The City of London and its role as a financial centre

            Тhe city of London and its role as a financial center

                                 Chapter 1.

              Introduction. The Concept of the City of London.

Britain is a major financial centre providing a wide  range  of  specialised
services. The country’s economy has for a long time  been  directed  through
the great financial institutions  which together are known as   “The  City”,
capital “C”, and which are mainly located in the  famous  “Square  Mile”  of
the City of London.

The “Square Mile” in the Roman Times  historically emerged on the Thames  as
the business and industrial nucleus of the future London. Through  centuries
of business and religious developments the City  assumed  its  role  of  the
world commercial centre as it is known today . When  in   the  20th  century
Great Britain  lost its empire  and other financial centres got  established
 in the world, the city adapted itself  to changed circumstances  to  remain
a  world  financial  leader.  The   City  of  London    has   the   greatest
concentration  of  banks  in the world (responsible for about  a quarter  of
total international bank lending) , the world’ s  biggest  insurance  market
(with about 1/5 of the international market ),  a  Stock  Exchange   with  a
larger listing of securities than  any other exchange, and  it  remains  the
principal  international centre  for  transactions  in  a  large  number  of
commodities. A large proportion  of  Britain’s wealth has been  invested  by
the City overseas. The City’s annual foreign income roughly double  that  of
the British manufacturing industries. The  above  proves  the  City’s  world
significance as a financial centre.  Geographically  the  City  is  a  large
office area bubbling with life at daytime and comfortably quiet outside  the
office hours. It’s historical sights like the Tower  of  London,  St  Paul’s
Cathedral, the Museum of London, the Monument and  others  as  well  as  the
beautifully impressive architecture of the office buildings  attract  crowds
of  visitors.  The  only  housing  project,  the  Barbican,  provides   very
expensive accommodation  along with an   arts  centre,  a  school  and  some
official premises.

Since after the mid - 80s financial and related  services  have  started  to
expand outside the “Square Mile” though the   City  of  London  remains  the
symbol and actual reality of the country’s power.

                               C h a p t e r 2

    Britain’s Economic and Financial Position Today at  Home and Abroad.

Finance and industry of the British economy go  hand  in  hand  as  industry
requires  a  diversified  network  of  financial  institutions  to   develop
successfully. Although  Britain’s financial power  today  exceeds  that   of
the country’s  industrial  achievement,  the  country  was  for  years  “the
workshop of the world”. It still remains  a  highly  industrialised  country
but the end of the 20th century saw tendencies for the economic decline.

Historically, after two world wars and the loss of its empire Britain  found
it increasingly difficult to maintain its leading position  in  Europe.  The
growing competition from the United States and later Japan   aggravated  the
country’s position.

Britain struggled to find a balance between the governments intervention  in
the economy and almost completely free-market economy of the United  States.
         The theories of the great British pre-war economist  J.  M.  Keynes
stated  that  capitalist  society  could  only  survive  if  the  government
controlled, managed and even  planned  much  of  its  economy.  These  ideas
failed  to get  Britain out of the image of  a country  with  quiet   market
towns linked by steam trains puffing slowly through green  meadows.  Arrival
of  Margaret Thatcher,  the Conservative prime-minister  in  office  between
1979 and 1990, discarded these theories as completely wrong.  Mrs.  Thatcher
claimed that all controls and regulations of the economy should  be  removed
and  a  market  economy  should  recover.  Her  targets  were   nationalised
industries. She refused to assist the struggling  enterprises  of  the  coal
and steal industries which were slimmed  down  in  order  to  improve  their
efficiency. In the steel industry, for example, the  workspace  was  reduced
from 130000 people to 50000 by 1990s  and the production of 1 ton  of  steel
by 1990 took only 3,7 man hours instead  of  12  man  hours   in  1980.  The
government  believed  that  privatisation  would  increase  efficiency   and
economic  freedom would encourage private initiative. A lot of big  publicly
owned production and service companies such as  British  Telecommunications,
British Gas, British Airways, Rolls Royce and even  British  regional  Water
Authorities were sold into private hands.  Britain  began  to  turn  into  a
country of shareholders.  Between  1979  and  1992  the  proportion  of  the
population owning shares increased from 7 % to 24%.

The Conservative government reduced the income tax from 33%  to  25%  as  an
incentive in production. This did not lead to any loss of revenue, since  at
the lower rates fewer people tried to  avoid  tax.  At  the  same  time  the
government doubled the VAT on goods and services to 15%. Today it is 17%.

Small  business began to increase rapidly. In 1984 for example there  was  a
total of 1.4 million small business though  including  “the  black  economy”
the figure was nearer to million. Proportionately, however, there  were  50%
more of them  in West Germany and the United States and about twice more  in
France and Japan.

Many small businesses fail to survive mainly as a result of poor  management
and also because compared with other European Community Britain  offers  the
least encouraging conditions. But small  businesses  are  important  because
they can grow into big ones and because they provide over half  of  the  new
jobs. It is particularly important because  unemployment  in  Great  Britain
rose to nearly 2.5 million people and a lot of jobs are part-time.

Energy is a major component of the economy, which depended  mainly  on  coal
production until 1975, began to rely on  oil  and  gas  discoveries  in  the
north sea. Coal still remains the single most important  source  of  energy,
in spite of its relative decline as  an  industry,  so  oil  and  coal  each
account for about one third of total energy consumption in Britain.  Over  a
number of years British policy makers promoted the idea of energy coming  of
different sources. One of them was  nuclear  energy  as  a  clean  and  safe
solution to energy needs. In fact  Britain  constructed  the  world’s  first
large scale nuclear plant in 1956. However,  there  were  a  lot  of  public
worries after the US disaster at Three Miles Island and the Soviet  disaster
in Chernobyl. Also nuclear research and safe  technology  is  proved  to  be
very expensive - by 1990 the real  commercial  cost  of  nuclear  plant  was
twice as high that of a coal power station. Renewable  energy  sources  such
as wind or solar energy, are planned to provide 1% of  the  national  energy
requirements in the year 2000.

