The London and Frankfurt Stock Exchanges

Part of the debate – in the House of Lords at 5:00 pm on 24th May 2000.

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Photo of Viscount Chandos Viscount Chandos Labour 5:00 pm, 24th May 2000

My Lords, while thanking the noble Lord, Lord Lamont, for introducing this debate, I am struck by the coincidence that 18 years ago I made my maiden speech on the arcane subject of a European Commission directive on accounting by banks. Today, in my first speech since my recycled return to the House--but not a maiden speech, unlike that of my noble friend Lord Layard who gave us an excellent contribution, so I can expect no mercy from noble Lords--the noble Lord, Lord Lamont, has given me an opportunity to venture into similarly complex territory.

Although I am no longer the practising investment banker that I was originally, I still have interests to declare, both as the director of a number of companies quoted on the Official List of the London Stock Exchange or traded on the AIM market. I am also an adviser--in commercial rather than political terms--to a member of the London Stock Exchange specialising in "growth" companies.

I listened with interest to the speech of the noble Lord, Lord Lamont, and I welcome at least the open-minded position towards to the proposed merger from which he starts. However, I had the impression that the further information that the two stock exchanges have been able to release since the first announcement of the intended merger and since the noble Lord first tabled the Motion, in particular in relation to the use of the euro, perhaps led to some reshaping of his line of attack.

None the less, during his speech the noble Lord voiced his well-known concern about the euro and highlighted the alleged losses suffered by UK pension funds from holding securities currently traded for settlement in euros. It is with some trepidation that I suggest that a distinguished former Chancellor has fallen victim to an economic fallacy, even when the same argument has been advanced by the Sunday Telegraph, but I will have the temerity to do so.

The euro-denominated securities held by UK pension funds are predominantly equities and hence real assets rather than monetary ones. It is possible to assess the performance of such an equity portfolio only by considering the aggregate effect of the movement in the share price and the exchange rate. Since the launch of the euro, eurozone equities have generally performed well, not least because in many cases companies have benefited from the competitive exchange rate in which they trade. The denomination or principal currency of settlement for an equity security is essentially a veil. For that reason, I welcome the clarification from the London Stock Exchange and the Deutsche Bo rse that it will be their customers who determine in which currency or currencies shares will be traded.

As the noble Lord, Lord Lamont, and other noble Lords have already made clear, the London Stock Exchange is a commercial organisation with no monopoly or privileged status beyond the legacy from its earlier, more protected position. In commenting on the noble Lord's Motion, I shall try to bear in mind strictly the limitation on the roles of both the Government and Parliament in this matter, although, like other noble Lords, I believe that a significant national interest needs to be considered as a result of the proposed merger.

That national interest certainly includes the maintenance and, if possible, enhancement of London's position in the global financial markets, generating employment and other economic benefits. However, even more in the national interest is to see the most efficient and dynamic capital markets made available to UK companies of all kinds to finance their investment, expansion and growth.

When my noble friends and I were still speaking from the Benches opposite, I cited the work of the American economics writer, Professor Brock, who has argued convincingly for a causal connection between the superior record over the past 10 years of the US in net job creation and in the vibrancy of its capital markets, in particular NASDAQ and the venture capital community. Of paramount importance, therefore, for the promotion of new companies and new jobs in the new economy is the closing of that gap between Europe's capital markets and those in America. We should not shrink from sacrificing, if it is necessary, 1,000 jobs in the City if, by so doing, some 5,000 lasting new jobs are created in emerging companies, financed by a strengthened stock market.

As it is, from the information currently available, I believe that the proposed merged exchange--iX--offers the best prospects for enhancing the provision of capital to small, medium and large companies, while at the same time promoting the best of the established strengths of the City. The prospective efficiency gains which I understand could be achieved through massively increased netting of counter-party risks should, through reducing the capital needed by member firms to support their customer business, lower the cost of dealing for all investors; as importantly, any capital thereby freed up will then be available to support proprietary trading by member firms, the trading which in large part determines the market liquidity available to long-term investors.

The separation--in both the British and German markets--between stock exchanges, clearing houses and settlement systems means that a simultaneous resolution of all these detailed issues is impracticable. I believe that, in the first instance, the merger of the two exchanges is the best possible way of achieving the desired efficiencies in settlement and risk management.

I shall touch only briefly on the issue of the growth company market, which I recognise is perhaps the most difficult area for many market participants and commentators. There is no doubt that the German Neuer Markt has been highly successful. Furthermore, while intuitively the ceding of the centre of the new growth market to Frankfurt feels threatening to UK technology and other high growth companies, I believe that the more rational sentiment should be that if the strengths of the Neuer Markt and NASDAQ can be brought to bear for the benefit of UK companies, then this will be for the national good.

Perhaps I may finish by urging the member firms of the London Stock Exchange, who will ultimately determine whether the merger will proceed, to look at the industrial, commercial and financial world around them. The very structures and institutions which may have served industry well 30 or 40 years ago are unlikely to be appropriate now, as companies both large and small trade in a hugely more open and international market.

I cannot forget the views expressed during the first debate in your Lordships' House in which I spoke. The leaders of some of the country's largest merchant banks urged a continuation of banks' ability to conceal their actual profitability through the use of hidden reserves. I recall an argument that took place at around the same time with a then banking colleague who vigorously asserted that it was in our employer's interest to continue as long as possible the archaic system of a Bank of England queue for new issues in the London stock market to protect the status quo and our banks' established positions.

I fear that, for all the traditional strengths of the City, it was attitudes such as those which contributed to the virtual disappearance of British-owned investment banks. I very much hope that all members of the London Stock Exchange will embrace the challenge and change involved in this proposed merger with an eye to the future and not to the past.