The financial transaction taxes that are springing up across Europe are making multi-leg investment strategies exponentially more expensive and punishing the buy-side's use of hedging strategies, writes Dan Barnes.
The buy-side could see the cost of derivatives trading
rocket under a new European transaction tax. Funds will be
paying the tax every time they convert assets to cash or bonds
to cover their derivatives trades. With margin calls taking
place on a daily basis, the tax could prove to be a strong
earner for national governments but it may leech out capital
from the investment fund sector.
"The proposals and the impact assessment that came with it
clearly have some very poorly thought out ideas about how the
market works and the implications haven't been contemplated,"
says Jorge Morley-Smith head of tax at buy-side industry body,
the Investment Management Association.
Funds already face newly imposed expenses when using complex
instruments under the European Markets Infrastructure
Regulation (EMIR) and rules based on the Dodd-Frank Act in the
US which follow the G20 proposals to centrally clear all
over-the-counter (OTC) derivatives trades. Central clearing
makes investment funds buy highly liquid, low-risk assets that
can be posted with a central counterparty (CCP) to act as a
buffer to account for changes in a derivative's price and in
case one of the trading counterparties defaults.
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