finance.
But most participants also recognise that the laissez-faire approach of the past will no longer be enough.
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Hedge funds: London wins prize for nurturing fast-rising star
By Stephen Schurr in London
Published: March 26 2006 21:58 | Last updated: March 26 2006 21:58
New CityIt is still in its infancy, but the hedge fund industry has played a central role in London’s renaissance as a financial centre. Now that hedge funds are going global, they are making London the sector’s new headquarters.
A decade ago, hedge funds were a disparate fraternity of money managers scattered around a half-dozen points on the globe with little interaction between the groups. Today, hedge funds have become a trillion-dollar industry, with the top 50 funds exerting a profound influence in virtually every market in the world.
And the industry now has a distinct centre of gravity that is in London. US funds still hold more than two-thirds of the industry’s assets, but London is growing far more rapidly. In 2002, London funds held $61m, or 10 per cent of global hedge fund assets. Three years later, London held $225m, or 20 per cent of the global assets.
“The UK hasn’t been at the vanguard of many developing industries in the past decade, but how London has built a vibrant hedge fund industry has been an extraordinary success story,” says Stuart Bohart, global head of prime brokerage at Morgan Stanley. “This industry has helped make London a magnet for international talent and capital, enriching the UK in the process.”
UK-based funds such as Man Group, Barclays Global Investors, GLG Partners and Lansdowne Partners have joined the elite ranks of hedge funds that manage more than $10bn. Meanwhile, virtually every major US hedge fund has established a London office in the past few years as a base for European operations.
ChartIn part, the reasons for this clustering are the same reasons why European hedge funds decided to domicile in London 10 years ago: the remarkable talent pool, the financial-services and prime-brokerage infrastructure provided by the investment banks and the friendly regulatory climate. The London hedge fund community likes to trumpet its relationship with the UK’s Financial Services Authority, which has won high marks for taking a rational approach to regulation.
“I think London will inevitably take a greater share of the hedge fund assets because this is where the talent pool is,” says Rod Barker, director of business development at RAB Capital, a publicly traded hedge fund multi-strategy firm. He notes that the liberalisation of European countries such as Italy and Germany has not given rise to booming local hedge fund industries. This is partly because these countries lack London’s robust investment banking and asset management industries.
However, there are crucial new reasons for the inflow of US hedge funds: the perception of greater market opportunities in the UK and Europe, as well as London’s role as an unofficial midway point between emerging Asian markets and the Americas.
“The lingua franca in the hedge fund industry is English, but London is also the perfect place for us to straddle the major world markets,” says Michael Hintze, founder of the $5bn London hedge fund CQS, which also has a Hong Kong office. Mr Hintze, an Australian who has been in London since 1994, also notes that London has drawn hedge fund skill from around the globe. “There’s so much talent and so many different cultures,” he says, “it’s like the United Nations in our office.”
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nternational talent: World’s brightest look to London
By Joanna Chung in London
Published: March 26 2006 21:58 | Last updated: March 26 2006 21:58
New CityRaymond Ng, chief trader of European spot foreign exchange for Citigroup, needed little convincing to relocate to London last year after 15 years in Singapore.
“Doing forex in London is a dream job,” says the 41-year old Singaporean. “London is the biggest financial centre in the world in terms of forex volumes. It is also the best time zone because you get a portion of Asia, a portion of New York and all of Europe.”
This allows Mr Ng to fulfil his professional ambitions, but helps his personal life too. “I have more time for family,” he says, showing off pictures of his two small daughters on his mobile phone. “In Singapore, I would often be at work until midnight to capture a good part of the US market.”
He breaks off to shout across the room, noisy with chatter, the clatter of keyboards, ringing phones and the occasional peal of laughter. Some 550 people work on this floor of one of Citigroup’s two office buildings in Canary Wharf, churning out fixed-income trades, products and deals for the world’s largest financial services group.
It is a microcosm of the New City. The opportunity to be at the centre of the action – while having a life outside the job – has drawn people from all corners of the globe.
“London is the financial centre of Europe,” says Killian Tracey, 27, who moved to London after finishing his degree in actuarial and financial studies at University College Dublin and now trades cash bonds and credit default swaps. “London has a lot of energy about it and everything is going on here so you have to be here.”
Mr Tracey is one of two Irishmen in the European credit team that also includes people originally from Italy, France, Ukraine, South Korea and China. Down the aisle, a Texan twang can be heard.
Mr Ng’s diverse team is a dozen-strong and includes a New Zealander and an Australian. Gaurang Chadha, 37, a few rows away, was born in Bombay, but grew up in Holland. Aside from English, he speaks six languages, including Dutch, German, Latvian (his wife is Latvian), and basic Japanese.
One floor below, amid a similar hubbub on the equities trading floor, sits 28-year-old Caroline Duriez, a Frenchwoman who trained as a lawyer at the European Court of Justice in Luxembourg. She now works in equity finance, supporting the prime brokerage sales team in London, a city she “fell in love” with.
There are complaints, of course. Elio Manca, director of equity derivatives, rides a motorbike to work. “I avoid public transport, I suffer every time I use it,” the 32-year old Italian says. Biting into a late morning sandwich of eggs and bacon, he adds: “You miss the good food.”
But the positive aspects seem to outweigh the annoyances. Cornelia Gibrand, a 25-year-old Swede who deals with Nordic corporate sales, says: “I like the 24-hour life. I like being able to do anything at any time of the week.”
It is also easy to get away. “It takes two-and-a-half hours to get into Paris, it’s a one-and-a-half hour flight to Lyon, or I can easily spend a weekend in Spain if I wanted,” Ms Duriez says.
Stavros Siokos, 37, has been based in London for a decade. He studied electrical engineering in Greece and earned a masters in computer science and a PhD in operational research at the University of Massachusetts. He is responsible for all types of alternative cash trading within equities, including program and algorithmic trading.
He says: “I like the mix of the European understanding of life and the American way of working. It is a mixture you don’t find in any other place in the world.
“London is a unique place in that it is entrepreneurial but people are expected to live their lives, have a family. In the US, you feel guilty about taking a holiday.”
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Hope you enjoyed the articles. As you would expect from the FT they are superbly written.