Will Bitcoin bite you on the Arse?

We are the Village Green Preservation Society.

God save Donald Duck, vaudeville and variety.

We are the Desperate Dan Appreciation Society.

God save strawberry jam and all the different varieties.

Preserving the old ways from being abused.

Protecting the new ways, for me and for you.

 

What more can we do?

 

Some innovations in financial markets took years to become accepted, running alongside older methods. For instance, before futures markets, prices had been quoted in fractions. The finest prices were 1/128ths and known as a Clo/Clo, or slang for a very close price. Once futures came along, decimals were quoted side-by-side fractions, so1/128th became .0017825, until seemingly overnight fractions disappeared entirely. Also open outcry trading ran hand-in-hand with computerised trading many years before being superseded. On the other hand, some changes that were viewed as revolutionary were quickly dispensed with like the fax machine, which became redundant as cheap computing and the Internet took over. The fax machine did last long enough for me throw one at a runner only to open my briefcase later at my first senior board meeting to discover that one of my colleagues had filled my case with its broken parts. Some innovations such as slicing and dicing subprime loans have been disastrous and nothing short of criminal, while ‘The Euro’ was manufactured and propagated by politicians which says all you need to know about that project. Now we have crypto-currencies like Bitcoin and Ether, which don’t look like they are going away anytime soon. The total market value of bitcoin reached $100 billion in June, amid stories of an anonymous trader who made more than $200 million profit in a month trading the virtual currency. I had treated this concept with utter contempt when I first became aware of Bitcoin in 2009. Now eight years later, they are becoming increasingly relevant and — not that this is a necessary seal of approval — they can be traded, with the CME publishing reference rates for them. Bitcoin is the brainchild of Satoshi Nakamoto whose true identity remains unknown, and has been the subject of much speculation. It is not known whether the name “Satoshi Nakamoto” is real or a pseudonym, or indeed whether the name represents one person or a group of people. Bitcoin was invented to be a decentralized digital currency not tied to any government or central bank and first appeared in January 2009 at a time when central banks around the world were starting to under-take quantative easing and cranking up the printing presses. Bitcoins are produced roughly every 10 minutes as reward tokens for completion of a block-chain block (mined in Bitcoin parlance) and have a finite issue of 21million. On current speed of “mining” this total will be reached by 2040. Payments using Bitcoin can be done instantly anywhere across the globe using peer-to-peer technology and at a nominal cost. Tasks, like tracking of the transactions and issuing new money, are managed collectively by the network, making it safe and anonymous to an extent. However this has had some appeal to criminals on the dark internet which is concerning. Also worrying is that there has been a rapid increase in the value of bitcoin versus the Dollar to over $2,000 currently from $280 in 2014. Entrepreneurs have been quick to see the success of Bitcoin. There are now about 30 crypto-currencies floating around the internet – some of which have been invented to solve specific problems such as Potcoin which does what the label on the tin infers it will do. It handles payments in the legalised Cannabis sphere. These payments have been a problem for some time as in most US states, Cannabis is now legal but it is still illegal to bank the transactional profits from the $100bln a year legal market, hence creating a problem. Crypto-currencies are different and potentially fill a gap in the market for a method of trade for a new business mindset. In doing so, this keeps central bankers and governments scratching their heads and lessens their reins of power. It is unlikely that all the cryptocurrencies in circulation will survive or whether the survivor has even been invented yet. With a generation of traders brought up on the internet who are now questioning old fashioned methodologies and new fund raising processes such as Initial Coin Offerings are being accepted it does appear that some radical ideas on currency are prescient. For no other reason than they challenge the established order these innovations should be welcome. However a cautionary note should be sounded when crypto-currencies are seen as trading tools. Unlike traditional FX pairs, there are no underlying economics to support trading decisions: No GDP revisions, no CPI rates and no central bank minutes. So one is in effect punting purely on supply and demand and as such please be warned.

Financial Clearing faces a muddy future. 

 

Financial Clearing faces a muddy future.

Prior to the formal Brexit negotiations starting on June 19th there has been a fair amount of sabre rattling from both sides of the channel. Alongside key issues such as the rights of migrants both European and British, ‘divorce payments’ and trade deals some opportunistic and ill-informed overtures to grab Euro clearing from London have been made.

