International Financial Services in the 21st Century

Head Table Guests

Douglas L. Derry, FCA, Corporate Director, Poplar Lane Holdings and Past President, The Empire Club of Canada; Caitlin Allen, Senior Student, Parkdale Collegiate Institute; The Reverend Vic Reigel, Christ Church, Brampton; Hazel McCallion, Mayor, the City of Mississauga; Major General Bruce J. Legge, CMM, CM, KStJ, ED, CD, QC, Freeman of the City of London and Past President, The Empire Club of Canada; Peter L. Agar, Consul General, British Consulate-General; John C. Koopman, Partner, Heidrick & Struggles and Third Vice-President, The Empire Club of Canada; Captain G. Ray Gibson, Master, The Honourable Company of Freemen of the City of London; Robin Anthony Eve, Chief Commoner, the City of London; John S. Smith, Senior Manager, Private Banking, The Royal Bank of Canada, Freeman of the City of London and Immediate Past President, British Canadian Chamber of Trade and Commerce; and K.Y. Ho, Chairman and CEO, ATI Technologies and Director, The Empire Club of Canada.

Introduction by Catherine Steele

It is my privilege to welcome our guest speaker, The Right Honourable the Lord Mayor of London, Alderman Clive Martin. Last Saturday's National Post described our guest today as ""London's Mayor of Money."" He is the 672nd Lord Mayor in an office that dates back 900 years. His role is to promote the City of London internationally. And just to be clear, our guest today is not to be confused with the Mayor of London. I must admit when I told people that the Lord Mayor of London was coming to speak to the Empire Club, a club with a reputation for its conservative and traditional approach, I got these rather shocked looks in return with comments like, ""Red Ken is speaking to the Empire Club?"" So for those of you who are expecting wild rhetoric and crazy antics from our luncheon speaker, this isn't him.

Our guest, the Lord Mayor of London, ""beats the drum for the square mile"" as he says. Travelling the world, he works to attract investment to the City of London. He is elected by members of the City livery companies-trade associations that date back as early as the 12th century-for a one-year term that ends in November. This year he's already visited South Africa, Greece, Hungary, Korea, the United States and several countries in South America.

His headquarters is Mansion House in the heart of London where his staff have titles such as Swordbearer and Common Crier. Mayor McCallion, you may want to borrow some of these titles for your next council meeting or meeting with the provincial government!

Alderman Clive Martin was born and educated in London. He completed National Service in the Royal Engineers (Survey), was commissioned and appointed OBE. In 1985 he was elected as Alderman to the City of London. He continues today as Chairman of MPG, a graphics communications business. He has also served as Vice-Chair of the City of London Magistrates Court and Sherriff. In fact, when I reviewed his background there appears to be very little that Alderman Martin hasn't done.

Ladies and gentlemen, please welcome The Right Honourable the Lord Mayor of London, Alderman Clive Martin to The Empire Club of Canada.

Clive Martin

Chairman, ladies and gentlemen, it's great to be in Toronto. Thanks for your very warm welcome. And Chairman, thank you for your invitation to address you today.

I am here as an ambassador for the City of London, Europe's financial capital and the hub of Europe's capital markets. In this capacity I travel widely. Over the last year I have been to some 30 countries, including most of Central and Eastern Europe, Southern Africa, India and the Pacific Rim and the Middle East.

My post should not be confused with that of the Mayor of London who is responsible for the strategic government of Greater London-such things as capital-wide transport, economic development, the environment of London, strategic planning issues and police, fire and civil-defence services.

The City of London today is both a global financial centre as well as the heart of the European financial system. Forty per cent of its work force now work for overseas firms and the amount of business that is done in sterling is small compared to that in the dollar, the yen and the euro. The City's role depends on providing advice, making markets and supplying financial services in foreign currencies, like the dollar and the euro.

It is therefore a much larger and more comprehensive financial centre than purely the U.K.'s own financial services industry. So, for the City of London, Economic and Monetary Union within Europe at the beginning of last year was a major event. And as you know, the U.K. decided not to participate in EMU at the outset. But, although the U.K. is `out,' the City of London is effectively `in' and London rapidly became the largest centre for the euro markets and for euro-denominated instruments. In London today you can trade, make payments and settle euro just like dollars.

There are 481 overseas banks resident in the City. This includes the welcome presence of seven Canadian banks who play a full part in our business life.