Research and development  (R&D)  in  Britain  are  Mainly  directed  towards
immediate practical problems. In fact British companies spend  less  on  R&D
than any European competitors. At the end of the 1980’s, for example 71%  of
German companies were spending more than 5% of their annual revenue on  R  &
D compared with only 28% of British companies. As a result Britain has  been
automating more slowly than her rivals. In fact it may  be  the  consequence
of Margaret Thatcher’s views  on  public  spending  which  includes  medical
service, social spending, education and R&D. “The  Iron  lady”  argued  that
“if our objective is to have a prosperous and  expanding  economy,  we  must
recognise that high public spending kills growth of industry”, as  money  is
taken  from  the  productive  sector  (industry)   to  be   transferred   to
unproductive part of it. As a result  in  the  80’s  only  6%  of  Britain’s
labour had a university degree against 18% in America, 13% in Japan and  10%
in Germany. Technical education has  always  been  compared  with  Britain’s
major competitors. According to government study  “  mechanical  engineering
is low and production engineers  are  regarded  as  the  Cinderella  of  the
profession”. Very few school leavers  received  vocational  training.  Since
1980’s among university graduates the tendency  has  been  to  go  from  the
civil service to merchant banking, rather than industry.  And  according  to
analysts resulted from  the  long-standing  cultural  roots.  Public  school
leavers considered themselves “gentlemen” too long to  adjust  fast  to  the
changes of time. Efforts are now taken by the  labour  government  to  boost
technical and enterprise skills  in  schools.  The  1999  Pre-budget  report
outlined a 10 million pounds for the purpose.

Despite the favourable effect of “Thatcherism” Britain’s  economic  problems
in the 1990s seemed to be difficult. Manufacturing was  more  efficient  but
Britain’s balance of payments was unhealthy, imports of manufacturing  goods
rose by 40%, and British exports could hardly  compete  with  those  of  its
competitors. Car workers in Germany, for  instance,  could  produce  a  Ford
Escort in help the time taken in Britain. In the  90’s  among  the  European
countries British average  annual  productivity  per  worker  took  the  6th
place. The revenue softened the social problems but distracted Britain  from
investing more into industry. Many analysts thought that  much  more  should
have been invested into engineering  production,  managerial  and  marketing
before the North Sea oil declined.

The Labour government undertakes to  improve  the  situation.  In  his  Pre-
budget report on 9 November 1999 the  Chancellor  of  the  Exchequer  Gordon
Brown set out new  economic  ambitions  for  the  next  decade.  Under  them
Britain will raise its productivity faster than  its  competitors  to  close
the productivity gap and a majority of Britain’s school and college  leavers
will go on to higher education.

In  the  80s  British  companies  invested  heavily  abroad  while   foreign
investments in Britain increased too. Today  in  a  speech  in  Tokyo  on  6
September1999 the Foreign Secretary Robin  Cook  said  that  “Britain  is  a
chosen country for more investment from Japan than anywhere else  in  Europe
and more than thousand companies operate in the U. K.”

Mr. Cook added that the huge European Market of 370 million people was  “the
largest single market in the world, a market that  is  set  to  expand  even
further with the arrival of new member states”. In fact he  said  investment
in Britain is the highest bridge into Europe.

Britain as a world leader in “high-tech” industries

One of the three British microprocessor producers was making 70% of  British
silicon  wafers  required  for  new  information  technology  even  in   the
seventies. On Nov.3.1999 Techmark, a new technology market, was launched  at
the London Stock Exchange. According to  Gordon  Brown,  Chancellor  of  the
Exchequer,  Techmark will be the London  Stock  Exchange  “market  within  a
market” for innovative technological companies.

The specialised institutions are agencies  created  to  meet  the  needs  of
specific groups of borrowers mostly industrial and commercial  -  which  are
not adequately covered by other institutions. They operate  in  both  public
and private sectors. In general  they  offer  alternative  funding  to  that
provided by banks and building societies. Some of  them  were  set  up  with
Government  support  and  with  financial  backing  from  banks  and   other
financial institutions. Some public sector agencies offer financial  support
to  industry in Scotland, Wales, and Northern Ireland.

The  main  private  sector  institutions  are  finance  houses  and  leasing
companies, factoring companies, finance  corporations  and  Venture  Capital

Finance houses  are   major  suppliers  of  hire-purchase  finance  for  the
personal sector of short term credit and leasing to the corporate sector.

Leasing companies  buy and own equipment required and chosen  by  businesses
and lease it at an agreed rental rate.

Factoring companies  provide cash for a company in  exchange  for  the  sums
they owe. A factoring company buys up a client’s invoices as they arise  and
finances up to 80% of the value of the invoices; the rest is  paid  after  a
period, after deduction  of administration and finance charges.

Finance corporations  meet the need for medium and long  term  capital  when
such funds are not easily or directly  available  from  traditional  sources
such as the Stock Exchange or banks.

Venture Capital Companies  offer medium term and long term equity  financing
for new and developing businesses when such funds are not readily  available
from banks and  other  traditional  sources.  The  British  Venture  Capital
Association has 103 full members, which make up over 99% of the industry.

