The following is a guest editorial courtesy of Andrew Saks, Head of Research and Analysis at ETX Capital.
The tug of war which has taken place over recent years between the two major economic drivers of the European economy has made itself very clear to traders in both large exchanges in Frankfurt and London, as it has done among retail traders too.
The past five years have been absolute testimony to the differences between London which is the ultra-dynamic, global superpower of the financial and capital markets industry with its dedicated infrastructure, magnetic talent base that ensures that all relationships between Tier 1 FX dealers, non-bank market makers, market connectivity companies and liquidity takers and providers can easily be maintained as the top level of the world’s senior level financial professionals are all based in the same square mile.
By comparison, Germany, which post-Brexit finds itself as a debt-ridden and overburdened provider of cash to the European markets, and in a position in which its own domestic industry is outmoded and unable to modernize.
Britain’s highly sophisticated electronic financial markets-dominating world capital is anathema to Germany’s legacy industry, archaic factories and socialist government.
Frankfurt, however, still has aspirations of becoming a dominant player on the world stage of trading, something which British peers have ridiculed, including Lord Myners who, quite rightly back in 2016 along with senior regulators in London, had concerns relating to how clearing operations can be expanded across both exchanges during the ill-fated proposed merger between London Stock Exchange and Deutsche Boerse.
Nothing that has ever been proposed as an Anglo-German collaboration has ever worked out well. Look at the 2005 to 2015 Bentley Continental range. One of the most unreliable cars on the market according to British and American automotive warranty companies. That’s what happens when the British and the Germans work together!
According to laws in America and Europe, notably the Dodd-Frank Wall Street Reform Act and the EMIR (European Market Infrastructure Regulation), exchange-traded swap contracts must be cleared through specific electronic clearing houses, a process which engenders greater transparency and in the case of London Stock Exchange, its own subsidiary LCH. Clearnet is used for this purpose.
The case in point here is that nowadays, with large banks better capitalized, transactions are now being passed to institutions with very little capital at all therefore if large trades went wrong, there could be massive exposure, and as a result, a question mark hung over the corporate governance of a new entity consisting of the London Stock Exchange and Deutsche Boerse with its head offices in two separate countries, which could lead to a shirking of responsibilities by British and European regulators, or a degree of buck-passing. Counterparty risk is, after all, a very important subject post SNB EURCHF peg removal.
Thus the idea of merging Deutsche Boerse was dropped, and those who were in the know knew full well it would never proceed.
What does all this matter? It’s all in the past, surely?
Well, it does matter because German politics are beginning to change, finally, and the ultra-conservative AfD political party which opposes the socialist government style that has been embedded in change-averse German society for the past 70 years wants to take Germany out of the European Union too.
The new terminology to propagandize this follows the British one. Dexit.
Deutchland Exit, I suppose.
The AfD party has even made a slogan for it, that being “Germany, but Normal”.
The AfD’s 600 delegates controversially met in person in Dresden and its ideology, which built its base on opposing Chancellor Angela Merkel’s migration policy, used the meeting to harden its stance on family reunification for refugees, voting in favour of a total ban.
What we have here, then, is a right wing nationalist party rather than the usual German left wing nationalist parties.
It could dump the debt of Europe, releasing Germany from the burden of being the pocket money source for non-producing southern Europe’s corrupt siesta states that think money grows on trees and has absolutely no modern economy or technology at all, and therefore allow Germany to begin a very effective campaign toward offering its own listed stock of domestic firms on its own venues without having the burden of OTT regulation and reporting issues.
It could develop its own OTC trading technology and become a European center for FX and CFDs. After all, German traders like to trade with British CFD and FX companies.
In January, UK politician John Glen lead post-Brexit talks with the EU to strike a “memorandum of understanding” that will guide future regulatory cooperation on financial services.
Senior UK government officials said at the time that any agreement struck would only provide minimal access to EU markets at the absolute best and will more likely only set up a method for UK and EU regulators to swap information on decisions.
Boris Johnson’s Brexit trade deal does not include an EU-wide arrangement for financial services, with UK firms instead having to negotiate a patchwork of individual EU nations’ regulations.
The only way the City of London can maintain its pre-Brexit access to the EU is if Brussels grants regulatory equivalence, however Brussels believes the UK is destined to diverge from its financial services regulations and has withheld the designation.
All absolute hot air.
If Germany gets its Dexit, all of that kowtowing to the socialists in the EU parliament would be irrelevant and self-determination of FX trading could be the new normal! That is if BaFIN, the German regulator gets its act together and stops contemplating trading latency floors and hampering decent execution times for traders whilst letting Wirecard get away with a huge fraud.
Perhaps this will be the one time in which German and British companies will make history by actually working together with successful and harmonized results – a good trading environment between Frankfurt and London.
They think it’s all over? It may not be this time!