FTT: TO BE OR NOT TO BE?
Mark Hemsley, CEO of BATS Chi-X Europe, outlines his views on the likely outcome for the FTT in Europe.
The Financial Transaction Tax (FTT) has been cause for regulatory, legal and industry debate on a European and national level. Some ‘Tobin tax’ proponents have staunchly supported the need for a pan-European, homogenised approach to an equities (and derivatives) tax, in some cases politically motivated to compensate for the fallout caused by the 2008 financial crisis. Others have outright opposed the notion voicing concern about the real implications on liquidity and that the tax will ultimately hurt the end investors as the charges and market impact implications are passed along the order execution chain. There have already been national implementations in France and Italy, which are influencing the debate on the shape of the 11 country European FTT.
At the beginning of September 2013, the Legal Service for the European Council delivered an opinion that the Counterparty principle being proposed for the FTT Directive would be contrary to EU law. This is a critical finding.
The Counterparty principle proposed that any non-FTT zone counterparty dealing with another firm within the FTT zone would be liable to pay the FTT. This fundamentally changes the effect of the FTT since it would have to predominately rely on the Issuance principle (i.e. based on whether the security was issued in a FTT zone country). It also potentially changes the dynamics within the FTT zone group since the overall predicted FTT income is reduced and some countries may find themselves spending a lot of time and effort chasing tax revenues on behalf of FTT zone countries that have the highest number and turnover of “issued” securities.
We have always taken the view that it will be very difficult to put in place something consistent at a pan-European level when some countries object so strongly to its implementation. Even the enhanced co-operation procedure, which draws together the 11 FTT zone countries, may not be enough to reconcile the legal and operational complexities that need to be resolved for the FTT to be implemented on a multinational basis. Instead, we may be left with a national approach to implementing transaction taxes in any countries wishing to participate.
National legislators need to be cautious not to hinder the competitiveness in Europe and also hinder the competitiveness of Europe as a whole. We have already witnessed financial services firms holding back on their entry and investment into Europe because of uncertainties about the FTT. The general trend we have seen is a move away from trading equities in those countries with a FTT towards those that do not. Whilst the political objective of ensuring that the financial sector pays for the recent financial crisis still has supporters, the proposed FTT is a very crude approach since it will damage the equity markets. The equity markets continued to function well through the crisis unlike many other parts of the financial framework and the FTT does not touch areas of the financial markets where considerable problems were identified. We agree with Tabb Group’s summation that ultimately this will make trading only more opaque for the investor. The legislators must be careful what they wish for.