Financial markets  is a collection of sophisticated securities, futures  and
options the money  market,  the  euro  currency  market,  Lloyd’s  insurance
market, the foreign exchange market and markets in bullion and commodities.

The Stock Exchange

The origin of the London Stock Exchange goes back to the  coffee  houses  of
the seventeenth century where those who wished  to  invest  or  raise  money
bought and sold shares in joint stock companies. Brokers later opened  their
own subscription Economy of the country has been directed through  the  City
which is the nerve center of the national finance. The greater part  of  the
country’s income comes from invisible exports - operations originating  from
the City and flowing through its channels.

A large proportion of  Britain’s  wealth  has  been  invested  by  the  City
overseas. A number of  banking  institutions  have  their  head  offices  in
Britain but operate mainly  abroad  in  particular  regions  such  as  Latin
America or East Asia through extensive branch networks. The  major  bank  in
this sector is Standard  Chartered.  This  shows  how  the  City  of  London
expands its activities beyond the country’s borders; the same goes  for  the
influence  of  the  London  Stock   Exchange   and   Commodities   Exchanges
(particulars of the City of London as a financial center will be dealt  with
in Chapter three).

                                 Chapter 3.

      The City of London as a Financial Center, its Main Institutions.

There has been a long tradition in Britain of directing the economy  through
the great financial institutions together known as “the City”,  which  until
1997 were located in the “Square Mile”  of the City of London. This  remains
broadly the case  today,  though  the  markets  for  financial  and  related
services have grown and diversified greatly.

Banks, insurance companies, the Stock  Exchange,  money  markets,  commodity
shipping and freight markets and other kinds of financial  institutions  are
concentrated in the solemn buildings of the City  and  beyond  its  borders.
The City of London is the largest financial  center  in  Europe.  London  is
also the world’s largest international insurance market and has the  biggest
foreign exchange market.

Britain’s financial  service  industry  gives  about  6.5  %  of  its  gross
domestic products (GDP) and contributes some 35 thousand  million  pounds  a
year. The largest contributors are banks,  insurance,  institutions  pension
funds, and securities dealers.  To  help  Britain’s  financial  services  to
respond to the competition and at  the  same  time  to  protect  the  public
investment, the Government introduced 3 pieces of legislation  to  supervise
financing the industry: the Financial  Services  Act  (1986),  the  Building
Societies  Act  (1986)  and  the  Banking  Act  (1987).  Under  these   acts
investment businesses need to be authorized and they have to obey rules  set
in the legislation. The main responsibility to supervise were  the  Bank  of
England, the Building Societies Commission, the Treasury and the  Department
of Trade and Industry. The Serious Fraud office was set  up  to  investigate
and prosecute significant and complex fraud.

The Bank of England.

The Bank of England was established in 1684 by Act of Parliament  and  Royal
Charter as a corporate body. Its entire capital stock was  acquired  by  the
Government under the Bank of England Act in 1946. It is  the  heart  of  the
City of London and Britain’s central bank. The Bank’s main functions are  to
execute monetary policy, to act  as  banker  to  the  Government,  to  issue
banknote and to provide central Banking facilities

for the banking system that is the Bank is  responsible  for  the  financial
system as a whole; it is “lender of last resort”. The Bank’s main  objective
is to support the Government in achieving low inflation. Unlike  some  other
central banks  the  Bank  can  not  act  independently  of  the  Government.
Decisions on changes in the interest rates are taken by  the  Chancellor  of
Exchequer. The Bank’s role is to advise the Chancellor and to carry out  his
decisions. The 1999 (November) interest rate was 5.5%.

As banker to the Government the Bank of England is responsible for  managing
the National Debt. It has the sole right  in  England  and  Wales  to  issue
banknote. The note issue is no longer backed by gold but the Government  and
other securities. The Scottish  and  Northern  Ireland  Banks  have  limited
rights to issue notes and those must be fully covered  by  holdings  of  the
Bank of England notes. Coins can be provided by the Royal Mint.

The Bank of England can influence money market conditions  through  discount
houses. If on any day there is a shortage of cash  in  Banking  system,  the
bank relieves the shortage either by buying bills from the  discount  houses
or lending directly to them.

The Bank of England is responsible for supervision  of  the  main  wholesale
markets in London for money, foreign exchange or gold bullion.

On behalf of  the  Treasury  the  Bank  manages  the  Exchange  Equalization
Account (EEA). Using the resources of EEA the  Bank  may  intervene  in  the
foreign exchange markets to check undue fluctuations in  the  exchange  rate
of sterling.

Discount Houses.

The Discount Houses are unique to the City of London (and to  Britain  as  a
country). They occupy the central position in the British  monetary  system.
They act as intermediaries between the Bank of England and the rest  of  the
banking sector promoting an orderly flow of  funds  between  the  Government
and the banks. In return for acting as intermediaries  the  discount  houses
have privileged daily access to the Bank  of  England  as  “lender  of  last


Banks in Britain developed from the London gold miths of the  17th  century.
By the 1920s and the 1930s there were  five  large  clearing  banks  with  a
network across the country. In February 1996  there  were  539  institutions
authorized under the Banking.  Act of 1987. In British banking retail  banks
should be described as dominant.

Retail banks primarily serve personal customers and  small  to  medium-sized
businesses. They operate through more than 11.350  branchers  offering  cash
deposits withdrawl facilities  and  systems  for  transferring  funds.  They
provide  current  accounts,  deposit  accounts   various   types   of   loan
arrangements and a growing range of financial services.

The main banks in England and Wales are Barklays, Lloyds, Midland,  National
Westminter   and the TSB group. The major Scottish banks  are  the  Bank  of
Scotland, Clydesdale and Royal Bank of Scotland.

