What are the regulation and market structure changes you’re keeping tabs on?
At the forefront are still the knock-on effects of Brexit. There was this unreasonable expectation that the UK was going to become the Singapore of Europe. We don’t have equivalence but there’s never been this bonfire of the regulations. Financial services were well and truly affected by Brexit and we’ve had to put in place duplicate infrastructure and presence, which is inefficient. We ran everything from London and passported services throughout the EU. Now we’ve got a physical presence in Europe, and we probably have 200 people who previously would have done jobs that operated out of London. We’re keeping on top of what benefits we can achieve out of new progress between the EU and the UK but we’re working on the assumption that we’re never going to get back what we had.
As markets move forward you are going to have a different set up in the UK versus the EU. Whether it’s your trade reporting or your allocations, everything must be done in duplicate. How is that helpful to a company like ours? There’s only so much you’re able to outsource back to say the UK or back to third party organisation and so you’re having to replicate a mini version of what you have in London or in the US. That’s an issue because you become a more fragmented setup. We went down the Brexit route where we were looking at setting up a new entity in Ireland but also looking at acquiring a company that would have the necessary licenses first. Ultimately we found a company in Luxembourg and stopped proceeding with the Irish set up. With hindsight I wish we hadn’t. It’s hard in Europe. Employment law is very distant from that in London.
If you asked me before the government signed a new agreement relating to Northern Ireland, I’d say it was going to get worse but there does seem to be a movement now. There’s a push to improve and formalise relations and it’s things like clearing and access to markets that are being focused on. I don’t think the government is going down this Singapore in Europe approach because then there’s no return and equivalence will never happen.
What are your thoughts on new proposed clearing regulation?
EU regulators are in negotiations around moving clearing activity of Euro interest rate swaps away from London to EU-based CCPs. That is transferable but it reduces efficiency. You’re talking about moving trillions of dollars in clearing from LCH Ltd to other EU CCPs. You’re then splitting the efficiency of the market because as there’s such a large volume going through it you can make it relatively inexpensive for people to clear. If you split it, it then becomes more expensive and it becomes less efficient. It becomes this duplicative issue we’re seeing across many areas. Because of this, you must charge more to cover your costs and therefore the underlying clients will end up paying for it – they will be paying for a less efficient landscape.
How is the provider landscape evolving and what is driving this?
Access to markets is no longer as easy as it used to be. We probably had 5,000 clients come to us over the last four to five years who have been kicked out by banks – a lot of that is clearing business. The banks want clients to have many different things, where that revenue comes from – or they’ll set a limit based upon size the company and say we will only deal with clients who have a balance sheet of more than X. We pick up the huge amount of that business that is discarded.
There are fewer players in this market. Clearing businesses, if you look at the US, I’d say five years ago there probably 400 FCMs where now there’s probably 60. That’s a drastic reduction. You don’t have a reduced level of activity; just more being cleared through fewer players. As the banks pull out of direct clearing for anyone other than those core clients who they view across several products, those other clients have to go somewhere.
Take prime services in London. We’re seeing a mixture of two of the big players in that market shut down because they’re Russia-owned. You’ve got banks once again raising the bar. We have the capability to provide access to everything they require but we’ve never done it as a holistic prime service offering. If you want access to commodities, equities, fixed income – they’re all individual corridors. There’s an opportunity for us now because if the banks are pushing for everything above one billion there’s a 500 million to one billion market where there’s no one servicing that. The whole landscape has shifted from some of the major exits that have been seen over the last year.
Do you expect regulators to be more cooperative in the future?
The feedback I’ve had was the regulators were in a state of suspension in terms of any progress. I’m sensing that now that the Northern Ireland protocol has been put in place there’s been a thawing of the relationship. There’s now communication. There was a great relationship between the FCA and BAFIN – the two the leading regulators in Europe – wherein they collaborated very well together, and Brexit severed that. I hope there’s more interaction with the FCA and the other EU regulators going forward.
We operate out of Luxembourg, with branches in Germany and we’re looking to move that licence to Germany so that we have everything run out of Germany under a BAFIN lead licence. It is a very slow process, and we have licence applications that we’ve done in Singapore which took a long time. In Columbia, we’ve got a payment licence which took three years longer than we thought, and Brazil was probably a couple years longer than anyone anticipated.
These things do take a long time, but they do seem to be getting slower. It is harder for people to enter the market. We’ve grown significantly over the last 15-20 years, and I don’t think we could have done the same thing having started today. It’s much harder for people to begin, and then when you get large banks, they’re like tankers. There’s so much oversight and bureaucracy.