The presence of the largest firms from North America, Continental Europe and Japan gives the City great expertise and so, unsurprisingly, it is playing a key role in the evolution of the euro currency by strongly influencing the qualitative changes to financial services and capital markets in Europe that are now taking place.

Firstly in the integration of the financial infrastructure. This is the electronic structure, such as the payment systems, clearing and settlement, that make it work efficiently.

Secondly, in the markets themselves where trading in corporate bonds and equities is developing rapidly. Already the European corporate bond market is the same size as the dollar one and over 70 per cent of the trading takes place in London. London is also the largest centre for cross-border equity trading. Bonds and equities are now becoming an increasingly important part of the raising of industrial capital in Europe.

And thirdly we are seeing consolidations in the banking sector-large firms merging or being taken over. These are mostly domestic at the moment, but there have been some cross-border ones, such as HSBC's acquisition of the French bank CCF.

The effect of all this is going to be the provision of more efficient and more sophisticated financial services in Europe and an increasing demand for fund management. And it has been estimated that the total global funds available for investment amount to a staggering $51,000 billion.

Many of you here will have been reading about the trials and tribulations of the London Stock Exchange over a hostile takeover bid from a Swedish company and the failed merger with the Frankfurt Exchange. So I thought that I would conclude with a few words about the future of exchanges-a subject which has implications for everyone, not just Europeans.

Europe today has a large number of exchanges, both equity and derivative, some of which are small national monopolies.

New, nimble, on-line systems are now making an appearance in Europe-and in North America. These are designed to compete with the established stock, bond and derivative exchanges and consequently they add to the fragmentation of trading.

Further down the line, technology marches on. It is inevitable that all products, including complex OTC contracts, will eventually go on-line.

This state of affairs has spawned moves by the established exchanges to reduce costs by consolidation, as well as by merging clearing and settlement systems. Some people have estimated that a pan-European settlement system could reduce transaction costs by 80 to 90 per cent.

It is early days though and it is the failures, such as the iX link up between London and Frankfurt that have hit the headlines.

But things are really not nearly as bad as they give the impression of being. London is a large and sophisticated international wholesale centre and it looks at the whole European market through international eyes.

It is also benefiting from four crucial advantages that it has over its competitors.

The first of these is London's size, its expertise and its liquidity. It is the largest centre for overseas banks with 19 per cent of the world market for cross-border lending.

Secondly it has the only fully unified regulatory system in the world. The Financial Services Authority has a totally one-stop-shop operation. It is completely international, balanced and pragmatic in its approach to the marketplace. It is well ahead of anything else in Europe in its management of the growing complexity of risk.

Thirdly, because of its resident expertise, London has been able to take full advantage of the frightening pace of technology. And this advanced technology is now beginning to reduce the need to consolidate exchanges. Instead, the way ahead is being driven by the utilisation of advanced technological systems. They are the ones that will attract business. And they are the systems that will draw liquidity. And I believe that you have to earn liquidity these days. These new systems enable you to trade, both remotely and internationally, through screens. Business has quicker access to the exchange and pre-trade risk management systems that enable orders to be vetted automatically before being submitted to the market. Electronic trading also provides a clearer audit trail within the market and better access to it.

And lastly, London has an advantage over its continental rivals in that it has an independent clearing house; one not part of any exchanges like they are in Frankfurt and Paris. The central counter party provided by the clearing house allows the netting of the various trades, be they equities, bonds or derivatives. This permits great reductions in risk and huge cost savings.

The London Clearing House already provides a central counter-party for the derivatives exchanges in London. The London Stock Exchange, Crest the settlement system, and the London Clearing House will introduce one for equities in February 2001.

No other centre has these four advantages. They give London a considerable competitive advantage that reinforces its position as the financial capital of Europe and the bridge into Europe for companies wishing to trade there.

Of course there is a long way to go, and it will take great skill and judgement to handle the new technology. At the same time risk has to be managed and a proper regulation of the new marketplace put in place.

Thank you, Chairman, for the opportunity to talk to you today. I am very much enjoying being in Toronto and I really love Toronto's moosescape. I haven't managed to hug one yet, but I am sure I will.

Thank you.

The appreciation of the meeting was expressed by John S. Smith, Senior Manager, Private Banking, The Royal Bank of Canada, Freeman of the City of London and Immediate Past President, British Canadian Chamber of Trade and Commerce.