With  a  relaxation  of  restrictions   on   competition   among   financial
institutions major banks have diversified the services  they  provide.  They
have lent more money for house purchases, have  more  interests  in  leasing
and factoring companies, merchant banks, securities dealers,  insurance  and
trust companies. They provide low facilities to  industrial  companies  ands
now support a loan guarantee scheme under which 70% of the  value  of  loans
to small companies is guaranteed by the Government.

Plastic card  technology  has  revolutionized  cash  transfer  and  payments
systems. There are around ninety two million plastic  cards  in  circulation
in Britain. There are different  types  of  cards  but  they  often  combine
functions. Cards can be used overseas too to obtain cash  from  bank  ATM  (
Automated  Teller  Machines).  Cash  machine  cards  have  greatly  improved
customers’  access  to  cash.  All  retail  banks  and  building   societies
participate in nation wide networks of ATMs. About two thirds  of  cash  now
is obtained through Britain’s twenty one thousand ATMs. .A lot of  them  are
located different places at supermarkets, for instance.

Many banks offer electronic payment of  cheques,  telephone  banking,  under
which  customers  use  a  telephone  to  obtain  account  information,  make
transfers or pay bills. Other  innovations  include  computer-based  banking
(through home computer) services over Internet and video links.

Merchant banks.

The traditional role of merchant banks was to accept bills of  exchange,  to
provide funds for trade and also  to  raise  capital  to  British  companies
through the issue of bonds and other securities. These activities  continue,
but the role of Britain’s  merchant  banks  has  diversified  enormously  in
recent years. Although they are called “banks” they are  more  involved   in
providing a range of professional services, such as  corporate  finance  and
investment management, than in lending money.

Building societies.

Building societies  are  mutual  institutions  owned  by  their  savers  and
borrowers. They have traditionally concentrated on  housing  finance,  long-
term mortgage loans against property - most  usually  houses  purchased  for
occupation.  Services  have  been  extended  into  other  areas,   including
banking, investment services and insurance. The Societies  are  one  of  the
main places were people deposit their savings - around 60% of adults have  a
building society saving accounts. Building  societies  offer  a  variety  of
accounts  with interest rates related to the time   for  which  a  saver  is
prepared to  tie  up  his  money.  So  they  are  major  lenders  for  house
purchases. Four of the largest Societies are planning to become  banks.  The
largest Societies, the Halifax, Abbey National and  Nationwide  owe  45%  of
the total assets of the movement.

National Savings Bank.

The National Savings Bank is run by the department of National  Savings.  It
provides a system of depositing and withdrawing savings at  twenty  thousand
post offices around the country or by post. The National Savings  Bank  does
not  offer  lending  facilities.  Its  deposits  are  used  to  finance  the
Governments public sector needs.

Investing Institutions.

The investing institutions are those which collect savings and  invest  them
into securities market and  other  long-term  assets.  The  main  investment
institutions  are  insurance  companies,  pension  funds,  unit  trusts  and
investment trusts. Together they make a vast resource of   funds  which  are
invested in securities and other assets.  They own  around  58%  of  British
shares. The British insurance industry is highly  sophisticated  and  serves
millions of policyholders in Britain  and  overseas.  Policyholders  include
governments, companies and individuals. The British insurance is  the  forth
largest in the world and in proportion to its GDP  is  the  highest  in  any
country. There are 2 broad categories of insurance: long-term insurance  for
many years, such as life insurance, permanent  health  (medical)  insurance;
and general insurance for a year or less,  which  covers  risks  of  damage,
such as loss of property, accidents  and  short-term  health  insurance.  In
1995 there were about 830 authorized  to  carry  on  insurance  business  in
Britain. The industry as a whole employs some  207.000  people,  plus  about
126.000 are employed in activities related to insurance.

Lloyd’s  is  an  incorporated  society  of  private  insurers   in   London.
Originally it dealt  with  marine  insurance.  Today  it  deals  with  other
classes of insurance, today it deals with other classes of insurance.  Long-
term life  and  financial  guarantee  business  is  not  covered.  Insurance
brokers as intermediaries are a  valuable  part  of  the  insurance  market.
Lloyd’s insurance brokers play an important role in the Lloyd’s market.

Institute of London Underwriters was formed in 1984 as  an  association  for
marine underwriters. Today it  provides  a  market  where  member  insurance
companies  transact  marine,  energy,  commercial  transport  and   aviation
insurance business. The Institute issues combined policies in its  own  name
on risks which are underwritten by member companies. About half  of  the  58
member companies are branches or subsidiaries of overseas companies.

Pension Funds.

Pension  Funds  collect  savings  Pension   Funds   collect   savings   from
occupational  pension  schemes  and  personal   pension   schemes.   Pension
contributions  are invested through intermediaries in securities  and  other
investment markets. Pension fund have a become a major force  in  securities
markets because they hold about 28% of the  securities listed on the  London
Stock Exchange. Total Pension fund assets are very big. To protect them  the
Pensions Act was introduced in 1995 to increase confidence in  the  security
of the funds.

Investment trusts and unit trusts.

Both investment trusts and unit trusts offer investors  the  opportunity  to
benefit from pools investments, although  their  respective  structures  are
somewhat different. Assets have grown considerably in the  last  few  years.
So individuals are attracted by the  possibility   to  invest  rather  small
amounts either on a regular basis, usually monthly, or in  a lump sum.

