If Brussels has any intention of moving one of the City of London’s jewels to continental Europe after Brexit, it will need to move mountains.
Wresting euro currency trading from the UK capital after 2019 will involve locating on the continent the equivalent scale of undersea fibre optic cables that make London’s foreign exchange trading centre hum.
A study by the European Central Bank on Wednesday concludes that the cables — usually about the diameter of a skateboard wheel — are a critical factor in determining the competitive strength of financial centres.
The fact the ECB has for the first time examined the possibility of euro currency trading moving from London, the world’s largest forex trading hub, adds another potentially divisive issue to Brexit negotiations that are due to finish in 2019. The accounts for about 43 per cent of foreign transactions involving the euro, the ECB estimated in a wider report about the role of the single currency.
The City and the UK government will be relieved at the discovery of the vast logistical obstacles facing any European ambition to topple London.
“The findings are consistent with anecdotal evidence gleaned from market participants that London’s trading cables and wider pull, combined with institutional inertia, mean that any shift to mainland Europe after Brexit would be gradual,” the study said.
Electronic trading has transformed the forex market, allowing investors and companies to exchange millions between continents in fractions of a second. But, as the ECB acknowledged, the City’s big inbuilt advantage was the laying of submarine fibre-optic cables in the 1980s that carry the majority of internet traffic.
Financial centres next to oceans have an advantage “because they are directly connected to the internet backbone, at the expense of landlocked cities like Zurich”, the study reported. “By one estimate, cable connections have boosted the share in global turnover of London, the world’s largest trading venue, by as much as one-third.”
About 8,000 miles of cables emerge from the seas around the UK at locations such as Crooklets Beach and Sennen Cove in Cornwall, and Highbridge in Somerset.
In addition, traders and bankers have long recognised London’s location as the best place to capture most of the global trading day. Each hour’s difference in timezone relative to the US, UK or Japan — the main global trading hubs — lowers the share of offshore trading of a country’s own currency by 12 percentage points, it found.
Another point in London’s favour is that unlike equities, bonds or derivatives, the $1.7tn-a-day cash foreign exchange markets are not risk-managed through clearing houses but instead settled via London-based CLS International Bank.
The eurozone had just 8 per cent of global currency trading, according to a study published last year by the Bank for International Settlements
The majority of Europe’s critical infrastructure for trading forex, as well as shares and derivatives, is clustered in a 30-mile radius around the City. In spite of the UK’s future, some of the industry’s biggest data centre operators, which host banks and high-frequency traders’ IT equipment, have announced capacity increases this year to cope with rising demand from investors in both Asia and the US.
Nevertheless Europe is still considering whether to relocate clearing of euro-denominated derivatives, which rely on managing the risk of daily price changes on contracts that can be open for many weeks or months, and is less dependent on submarine cables.