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As iTulipers know, London has largely gained it's eminence as a financial centre as a result of leading the regulatory dash to the bottom. This excellent article on re-hypothecation is a very good example of this: http://newsandinsight.thomsonreuters...ation_scandal/
David Cameron, the British PM, is head of the Conservative party. Guess who funds them? http://www.ft.com/intl/cms/s/0/49051...44feabdc0.html
Yesterday, David Cameron lost an important battle. He was trying to protect the City of London from EU regulations by threatening to use the UK's veto to block the latest treaty. The French & Germans called his bluff. Whoops. The consequences? http://www.ft.com/intl/cms/s/0/ba7f2...44feabdc0.html
But in the UK, there is absolutely no statutory limit on the amount that can be re-hypothecated. In fact, brokers are free to re-hypothecate all and even more than the assets deposited by clients. Instead it is up to clients to negotiate a limit or prohibition on re-hypothecation. On the above example a UK broker could, and frequently would, re-hypothecate 100% of the pledged securities ($500).
This asymmetry of rules makes exploiting the more lax UK regime incredibly attractive to international brokerage firms such as MF Global or Lehman Brothers which can use European subsidiaries to create pools of funding for their U.S. operations, without the bother of complying with U.S. restrictions.
In fact, by 2007, re-hypothecation had grown so large that it accounted for half of the activity of the shadow banking system. Prior to Lehman Brothers collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK. With assets being re-hypothecated many times over (known as “churn”), the original collateral being used may have been as little as $1 trillion – a quarter of the financial footprint created through re-hypothecation.
This asymmetry of rules makes exploiting the more lax UK regime incredibly attractive to international brokerage firms such as MF Global or Lehman Brothers which can use European subsidiaries to create pools of funding for their U.S. operations, without the bother of complying with U.S. restrictions.
In fact, by 2007, re-hypothecation had grown so large that it accounted for half of the activity of the shadow banking system. Prior to Lehman Brothers collapse, the International Monetary Fund (IMF) calculated that U.S. banks were receiving $4 trillion worth of funding by re-hypothecation, much of which was sourced from the UK. With assets being re-hypothecated many times over (known as “churn”), the original collateral being used may have been as little as $1 trillion – a quarter of the financial footprint created through re-hypothecation.
If any group stood out, it was the one that – according to Financial Times analysis of official electoral commission data – has done most to finance the Tories’ return from the wilderness of opposition to government: hedge fund managers.
In the past 10 years, they have made more than £14.3m of largely personal donations. And in the 18 months since the general election that took David Cameron to the head of a Tory-led coalition, they have donated more than £2.2m.
The figures reveal a small irony of recent UK politics. London’s highly successful hedge fund industry prospered under the previous centre-left Labour government, which showered it with praise and eased regulation. But the Tories won the resulting dividends: the sector is now the biggest single contributor to party coffers.
In the past 10 years, they have made more than £14.3m of largely personal donations. And in the 18 months since the general election that took David Cameron to the head of a Tory-led coalition, they have donated more than £2.2m.
The figures reveal a small irony of recent UK politics. London’s highly successful hedge fund industry prospered under the previous centre-left Labour government, which showered it with praise and eased regulation. But the Tories won the resulting dividends: the sector is now the biggest single contributor to party coffers.
But early Friday morning these differences were painfully evident. When it counted, Mr Cameron failed to win support for the protocol from a single European leader. After the summit, Britain’s financial services industry remained just as exposed to what Mr Cameron called the “constant attack” of the Brussels regulatory machine.
The main difference is that there is a new inner grouping within the EU that can potentially agree new financial regulations without the UK even being present – a danger Mr Cameron has explicitly recognised. To boot, the summit gamble used up precious political capital with the dwindling allies that Britain relies upon in the EU to block the regulations it opposes.
“It is much more likely that Britain will be isolated at meetings of finance ministers. I can’t imagine why anyone will want to make an effort any more,” said one well placed European official. “The temptation to teach them a lesson will be strong. The consequences are serious.”
Sharon Bowles, who chairs the European parliament’s committee handling financial regulation, echoed this concern. “Cameron’s veto was meant to be a show of strength,” she said. “Now, without a place at the negotiating table, we may not get to influence those very policies that will impact on the City and our financial sector as a whole.”
The main difference is that there is a new inner grouping within the EU that can potentially agree new financial regulations without the UK even being present – a danger Mr Cameron has explicitly recognised. To boot, the summit gamble used up precious political capital with the dwindling allies that Britain relies upon in the EU to block the regulations it opposes.
“It is much more likely that Britain will be isolated at meetings of finance ministers. I can’t imagine why anyone will want to make an effort any more,” said one well placed European official. “The temptation to teach them a lesson will be strong. The consequences are serious.”
Sharon Bowles, who chairs the European parliament’s committee handling financial regulation, echoed this concern. “Cameron’s veto was meant to be a show of strength,” she said. “Now, without a place at the negotiating table, we may not get to influence those very policies that will impact on the City and our financial sector as a whole.”
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