Investment trusts companies are companies which are  listed  on  the  London
Stock Exchange and must invest mostly in   securities  for  the  benefit  of
their shareholders. The trusts are exempt  from tax on money which they  get
within the trusts. Some trusts  specialize in particular geographical  areas
or in particular markets.  At the end of June  1996  there  were  about  350
investment trusts companies listed on the London Stock Exchange.

In unit trusts the investors’ fund are pooled together but are divided  into
units of equal size. Unit trusts are open ended collective funds  where  the
funds are managed by management groups. The  unit  trust  sector  has  grown
rapidly in recent years. Nearly three million people are estimated  to  have
holdings in unit group.

Specialized institutions.

The origin of the London Stock Exchange goes back to the  coffee  houses  of
the 17th century, where those who those who wished to invest or raise  money
bought and sold shares of joint-stock companies. Brokers later opened  their
own subscription rooms and in  1773  this  was  named  the  Stock  Exchange.
During the 19th  century  the Stock Exchange developed  as  the  demand  for
capitol  grew  with  Britain’s  Industrial  Revolution.  The  Exchange  also
financed the construction of railways, bridges and dams  across  the  world.
Today it is one of a number of highly organized  financial  markets  of  the
City. It provides trading platform and the  means  of  raising  capital  for
British  and  foreign  companies,  Government  securities,   eurobonds   and
depository receipts. Official list is the Exchanges main market, while  AIM,
the Exchanges  new market is  for  smaller  rapidly  growing  companies.  It
opened in 1995. Companies which apply for a listing  on  the  Exchange  must
provide a full picture  of  their  operations,  i9ncluding  their  financial
record, management and business prospects. If a company wants  to  join  AIM
the rules are less  strict.  Such  companies  include  multimedia  and  high
technology business.

Today the Exchange has moved away from face-to-face dealing on  the  trading
floor to system of dealing from member firms’ offices.  The  quotations  are
displayed on electronic screen. Before  1986  only  British  companies  were
allowed to operate. In 1986 deregulation, known as “the  Big  Bang”  allowed
any foreign  financial  institution  to  participate  in  the  London  money
market. Other changes involved a system under which  negotiated  commissions
were allowed instead of fixed rates and dealers are permitted  to  trade  in
securities  both  as   principals  and   as   agents.   Traditional   retail
stockbrokers are facing  growing  competition  from  operations  running  by
large banks and building societies.

The Exchange has its administrative center in London, with regional  offices
in Belfast, Birmingham, Glasgow, Leads and Manchester.

Many companies raise new capital on the  London  money  market.  The  quiet-
edged  market,  that  is  the  market  of  Government  shares,  allows   the
Government to raise money by issuing stock through the Bank of England.

The Exchanges now going through a further period of change  which  has  been
described as the most significant period since “The Big Bang”.

Money markets.

London’s money markets channel wholesale short-term  funds  between  lenders
and borrows. These operations are conducted  by  all  the  major  banks  and
financial institutions. The Bank of England regulates the market.  There  is
no physical market place; negotiations are conducted mostly by telephone  or
through automated dealing systems. The main financial  instruments  are  CDs
(Certificates of Deposit), bills of exchange, Treasury and  local  authority
bills and short-term Government stocks.

Financial Futures and Traded Options.

Financial futures are legal contracts for  the  purchase  or  the  sale   of
financial products, on a specified future date at  a  price  agreed  in  the
present. Trading  and  financial  futures  developed  out  of  the  numerous
futures markets in commodities which originate from London’s position  as  a
port and from Britain’s need to import food and raw material.

Options  are contracts which  give  the  right  to  buy  or  sell  financial
instruments or physical commodities for a stated period at  a  predetermined

Financial futures  and  options  are  traded  on  the  London  International
Futures and Option Exchange (LIFFE) which was established in 1982..

Commodity Exchanges

Britain remains the principal international center  for  transactions  in  a
large number of commodities, though the consignments themselves  never  pass
through the ports of Britain. The need  for  close  links  with  sources  of
finance, shipping and insurance services often determines the  locations  of
these markets in the City of London. There are  futures  markets  in  cocoa,
coffee, grains, rubber, sugar, pigmeat,  potatoes there.

Gas, oil for heating and petroleum  are  traded  through  the  International
Petroleum Exchange, Europe’s only energy futures exchange.

Copper, lead, zinc, nickel, aluminum, aluminum alloys and  tin  are  treaded
through the London Metal Exchange (LME),  the  world’s  largest  non-ferrous
base metals exchange.

The Baltic Exchange is the world’s leading international shipping  exchange.
It contributed to 292 Mln pounds  in  net  overseas  earnings  to  Britain’s
balance of payments in 1995. Baltic dealers handle  more  than  a  half  the
world’s bulk  cargo,  transportation  of  oil,  ore,  coal  and  grain.  All
Britain’s  agricultural  futures  markets  are  operated  from  the   Baltic
Exchange and physical trading and commodities is also carried out there.

                                 Chapter 4.

   The International Role of the City of London in the World Monetary and
                              Currency Fields.

A recent comprehensive study of four world cities - London, Paris, New  York
and Tokyo - confirmed many strength of London and described it  as  possibly
the most international of all world cities. The study said that  London  and
New York are the only two pre-eminent international financial  centers  with
advantages over other cities. One city  that  is  emerging  as  a  financial
center of the Asian continent is Tokyo.

Strengths of London include:

1. The concentration of business and service functions - among them  support
  services such as legal services, accountancy, and management consultancy.

