US forced to ease regulation as banks head for London

The Securities and Exchange Commission (SEC) is being forced to drastically reduce its capital and other regulatory requirements on New York-based investment banks in an effort to stem a flight of securities business to London.

At least one US investment bank has identified London as the most attractive centre in the world for trading derivative instruments and other securities, according to sources at the World Economic Forum's annual meeting in Davos, Switzerland. The bank is planning to shift significant parts of its business to London over the next year in the absence of action by the SEC.

The decision is understood to have been taken after studying the relative merits of more than 50 countries, including a number of offshore centres like the Cayman Islands. Ultimately, it came down to a choice between Switzerland and the UK, with London selected because of its strong infrastructure and benign regulatory environment.

The sources cited the UK's "rational regulatory approach" including its move to a single regulator for the City, the Financial Services Authority. This was favourably compared with New York's "byzantine" regulatory obligations. The capital requirements of regulators in New York were also more onerous.

The SEC has reacted to threats of a mass desertion to the UK and other financial centres by proposing special measures to reduce the capital and other regulatory requirements for certain forms of business, including the so-called "broker dealer light" rule.

However, another leading Wall Street securities house warned that London stood to lose its position as Europe's leading financial centre after the introduction of the single currency.

Howard Lutnick, chief executive of Cantor Fitzgerald, said that whichever centre managed to establish a benchmarking instrument for sovereign debt after European Economic and Monetary Union, it would automatically become the leading financial centre. Since this was likely to be a German or French instrument, there was every possibility of London losing its pre-eminent role.

Mr Lutnick insisted that Europe would need to develop and integrate its capital and fixed-income markets if the euro was to gain "currency supremacy" over the dollar. The US debt market was far more advanced than anything in Europe, Mr Lutnick said.

"Without the impediment of foreign exchange, European business will seek cross-border financing - creating tremendous competition between banks, and significant downward pressure on cost of funds," he said.

He added: "If France, Germany, Italy or the UK establish themselves as the European benchmark, the European market will gravitate towards that centre as it will offer the cheapest source of funds.

"However, if this benchmark is not created, then the euro will always struggle to compete with the dollar as a reserve currency. In those circumstances, the default centre will be London."