Leading figures in the European derivatives industry
have issued stark warnings this week about the detrimental
impact the proposed Financial Transaction Tax (FTT) may have on
the market, writes Jonathan Watkins.
The European Parliament has estimated a potential 20bn
could be generated from its levy on derivatives, while a
finalised FTT plan from the European Commission has
brought the controversial toll to the brink of
Under plans approved by Brussels last week, the 11
participating countries now able impose a 0.01% levy on
Speaking to FOWi, Anthony Belchambers, CEO of the Futures
and Options Association, said the introduction of an additional
charge is set to land the end user with further costs, and
could be detrimental to market liquidity.
Loading the industry with further costs
It is an appalling time to consider loading up the
industry with yet further cost, said Belchambers.
Increases in direct costs and pass through costs are
cumulative and will have to be met by the end user and the
question for the end user is how and from whom will the end
user recover that significant increase in cost?
There is a tipping point
which could generate a decline in order flow which, in turn,
could damage liquidity and the risk management transfer process
and one of the lessons of the recent crisis was the need
to enhance the risk management capability of intermediaries and
end users rather than reduce it.
Despite facing a lower tax
percentage than shares and bonds, derivatives transactions are
still set to make up for two-thirds of the estimated 30
to 35bn expected to be generated from the FTT each
Another attack on the economics of trading
Commonly referred to as the Tobin Tax, the levy has become a
contentious issue among EU countries, both for and against,
along with heavy opposition gathered on the other side of the
Calling the tax a bullet aimed at the heart of London, the
UK has strongly opposed the tax from the outset and has been
joined by Washington, Wall Street and leading European
This is just another attack on the economics of
trading in the marketplace and the industry just doesnt
need this with all the major increase in regulatory and
compliance spend which is being faced by the firms at the
moment, said Belchambers.
Are we going too far with all of this and not really
thinking sufficiently about the consequences for the economics
of market participation.
"It is interesting that David Wright, secretary general of
IOSCO, only recently commented that more thought should be
going into the economic consequences of regulatory change
Germany is one of the 11 countries set to introduce the tax
and is estimated to generate 10bn alone.
But Deutsche Börse group, parent company of Eurex, has
also warned of the potential unintended consequences of
implementing such a charge.
EU regulators want transparency and stability for the
financial markets, which is justified, and they also want
financial firms to pay part of the cost, said Deutsche
Börses CEO, Reto Francioni.
Sparking furious responses on both sides of the
But the tax will make sure that financial services
transactions move to less regulated markets and those who did
not cause the crisis will be burdened.
The exchange operator also warned that the tax may counter the
G20 efforts to foster the regulated and transparent
Participating EU countries
The impacts of this
potential tax show a striking discrepancy between political
objectives derived from the financial crisis, said
By introducing the tax in
only 11 member states of the European Union theses negative
impacts will only play out more strongly.
Novel and unilateral theories
Despite being a fractional charge only implemented in
Europe, the FTT has also sparked extreme opposition from a
coalition of US businesses.
The group, which includes the US Chamber of Commerce and the
Financial Services Forum, has written to the European
Commission objecting the unilateral imposition of a global
financial transaction tax
These novel and unilateral
theories of tax jurisdiction are both unprecedented and
inconsistent with existing norms of international tax law and
long-standing treaty commitments, said the group.
Concerns have also been raised in the US that the FTT could
be in breach of international laws.
Complexity and uncertainty
While some believe the tax may cause a migration of
business, the reality could be that the complexity and
uncertainty could cause a drop in trading altogether.
If market participant re-calibrate their needs and start
managing their risk less or using more standardised
instruments, derivatives volumes could be set for yet another
"If you do over-tax trading in one area, it moves," said
Justin Urquhart-Stewart, director of Seven Investment
This was demonstrated by Frances early roll-out of the
tax, which initially failed to target the majority of larger
derivative traders by leaving open a loopholes in which trades
using derivatives instruments could dodge the charge.
Higher tax on HFT
The Italian government could be next in line to implement the
levy which will also include a 0.02% charge on high-frequency
Italys FTT could be
introduced as early as March 2013.
Algirdas Semeta, the EU tax
commissioner who has frequently championed the FTT, described
it as an unquestionably fair and technically sound tax set to
strengthen the market.
"With today's proposal, everything
is in place to enable a common financial transaction tax to be
become a reality in the EU, he added.
Eleven member states called for this proposal, so that
they can proceed with the FTT through enhanced
I now call on those same member states to push ahead with
ambition to drive, decide and deliver on the world's
first regional FTT."
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