Food for Thoughts: Gow’s, with David Clark, chairman of the WMBA

David Clark, chairman of the Wholesale Markets Brokers Association, seems to relish fighting his corner. “It’s difficult, but it is also fascinating to be involved,” he says. “Some of the process of re-regulating the industry has been good and worthwhile. Sadly, some has not. Unintended consequences have been as problematic as the issues new rules have tried to solve.”

Clark is determined to hold regulators to account and defend the industry against the wrong-headed and dangerous.

But that does not mean he condones poor behaviour or that he is an unthinking apologist for the City. Nothing could be further from the truth. Clark started life as an FX trader at Bankers Trust in 1969.

When I suggest the FX fix would inevitably be manipulated because there is no commission, no spread and no way to make money, he understands the point but disagrees.

“I think it is truly shocking. The brazen way there were chat rooms called the ‘Cartel’ and the like just shows how far standards of behaviour fell short. When I traded FX, the idea that you go down the Green Man [once an historic pub, now a hideous Wetherspoon’s in the architectural disaster of 1 Poultry] and talk about client position was unthinkable. It was a sacking offence.”

His view on the individuals involved in the Libor scandal is equally vehement. But Clark believes the pressures in the financial crisis were intense.

Bank balance sheets became inverted pyramids where a tiny point of cash supported the whole edifice. The structure remained remarkably stable in normal markets where short-term funding was readily accessible. In stressed conditions everything changed.

“What those traders did was unequivocally wrong,” says Clark. “But the interbank rate was critical for individual institutions and the entire financial system. Those traders were under enormous strain. When no one trusts each other in a highly leveraged system, systemic risk is writ large. Could the banks have run their balance sheets more conservatively? They could. But they were not breaking any rules and you can guarantee shareholders would not have thanked them if return on equity had not been keeping pace with their peers.”

Clark recognises that the Libor and FX debacles have drawn the attention of regulators to all areas of OTC markets where market participants play a role in setting prices. That ranges from key benchmarks such as Sonia and Eonia to more esoteric areas of markets such as the gold fixing. Libor and FX may just be the end of the beginning, rather than the beginning of the end.

That could be bad news for investors across asset classes. There are some areas of finance where banks can be disintermediated — such as corporate lending and infrastructure finance — but market making has always been the role of the sell-side. Shoring up capital, paying record fines and coping with new regulations are conspiring to rob markets of liquidity.

“When I was trading dollar-Deutschemark, president Reagan was shot by John Hinckley [March 30, 1981],” says Clark. “It was a volatile day. But it was not even close to the volatility we saw when the Swiss [National Bank] abandoned the euro peg in January. FX markets gapped. I think there are two causes. The first is the lack of liquidity, which relates to regulation. The second is the lack of voice trading and the rise of algorithms.

“If you are talking to someone you can get a view. Algos don’t have a view. Did anyone think the Swiss franc peg was sustainable? When it broke down we should not have been shocked. Shocking news is that the president of the United States has been shot and not knowing whether he will survive. Back in the dark ages markets seemed to function better.”

He believes that there will soon be a clash between the liquidity central banks want markets to deliver as they normalise policy, and what regulators have delivered. In this new world the authorities may find their ability to influence markets limited as so much activity has been pushed into the shadow banking sector.

“The question is: what levers can central banks pull if the positions are held by entities that they do not regulate?” asks Clark.

For all of the travails faced by his industry and his exhausting lobbying often in the face of ignorance, Clark believes the effort has been worth it. He is particularly fulsome in his praise of the Fair and Effective Markets Review in the UK. That now appears to be informing the Financial Stability Board’s progress towards a global code of conduct.

“I think UK regulators now have it about right,” says Clark. “Their message is we have lectured enough and fined enough. Fix it for yourself or there will be real trouble. I think the answer to fixing it isn’t more compliance officers. Their job is to protect the firm, not think about the industry, let alone systemic risk. The answer is better management.”

Gow’s was, well, Gow’s. The fish is always good and the menu and setting pleasingly retro. It does not set out to wow, but never disappoints. One annoying aspect was the tinned muzak. The collected works of Elton John, in my opinion, are not an ideal accompaniment to food. They are an emetic. Fortunately for all concerned the beautifully grilled plaice and Clark’s interesting views and company were sufficient balm to the aural torture.

It was a good setting to meet David Clark. Though the City has been through boom and bust, Big Bang and the global financial crisis, some traditions are immutable. Cynics might call it an oxymoron, but Clark struck me as being an honest broker.

Gow’s: 81 Old Broad Street, EC2M 1PR

Mains: Cod and chips with tartare sauce; Whole grilled plaice; French beans

Drinks: 1 bottle Macon-Villages, Domaine De La Grange Magnien; tap water 

Total (including service): £83:25

Foodie rating: A