The Economist

London under threat

WHERE will Europe’s capital markets be based? London has long been Europe’s biggest financial centre, and indeed, in terms of international business, the world’s. The Eurobond market is based in London. By last year its futures exchange, the London International Financial Futures and Options Exchange (LIFFE), did more business than any other bar the Chicago Board of Trade. More foreign-exchange business was done in the City than any other financial centre. Investment banks from both Europe and the rest of the world chose to have their European base there. But the advent of the euro makes many wonder whether Frankfurt, the home of the European Central Bank (ECB), will leave the City out in the cold.

There are signs that Frankfurt might at least pose a threat. Trading in continental shares has been migrating from London over the Channel. The London Stock Exchange has been forced into a partnership with the Deutsche Börse to trade an index of 300 European stocks. Although other European exchanges are belatedly planning to join too, Frankfurt is clearly in the driving seat. Frankfurt’s derivatives exchange, having snatched almost all of LIFFE’s biggest contract in ten-year German government bonds, and joined up with Switzerland’s SOFFEX, has now replaced LIFFE as the world’s second-biggest futures exchange. Many people think that the ECB will prove a magnet that draws financial firms to Frankfurt.

In fact, these developments do not provide much evidence of London’s decline as a financial centre. It probably does not matter that the ECB is based in Frankfurt: America’s Federal Reserve is based in Washington; its main financial centre is in New York. Nor does it matter where an exchange is in Europe, if the business emanates from London-based institutions. And most of the City’s activity is in the over-the-counter business: in bond trading, derivatives or foreign exchange. London’s share of currency trading has actually increased: a third of all foreign-exchange transactions are now booked there, compared with Frankfurt’s 5%. London has big advantages: lots of institutional investors (managing more than four times the amount managed by their Frankfurt counterparts); a light regulatory touch; and talent: more people are involved in the financial-services business in London than live in the whole of Frankfurt.