LONDON — To some, it is the Big Bang. Others call it the Revolution. In a country given to understatement, neither is an exaggeration.
Changes about to sweep through London's financial district will be revolutionary indeed, affecting securities markets and firms worldwide. Membership in the London Stock Exchange is to be liberalized, and centuries-old restrictions are to be eliminated, providing new opportunities for foreign as well as British financial institutions.
"The changes are vast," Richard Lloyd, chief executive of the merchant bank Hill Samuel & Co., said. "Customs, many of them restrictive, are being swept away that have been with us for a long time."
Among the most significant developments:
- On March 3, the London Stock Exchange will remove a restriction that since the 18th Century has limited membership to individuals. The acceptance of corporate members will effectively open Europe's largest, most important securities market to international banks and brokerage houses.
The move is expected to lure some blue chip equity trading away from other financial centers and intensify competitive pressure in the British securities markets.
- On Oct. 27, the exchange will abandon the minimum broker's commission of 1.65% on all equity transactions, a move considered certain to increase trading volume but one that could trigger a commission war and shakeout similar to that which followed the May Day, 1975, deregulation of commissions on the New York Stock Exchange.
To further stimulate trading volume, the exchange is pressing the government to remove a 1% duty on all transactions. An exchange survey indicates that such a move would increase volume by about 70% over a four-year period.
- Also on Oct. 27, barriers will fall that have compartmentalized London financial services since the early 17th Century, when securities were traded in the coffee houses around Throgmorton Street.
Division Will Disappear
The age-old division separating London's brokers and jobbers will disappear. Brokers, who deal with investors but are forbidden from market making, and jobbers, who make markets but cannot deal directly with the public, will be permitted to enter each other's preserves.
Restrictions that have prevented commercial banks from operating in securities markets and securities houses from offering banking facilities will also be dismantled. In a parallel development, the exchange is implementing a computerized information system for quoting and dealing. Exchange officials said it will be the most modern anywhere.
"By October, we will be the only stock exchange in the world that can move off its trading floor," exchange spokesman Luke Glass said.
Collectively, all these measures will convert London into an international free-for-all, giving major banks and financial houses the chance to test a complete range of services for the first time.
Already a quarter of the world's international bank lending takes place in London--there are more U.S. banks in London than in New York. And London serves as the epicenter of the $45-billion-a-week Eurolending market. The changes have global ramifications.
"What is happening here will make London the most critical point of development for our global strategy," said Stanislas Yassukovich, chairman and chief executive officer of Merrill Lynch Europe Ltd.
Robert H. Smith, vice chairman of Security Pacific Corp., the Los Angeles-based banking firm, said: "It's a unique opportunity for our merchant banking strategy. We can offer to lend, deal in capital products, underwrite securities, and broker."
The rapid advances in communications technology that have turned London, New York and Tokyo into 24-hour global markets for securities mean that London's liberalization will draw additional business from other major markets. Much as changes in other markets have helped bring liberalization to London, it is widely thought that London's Big Bang will accelerate the pace of change in New York and Tokyo.
To police the new free-wheeling London system, a Securities and Investments Board will license institutions and exercise other forms of control--indirectly, through a series of self-regulating organizations. Its presence marks the first legally backed regulatory body in the fiercely independent square mile that is London's financial district, better known as "the City." Until now, the City has run itself as a group of "old-boy" clubs that make their own rules.
The changes in London began as the price for ending a prolonged legal challenge to tight exchange rules on grounds that they constitute restrictive practices. The threat to the system, coupled with the prospect of no immediate alternative, led to an agreement to drop the challenge in return for liberalization moves.