The City and its Institutions



The term ‘the City’ is often used as a shorthand description for the UK financial services sector. London is still the UK’s main financial hub but many other cities such as Birmingham, Cardiff, Edinburgh, Leeds, and Manchester, also have large financial centres.

One of the great advantages of the UK over other countries is its location. Because of its time zone, the opening hours of its financial markets overlap with those of both New York and Tokyo, two of the world’s other leading financial centres.



City of London

The financial services industry comprises a mixture of institutions that provide services both to the public (such as asset management, banking, and insurance) and to business (such as hedging risks and arranging funding of major government infrastructure projects).

FINANCIAL INSTITUTIONS

The City is made up of many financial institutions. Those listed below are some of the main bodies that influence the institution's activities:

The Bank of England
www.bankofengland.co.uk

The UK’s financial system. Its main functions are to:

In 1997, the Government gave the Bank of England independent power to raise or lower interest rates in order to meet the inflation targets that are set by the Government. These decisions are made by the Monetary Policy Committee (MPC).

HM Treasury
www.hm-treasury.gov.uk

The Treasury is the United Kingdom's economics and finance ministry. It is responsible for formulating and implementing the Government's financial and economic policy. Its aim is to raise the rate of sustainable growth, and achieve rising prosperity and a better quality of life with economic and employment opportunities for all.  

The Financial Services Authority (FSA)
www.fsa.gov.uk

The FSA acquired its powers on 30th November 2001. As the regulator of financial services in the UK, its primary responsibilities are to:

The FSA regulates about 30,000 firms, including insurance companies, investment houses, and financial advisers. It monitors firms to ensure that they comply with its rules which protect customers and reduce fraud and money laundering.

The FSA also approves individuals to undertake certain functions eg, fund managers, dealers, and compliance officers. Depending on their job function, individuals may be required to pass an appropriate examination and complete a period of supervised experience in an FSA authorised and regulated firm before they receive approval to deal with clients. The FSA also requires employees to maintain their competence by keeping their knowledge up-to-date through continuing professional development such as, attending seminars, reading trade journals and undergoing new product training.

The FSA has extensive powers: firms and individuals who do not meet its standards can face severe penalties.

Lloyd’s of London
www.lloydsoflondon.co.uk

Lloyd’s of London specialises in the insurance and reinsurance market. Through it, insurance brokers deal with
high-risk, specialist insurance for businesses.

Although it provides some insurance products suitable for the general public (motor, household and travel) Lloyd’s insurers only deal with authorised insurance brokers. Most of the members are large corporations rather than private individuals.

EUROPEAN INFLUENCE

Committee of European Banking Supervisors (CEBS)
http://www.c-ebs.org

CEBS comprises of high level representatives from the banking supervisory authorities and central banks of the European Union. 

Its role is to advise the Commission, with regards in the preparation of draft impleminting measures for banking activities. Contribute to the consistent implementation of Community Directives and to the convergence of Member States' supervisory practices throughout the Community. Also enhance supervisory co-operation, including the exchange of information.

The Committee of European Securities Regulators (CESR)
www.cesr-eu.org

The CESR is an independent Committee of European Securities Regulators. The Committee was established under the terms of the European Commission's Decision 6 June 2001.

The role of CESR includes advising the European Commission on the development of European securities legislation. This is to ensure that investors can enjoy the same level of protection across Europe. The CESR launches regular consultations as it develops its proposals to help regulate and supervise effectively, ensuring investors and market participants remain confident in the safety of the markets in which they invest.

Europa
http://europa.eu.int

EUROPA is the portal site of the European Union. It provides up-to-date coverage of European Union affairs and essential information on European integration. Users can also consult all legislation currently in force or under discussion.


MARKET INSTITUTIONS

A market place where various forms of trading takes place. See list below of example of Markets in the UK.

The London Stock Exchange (LSE)
www.londonstockexchange.com

The LSE is one of the world’s major markets for buying and selling shares. For a company’s shares to be traded on the LSE it must fulfil certain criteria, known as listing requirements, which are set by the FSA. Trading markets offered by the LSE include:

Virt-x
www.virt-x.com

Virt-x is an electronic market which deals in both UK and non-UK shares. It is a competitor of the London Stock Exchange.

Deutsche Börse
www.deutsche-borse.com

Deutsche Börse is one of the biggest exchanges in Europe and trades both American and European shares. The group now also owns Clearstream – the clearing house described in the next section.