2. Efficient world-wide communication links.

3. A favorable position in the time zone between the United States  and  Far

4. A stable political climate.

5. World-class service industries including  hotels,  restaurants,  theaters
  and other cultural attractions.

Britain  and  the  City  of  London  as  a  financial   symbol,   encouraged
international liberalization in financial services. It played a  major  role
in negotiating agreements closely connected with GATT (General Agreement  of
Tariffs and Trade) as well  as  negotiations  within  the  Organization  for
Economic  Cooperation  and  Development.  Briefly,  apart  from   world-wide
insuarence and banking strength, Britain’s important features include:

 . Its foreign exchange market,. whose daily turnover of 294 Mln  pounds  in
   1995 represented 30% of Global turnover and was more than the turnover of
   New York and Tokyo combined.

 . The London Stock Exchange which is the biggest trade center for  overseas
   equities in the world; it makes 55% of global turnover.

 . The world’s second largest fund management center, after Tokyo.

 . One of the world’s biggest markets in financial futures and options.

 . One of three largest international bond centers in the world.

Britain’s international role in the  world  monetary  and  financial  fields
became particularly in the late 1980s.

Deregulation has been the main catalyst in increasing the City’s role as  an
international financial center. Fundamental reforms of 1986,  known  as  Big
Bang affected the London Stock Exchange tremendously,  because  any  foreign
financial institution can now participate in the London money market.  “What
we were trying to do”, in the words of a former Deputy  Chairman  of  London
Stock Exchange, “ was to create a new market, not one just  oriented  toward
the UK, but one that can become international”. It was  intended  to  secure
London as the leading financial center of  Europe,  and  the  third  in  the
world alongside New York and Tokyo.

Many  foreign  banks  and  finance  houses  tried   to   profit   from   the
deregulation,  some  by  direct  competition  and  others  by  buying  long-
established City enterprises. Before the Big  Bang  all   City  stockbroking
firms were British. By 1990 one hundred fifty four out of four  hundred  and
eight were foreign owned. The main investors  in  British  stockbroking  are
the United  States,  Japan  and  France  (also  see  Chapter  2,  The  Stock

British banks, insurance companies,  building  societies,  and  other  money
lenders often prefer to invest in other  areas,  rather  than  industry,  in
contrast with Britain’s competitors, for example Germany  and  Japan,  where
the level of industrial development is higher.

Britain strongly supports the removal of national regulations  and  exchange
controls  which  restrict  the  creation  of  common  market  in   financial
services. London is a major center  for  international  banking.  Altogether
five hundred sixty one  foreign  banks  are  represented  in  Britain.  They
employ about 40.000 people and provide different services in many  parts  of
the world.

Japan  and  the  United  States  are  the  two  countries  with  most  banks
represented in  London  (see  the  table  attached).  Assets/liabilities  of
overseas banks in Britain have doubled  in  the  last  ten  years.  Overseas
banks have a very high proportion of their operations in foreign currency.

Since the end of 1920s the Moscow Narodny Bank has been operating in  London
to deal with transactions with the Soviet Union and Russia now.

A number of British banks have their head offices  in  Britain  but  operate
mainly abroad. Standard Chartered is the major bank in this sector:  it  has
a network of over 600 offices in more than 40  countries  and  employs  over
25.000 people. Standard Chartered’s activities  are  concentrated  in  Asia,
Africa and Middle East.

British banks are developing innovative banking services in  their  overseas
operations. For example  Standard  Chartered  has  opened  the  first  fully
automated branches in Hong Kong and Singapore. Satellite  dishes  have  been
installed in Barclays’ branches in Zimbabwe

London and Tokyo are the main world centers for eurocurrency  dealings.  The
euromarket  began with eurodollars - US  Dollars  lent  outside  the  United
States - and now has developed into a powerful  market  of  currencies  lent
outside their domestic marketplace.  Transactions  can  be  carried  out  in
eurodollars, eurodeutschmarks, euroyen, and so on. So, euroloans are  short-
term trances (three to six months)  given  by  banks  at  the  LIBOR  rates.
Eurobonds are issued for periods of  five  to  twenty  years  in  currencies
other than that of the issuing country.

The London International Futures Exchange trades on the floor of  the  Royal
Exchange building. Over 200 banks and  other  financial  institutions,  both
British and foreign, are members  of  the  market.  In  fact  over  70%  are
overseas-owned.  They  make  contracts  in  British,  German,  Italian,  and
Japanese Government bonds.

In 1995 LIFFE announced new linking agreements with the Tokyo  International
Financial Futures Exchange and Chicago Board of Trade. In 1996 LIFFE  merged
with the London Commodity Exchange, which is  Europe’s  primary  market  for
trading futures and  options  contracts  in  cocoa,  coffee,  sugar,  wheat,

Anyone may deal in gold but, in practice, dealings are largely  concentrated
in the hands of five members of the London gold market. Around 60 banks  and
often  financial  companies  participate  in  the  London  gold  and  silver
markets. Trading is done by telephone and electronic  communications  links.
The five members of the London Bullion Market Association meet  twice  daily
to establish a London fixing price for Gold and this price  is  a  reference
for world-wide gold dealings.

                                 Chapter 5.

 Recent Financial Institutions (the London Club, Britain in the IMF, British
                              Banks in Russia).

The International Monetary Fund  (IMF)  and  the  London  Club  can  not  be
properly described as recent institutions but it is important to note  their
recent activities in the light of the financial problems in Russia.

The IMF was founded in 1944 to  secure  international  monetary  cooperation
and stabilize exchange rates.  Operating  funds  are  subscribed  by  member
Governments according to the volume  of  their  international  trade,  their
national income and  their  international  reserve  holdings.  Members  with
temporary difficulties in  their  international  balances  of  payments  may
purchase or get credits form the IMF of the foreign exchange  they  need  at
fixed rates if they meet the required conditions. Russia applied to the  IMF
for credits.