Clearing is the name given to the process of validating the availability of funds to complete a transaction and the subsequent recording of the transfer of assets. The clearing houses in London, predominantly the LCH, handle trade clearing for most instruments from freight, interest rate swaps through to commodities and gold. London handles about 70% of global Euro trading which equates to nearly €1 Trillion daily and for each trade cleared there is charge. To put a catch all term on clearing houses they are huge repositories of risk.  This is obviously a lucrative business which European centers have long had jealous eyes on. Europe’s financial leaders have consistently argued that clearing in Euros should be centered within the mainland of Europe. Apart from jingoistic reasons the clear financial thought process is that trading will inevitably follow the clearing and in the end lead to the demise of London as the European financial center.

London has been at the forefront of financial trading and innovation since the early 1800s and has a pool of resources deeper than any other center in Europe. Alongside the clearing of Euro instruments London also clears 18 major currencies and the overlap with clearing of commodities ensures that there is always liquidity. The advantages of having one major clearing house centered in London also allows trading houses to benefit from multi-currency  netting efficiencies. The benefits are felt worldwide as Singapore based  Spencer Campbell, MD of Kaloti Precious Metals, says “Fragmentation of credit across the bank facilities will disrupt the overall flow of commodities across boarders”.

The Euro although issued in Euro and seemingly controlled by the Germans is in fact now a widely traded instrument. This becomes a source of irritation to European politicians as they can only exert limited control over the trading of Euro but none over derivative trading in the Euro. Similar to watching the puppy you have house trained refuse to come back when you take him for his first long walk. The European Central Bank first tried to relocate clearing in 2011 when it tried to insist that all euro trades were done within the Eurozone; however this was ruled illegal when the City argued successfully that to force to relocation inside the Eurozone breached EU treaty free-movement requirements. Valdis Dombrovskis, vice-president responsible for financial stability, financial services and capital markets in Europe recently said: ‘The continued safety and stability of our financial system remains a key priority. As we face the departure of the largest EU financial center, we need to make certain adjustments to our rules to ensure that our efforts remain on track.” In effect Europe is once again trying to enforce the necessity of clearing houses being located in mainland Europe and he also issued a thinly veiled threat that some clearing houses “may be of such systemic importance” that the new regulatory requirements will not be able to safeguard the EU financial system alone, forcing some businesses to move operations within EU borders.

In response the London Stock Exchange group, majority shareholder in the LCH, made clear its feelings when it told me. “Regulatory cooperation, which the UK currently enjoys with the US, supports financial stability across the entire market,  as well as providing very substantial economic  efficiencies for customers, and hence for the real economy as well.” And continued “A location policy does the opposite, it increases, not decreases, risk and costs for customers. Given these facts, European and global customers have overwhelmingly expressed a clear preference for shared regulation between the EU, the UK and the US.”

Michael Spencer, the leading broker for a generation, is even more succinct in his view.” Sadly my opinion is that what the Europeans are discussing doing is a really sad and, if I might say, ill-informed piece of economic nationalism that is deeply against efficient and free markets,” and added. “We clear dollars successfully in London; we clear yen – nobody’s phoned London from Tokyo saying we must insist that your yen clearing in derivatives is moved back to Tokyo or Australia or New Zealand or Hong Kong or Singapore or Hungary.”

The general consensus is that less than 10% of trading takes place in European financial centers and as such the increased costs of trading, caused by the lack of netting facilities, would increase by as much as 20%.Thats 20% of bank capital which would be diverted away from other projects at a time when Europe is crying out for funding.

David Buik, Panmure Gordon’s revered commentator,  reflected how most traders and brokers in London  feel  when he told me that it would be  “Madness for EU to break up current clearing arrangements – the largest and safest insurance company in the world – for the sake of infantile retribution! The only gainer will be the UNITED STATES! Think again!”

As the British government attempts to negotiate the best terms for an orderly departure it feels like the discussion will drag on infinitum however what may spur on an adverse decision for the UK is the election of a staunchly left wing Socialist government led by Jeremy Corbyn. Having repeatedly attacked businesses, bankers and derivative trading how ironic would it be for Macron and Merkel to see a socialist government come to Europe’s aid by driving financial trading from London and as a consequence clearing would be less likely to stay. This would be a tragedy for London and a pyrrhic victory for Europe.