DERIVATIVE MARKETS

A derivative is the general title given to futures and options. A future specifies the price at which a person will buy a share at a specific date in the future. An option gives a person the right, but not the obligation, to buy a share at a specific price at a specific future date.

By their nature, derivatives are riskier than simply buying and selling shares, which is commonly done on the LSE. However, they do allow customers to plan ahead, as they know what they will be paying out at a certain future date. For example, a chocolate manufacturer can guarantee the price at which it will buy cocoa beans at a future date, thereby enabling it to budget more efficiently. If traded successfully, derivatives can also yield large returns.

Euronext.liffe
www.euronext.com

Euronext.liffe is London’s primary exchange for trading in financial derivatives and certain commodity derivatives. The financial derivatives traded there include futures and options on shares. The commodity derivatives traded are futures and options on physical products, such as barley, coffee and wheat.

There are two other major commodities markets in the UK. These markets trade in derivatives of physical products, such as wheat, barley, coffee, oil, and metals etc, rather than shares and other financial instruments. By using these markets, for example, a chocolate manufacturer can guarantee the price at which they buy cocoa beans at a future date, thereby enabling it to budget more efficiently. Euronext.liffe deals in soft commodities like wheat, cocoa and coffee; there are two other major commodities markets in the UK.

ICE Futures
www.theice.com

ICE Futures previously known as the International Petroleum Exchange (IPE). A group of energy and futures companies founded this exchange in 1980 and the first contract, for gas oil futures, was launched the following year. ICE Futures is a Recognised Investment Exchange. It is Europe's leading energy futures and options exchange and it provides a highly regulated marketplace where industry participants use futures and options to minimise their price exposure in the physical energy market.

London Metal Exchange (LME)
www.lme.co.uk

The origins of the London Metal Exchange can be traced as far back as the opening of the Royal Exchange in 1571, trading in base metals such as copper, aluminium, zinc, lead, nickel, and tin. The London Metal Exchange is the world's premier non-ferrous metals market with highly liquid contracts and a worldwide reputation. Trading on the LME is carried out via open outcry, the inter-office telephone market and electronically via LME Select. The primary roles of the LME are pricing, hedging and physical delivery.

CLEARING HOUSES

Clearing houses ensure that once shares have been traded money and shares are transferred smoothly and efficiently. They are responsible for clearing trades, settling accounts, collecting and maintaining margin monies, regulating delivery, and reporting trading data. Clearing houses act as third parties to all futures and options contracts, acting as a buyer to every clearing member seller and as a seller to every clearing member buyer.

London Clearing House & Clearnet
www.lchclearnet.com

LCH. Clearnet was formed following the merger of the London Clearing House Ltd and Clearnet. LCH.Clearnet is the leading independent central counterparty clearing house in Europe, serving major international exchanges and platforms such as the London Stock Exchange and Euronext.liffe.

The ‘central counterparty’ role essentially removes the risk when participants buy or sell financial instruments. Every buyer is deemed to be buying from the central counterparty and every seller is deemed to be selling to the central counterparty. Risk is reduced because the central counterparty is well financed and each side of a trade remains anonymous. The clearing house also keeps records of options and futures contracts, ensuring that the holders are retaining enough assets (known as ‘margin’) to cover possible losses.

CRESTCO
www.crestco.co.uk
www.euroclear.com

CRESTCo is part of the Euroclear group, It is the Central Securities Depository (CSD) for the UK and Ireland. CRESTCo is regulated by the UK’s Financial Services Authority and operates the CREST system.
CREST is one of the most efficient settlement systems and is a leader in settlement risk reduction. Clearing and settlement staff make sure that, once shares have been traded, money and shares are transferred smoothly and efficiently. CREST offers settlement for a wide range of corporate and government securities, including those traded on the London and Irish Stock Exchanges and virt-x. CREST also settles money market instruments and funds, plus a variety of international securities.

Clearstream
www.clearstream.com

Clearstream was formed in January 2000 through the merger of Cedel International and Deutsche Börse Clearing. Clearstream offers settlement (delivery of securities in return for payment) and custody (management, safekeeping and administration of securities on deposits) services to the German, Luxembourg and international markets, covering over 150,000 domestic and internationally traded bonds and equities. Clearstream's core business ensures that cash and securities are promptly and effectively delivered, and that customers are notified of the rights and obligations attached to the securities they keep under custody.


For more insight into the financial Services industry take a look at our Introduction to Investment Award





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