Great Britain plays an important role in the IMF. On the 10th  of  September
1999 the Сhancellor of the Exchequer  Gordon  Brown  was  appointed  to  the
Interim Committee of the IMF. The  Committee  was  established  in  1974  to
advise the IMF on the management of the  international  monetary  system  as
well as on dealing with any sudden shock to  the  world  money  system.  The
Chancellor will lead discussions on the  reform  of  the  Interim  Committee
after the proposals of the G7 Finance Ministers.

There will be also discussions on reforms to involve the private  sector  in
presenting the world financial prices. It is  the  aim  of  IMF  to  relieve
third world debt to avoid large-scale financial crises.

Among the recent developments it is  important  to  mention  the  choice  of
London as the location of  NASDAQ-Europe.  In  his  speech  on  the  5th  of
November  1999,  the  Chancellor  of  the  Exchequer  Gordon  Brown  it  was
excellent news for the City of London to launch a joint venture to create  a
pan-European security market.

Gordon Brown said: ”NASDAQ’s  decision to locate its European exchange  here
represents a massive vote of confidence in the City. NASDAQ  -  Europe  will
strengthen  the  UK  financial  services  industry  and  reinforce  London’s
position as one of the worlds’ top  international  financial  centers”.  Mr.
Brown added, “NASDAQ’s presence here will be  good  for  the  wider  economy
too, not just in the UK but Europe as a whole.  Job  creation  and  economic
growth depend on efficient capital markets sending funds  to  businesses  to
finance their expansion”.

An important move in the European monetary life was the  introduction  of  a
single European currency, the Euro, on the 1st of January 1999.  A  separate
protocol recognizes that  Britain  is  not  obliged  to  join  the  currency
without a separate decision by British Government and Parliament.

So far the Bank of England has not voted to adopt the  single  currency.  On
the 6th of September 1999  Mr. Cook , the Foreign Secretary, stated that  if
the Euro proves to be a success, it would be in Britain’s interest  to  join
it. Britain will first have to test whether there is enough  flexibility  in
British   economy  and  if  the  Euro  will  promote  strong   international
investment and boost British financial services industry.

According to the decision of European Union (EU) Heads of Government  single
currency notes and coins will be introduced at  the  beginning  of  2002  at

The London Club set up in the 1980s under an agreement in London,  comprises
over 600 big commercial banks whose credits are not  covered  by  government
guarantees or insurance. There is a steering committee  of  the  Club  which
operates between the Club’s sessions.  The Sessions are held at the  request
of the debtors in different cities of the world.

After the collapse of the USSR, the Soviet Union bank for  Foreign  Economic
Affairs owed the London Club a total of  over  32  Bln  Dollars.  Under  the
latest decision on restructuring the Russian debt it was agreed in  February
2000 that the debt would be restructured. Nearly  one  third  of  the  total
amount will be written of and Russia will be allowed to have a grace  period
of seven years, during which it will pay only reduced interest rates on  the
remaining  sum.  In  return,   the   Russian   Government   undertakes   the
responsibility for the debt and would be considered defaulting if  it  fails
to meet the stated conditions.

Although the London Club is not entirely a British entity the  title  speaks
for the significance of the city of London.

The world-wide network of British  banks  is  not  directly  represented  on
Russian market. Operations  available  are  carried  out  only  through  the
branches of British banks based in other cities of the world.


1. Although historically the heart  of  the  financial  services  sector  in
  Britain was located in the “Square Mile” of the City of London, and  this
  is broadly the case now, financial institutions have  moved  outside  the
  area all over the country.

2. The City of London is concentration  of  British  financial  power  which
  makes London an angle of the New York-Tokyo-London triangular.

3. Though Great Britain is still  a  leading  industrialized  nation  and  a
  member of G7 group it real  power  and  international  influence  centers
  around its financial activities.

                               Reference list.

1.David McDowall, Britain in close-up/Longman Singapore Publishers Pte Ltd.

2.Britain’s Banking and Financial Institutions/Reference Services, Central
Office of Information, London.

3. Angela Fiddles, The City of London (the historic square mile).

4. Talking Points on Britain’s Economy/October 1999, December 1999.

5. Банковское дело, выпуск №12, 1998г.

                                 Appendix :

                                  Table 1 .
          Net Overseas Earnings of Britain’s Financial Institutions

|                                    |Million    |
|                                    |Pounds     |
|Banks                               |6,188      |
|Securities Dealers                  |1,658      |
|Commodity traders. Bullion dealers  |556        |
|and export houses.                  |           |
|Money Market Brokers                |112        |
|Insurance Institutions              |5,952      |
|Pension Funds                       |2,044      |
|Unit trusts                         |724        |
|Investment Trusts                   |383        |
|Fund Managers                       |425        |
|Baltic Exchange                     |292        |
|Lloyd’s Register of Shipping        |57         |
|Finance Leasing                     |40         |
|Non-specified institutions          |1,962      |
|Total                               |20,393     |

                                  Table 2.
                            Notes in circulation.

|         |Value of notes in          |No of notes issued by      |
|         |circulation end February   |denomination in year to end|
|         |1996 (million)             |February1996 (million)     |
|1 pound  |56                         |-                          |
|5 pounds |1,067                      |336                        |
|10 pounds|5,688                      |575                        |
|20 pounds|8,579                      |326                        |
|50 pounds|3,104                      |43                         |
|Other    |1,154                      |-                          |
|notes    |                           |                           |
|Total    |19,648                     |1,280                      |

                          Source : Bank of England.

