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Gillian Tett, capital markets editor, talks to James Montgomery, FT.com editor, about capital markets and the rise of new financial instruments at Davos on January 26 2007
James Montgomery, FT.com editor: Gillian, one of the talking points at Davos this year has been the growing rivalry between New York and other financial centres such as London. Tell us what people have been saying about that?
Gillian Tett, capital markets editor: Well, the issue of rivalry between New York and London, or New York and other financial centres, has certainly been a top debating topic. After all, the overarching theme of this year’s conference is the changing power equation and that’s one good example of it in the financial sector. Now a lot of the New York contingent…and we do have a large contingent from Wall Street this year, are saying that they think there is a real shift of business away from New York. And going particularly to London at the moment, but also Hong Kong, one of the key debating points at a lunch yesterday, for example, was the degree to which regulation in New York is scaring a lot of senior financial figures. A lot of praise for the Financial Services Authority in the UK, people saying that that type of principles based approach is a kind of system that America should be copying right now.
JM: And another of the shifts that we’ve been talking about is the rise of new forms of markets and financial instruments?
GT: Absolutely. If you’re looking at how power is changing in the financial world today, there is a much bigger shift away from the established focuses for activity on exchanges into off exchange activity, over the counter trading through new financial products such as derivatives, but also there’s a really significant shift away from public listed equity to private equity and if you add those two things together, what you essentially get is a financial system that is becoming more opaque and that some of the old forums for activity are no longer where the really interesting action’s happening.
JM: And that’s a particular challenge for policy makers and that’s been a talking point as well?
GT: Well, it created a challenge for policy makers because it makes it much harder for regulators, let alone ordinary investors, to see where the risks in the financial system lie and to see where trends or problems could be building up. And so one of the issues that we’re going to be talking about over lunch today is whether that’s creating new dangers for financial stability and, if so, how exactly regulators can respond.
JM: And, lastly, private equity are out in force in unprecedented numbers really. Who’s here and what have they been doing?
GT: Well, one of the ways that the shift in power structure’s impacting the financial world is putting more activity into the hands of people like private equity and, of course, in addition to that, interdealer brokers are also growing in prominence. And it’s very interesting that at this year’s Davos we have a lot of private equity figures here, who are trying to put the case for private equity playing a positive role in the financial system. We’ve also got a lot of interdealer brokers and that’s particularly interesting because these guys haven’t been to Davos before. They’ve tended to operate in the shadows, but they, together with the private equity world, are realising that they need to start engaging much more widely if they are going to play a larger role in the financial system.
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