Viewpoint | Robert Boardman
Commission model estimates annual revenue of €57.1 Billion, if applied in all EU countries. Limiting
it to the 11 countries that have agreed to adopt the FTT reduces the target to €35 Billion annually. Two-thirds of the total levy is expected to come from the derivatives market, particularly the highly liquid interest rate derivative contracts which the European Commission’s model suggests will account for half of the total tax raised. The model assumes a massive 90% reduction in derivative transactions, so the accuracy of its estimates about the impact on derivatives will be key to predicting tax revenue.
What about cash equities? Although not to blame for the financial crisis, other political rhetoric demands equities are included in the FTT. Some politicians demand curbs on speculative and high- frequency trading, arguing that it serves no “public purpose” and cite the 6th May 2010 Flash Crash in US equities as further evidence of instability caused by rapid automated trading. Such is the demand to introduce a FTT in equities that France and Italy have already introduced a limited scope FTT covering equity trading in larger companies incorporated in those countries, in advance of the European version. If the proposed European FTT is watered down, these early versions could be useful barometers of what might happen following its introduction. The French FTT, introduced 1st August 2012,
required buyers of French equities to pay 20 basis points tax, levied on stocks with a market capitalisation of greater than €1Bn. The Italian FTT, introduced 1st March 2013, gave a new twist: 12 basis point tax for purchases done on exchanges or multilateral trading facilities, or 22 basis points for purchases done over the counter. The Italian tax has a lower threshold market capitalisation of €500 Million. Significantly both tax laws were drafted to charge the net settled position each day, which meant that market makers were able to reduce their tax liability by ending the day with flat positions. The tax is of course paid by end investors, mutual funds, pension schemes and other real-money investors. Both FTTs also included a separate tax on high frequency trading,
Best Execution | Spring 2013
but it was narrowly drafted and the amounts collected are small. Using BATS data for the first 15 business days of the Italian FTT, turnover in the Italian MIB large cap index has fallen 11% compared with the same period in 2012. But turnover in the German DAX index (where there were no tax changes) has also fallen 10% in the same comparison, so there is not yet compelling evidence of reduced turnover. The OTC market in Italian equities has collapsed, and instead some brokers are using a work-around to report OTC trades to exchanges and thereby benefiting from the lower rate. The French FTT had a similar small reduction in market turnover immediately after its introduction, but there was no long term reduction in liquidity. High-frequency trading has largely continued. So despite the political rhetoric, the FTT was a disguised tax on the general public and did little to reduce perceived risk in public markets. The final terms of the European FTT are still being negotiated, and although the initial draft lacked some of the exemptions that are present in the French FTT, many political observers believe that France in particular will be lobbying to position its current tax as the model for the new European levy. The result of these negotiations will be crucial to determining whether the European Union can wave a magic wand to produce pain-free revenues or whether it will be found, like Goethe’s Apprentice, to be dabbling in experiments with disastrous consequences. ■
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