                                  Table 3.
                          Major British Banks 1995.
|           |Assets     |Market     |Staff|Branches |Cash       |
|           |Liabilities|Capital    |     |         |dispensers |
|           |(Mln       |(Mln       |     |         |and ATMs   |
|           |pounds)    |pounds)    |     |         |           |
|Abbey      |97,614     |10,765     |16,30|678      |1,267      |
|National   |           |           |0    |         |           |
|Bank of    |34,104     |4,095      |11,30|411      |463        |
|Scotland   |           |           |0    |         |           |
|Barclays   |164,184    |18,407     |61,20|2,050    |3,020      |
|           |           |           |0    |         |           |
|Lloyds TSB |131,750    |25,496     |66,40|2,858    |4,346      |
|           |           |           |0    |         |           |
|Midland    |92,093     |39,658     |43,40|1,701    |2,282      |
|           |           |           |0    |         |           |
|National   |166,347    |13,548     |61,00|2,215    |2,998      |
|Westminster|           |           |0    |         |           |
|Royal Bank |50,497     |4,750      |19,50|687      |1,009      |
|of Scotland|           |           |0    |         |           |
|Standard   |38,934     |7,757      |1,100|1        |-          |
|Chartered  |           |           |     |         |           |

                                  Figure 1.
           Major Banks lending to British Residents December 1995.

                                  Table 4.
                         Largest Building Societies.
|Rank by Group    |Rank After Flotations   |Group Assets (million|
|Assets           |and Mergers in 1977     |pounds)              |
|1. Halifax.      |-                       |98,655               |
|2. Nationwide.   |1                       |35,742               |
|3.Woolwich       |-                       |28,005               |
|4. Alliance &    |-                       |22,846               |
|Leicester        |                        |                     |
|5. Bradford &    |2                       |15,658               |
|Bingley          |                        |                     |
|6. Britannia     |3                       |14,916               |
|7.National &     |-                       |14,133               |
|Provincial       |                        |                     |
|8.Northern Rock  |-                       |11,559               |
|9.Bristrol & West|-                       |8,589                |
|10. Birmingham   |4                       |6,725                |
|Mdshires         |                        |                     |
|11. Yorkshire    |5                       |6,412                |
|12.Portman       |6                       |3,513                |
|13.Coventry      |7                       |3,379                |
|14.Skipton       |8                       |3,037                |

                                  Table 5.
                          Overseas Banks in Britain
                        (Main Countries Represented).
|Country of  |Branches of|British            |Represen|Other|Tota|
|origin      |an Overseas|Incorporated       |tative  |     |l   |
|            |Bank       |Subsidiary of an   |offices |     |    |
|            |           |Overseas Bank      |        |     |    |
|France      |16         |8                  |23      |-    |47  |
|Germany     |19         |5                  |4       |-    |28  |
|Italy       |15         |1                  |28      |-    |44  |
|Japan       |28         |6                  |15      |4    |53  |
|Switzerland |9          |2                  |17      |-    |28  |
|United      |23         |9                  |11      |6    |49  |
|States      |           |                   |        |     |    |
|Other       |153        |41                 |111     |7    |312 |
|countries   |           |                   |        |     |    |
|Total       |263        |72                 |209     |17   |561 |

                          Source: Bank of England.

                                  Table 6.
            General and Long-term Insurance Business 1985 - 1995.
                       General Insurance net premiums.


                                  Table 7.

                Growth in Unit Trusts and Investment Trusts.



|Assets -      |anything owned by an individual, company, legal   |
|              |body or government which has a cash value.        |
|Big Bang -    |a system of major changes which brought           |
|              |deregulation to the London Stock Exchange in 1986.|
|Bill of       |an officially signed promise  to pay to the       |
|Exchange -    |receiver of the bill, the stated at the fixed     |
|              |time.                                             |
|Bond -        |a certificate issued by the borrower as a receipt |
|              |for a loan usually longer than 12 months; it      |
|              |indicates the interest rate and the date of       |
|              |repayment.                                        |
|Eurobond-     |an international certificate issued by the        |
|              |borrower for a long-term loan (from 5 to 15 years)|
|              |in any European currency but not in the currency  |
|              |of the issuing bank.                              |
|Securities-   |general term for stocks and shares of all types.  |
|Exchange-     |a market for the toll purchase of goods or        |
|              |securities.                                       |
|Stock         |a market for short or long term transactions in   |
|Exchange-     |securities .                                      |
|Commodity     |a stable market for wholesale transactions in     |
|Exchange-     |preferably commodities and raw materials          |
|Money Market- |a market for money instruments with a period of   |
|              |validity of less than one year.                   |
|Factoring-    |a business activity in which a company takes over |
|              |the responsibility for collecting the debts of    |
|              |another company.                                  |
|Fund          |managing investors’ funds on their behalf or      |
|Management-   |advising investors on how to invest their funds.  |
|Financial     |legal contracts for the sale or purchase of       |
|Futures-      |financial products on a specified future date, at |
|              |the price agreed in the present.                  |
|Option-       |A contract giving the right to buy or sell        |
|              |financial instruments or goods for a stated period|
|              |at a stated price.                                |
|The London    |The international gold and silver market in London|
|Bullion Market|where trade is done by a telephone or electronic  |
|-             |links.                                            |
|Hedge         |The purchase or sale futures contract as a        |
|              |temporary substitute for a transaction to be made |
|              |at a later date                                   |
|Open-Ended    |A fund without a fixed number of shares           |
|Fund-         |                                                  |
|Quite-edged   |Loans issued on behalf of the Government to fund  |
|loans -       |its spending.                                     |