The FTT - Finally a Reality

By Rebecca Healey, TABB Group

Originally published on TABB Forum

After years of wrangling, France and Austria appear to have broken the deadlock between the 11 ‘enhanced co-operation’ countries, and a compromise agreement has apparently been reached on a financial transaction tax. As of Jan. 1, 2016, all financial transactions, excluding primary market and bank loans, will be taxed if at least one of the parties is based in the EU. Is this finally it, or is it just more political posturing?

The agreement by France to tax all derivatives, rather than just credit default swaps (CDS), as well as shares and bonds was an important step in re-igniting the implementation of the financial transaction tax. But it now appears that the remaining stumbling block of the issuance versus residency principle has also been overcome. Finance Ministers from the 11 Member states met in Brussels earlier this week to sign an agreed text. The question is: What is the agreed text?

The FTT is to be implemented on all financial products except the primary market and bank loans. The proposed rate is reported to be 0.1% for shares and bonds and 0.01% for derivatives. It would appear that the Italian model based on the issuance principle has been dropped due to the significant legal challenges of imposing a tax on a state that does not wish to be part of the proposed tax regime.

The introduction of a specific minister, the Austrian Finance Minister Hans-Jörg Schelling, to push the FTT over the line to implementation is indicative of the political will to put the FTT into place; but still the question remains as to how this tax will be collected and enforced. Portugal will be leading on the technical implementation and France’s former economy minister, Pierre Moscovici, is in charge of the matter at the European Commission.

Currently, Italy and France collect the tax on a net basis at the end of day (EOD), meaning the very traders the tax was supposed to impact (intraday speculative traders) could get off scot-free, provided their EOD position is flat. With transaction information to be included in the standardized mandatory matching fields that CSDs now need to provide their NCAs under the new Central Securities Depositary Regulation, is this how the European Commission plans to track payment of the FTT?

The Outcome

Given that the tax is to be based on the widest possible base and lowest rate to take into account the impact on the real economy and the risk of relocation of the financial sector, perhaps the intention is to make the tax so onerously difficult to avoid that, given the minimal cost, it may be easier just to cough up.

However, as we have seen from recent stats produced by Credit Suisse, markets have a knack of delivering unintended consequences. In Italy, average trading volumes have declined by almost 12% since the introduction of the tax versus an overall 7% increase in European volumes. In France, volumes have been less impacted due to the high number of exemptions – to all participants it would seem except the retail investor.

As @RemcoLenterman posted this morning on Twitter:

You really could not make it up.

While the news out this morning is probably more political posturing, Europe is significantly closer to the implementation of the dreaded FTT. The question now will be whether this makes the possibility of a Brexit in May more likely?