Equities trading focus | FTT | Denis Orrock


much activity that is taking place on a national level – the debate surrounding Italian derivatives being a prime example. Capital markets, asset management and custodian firms need to put their uncertainties around fee levels within the EU FTT to one side and start to prepare for the operational certainties that are already here.


The solution conundrum Most institutions have tactical solutions in place, perhaps based upon their existing tax software, but forward-thinking firms are now looking for a more strategic tax-processing solution that acts as a central repository for all tax rules – not just the EU FTT. The idea is that this repository would then serve all of the regional tax requirements, interfacing with local systems. The alternative is a tactical


solution, which typically is resource intensive and has limited capability in terms of workflow, exceptions management or rule flexibility. Industry evidence with regards to both the French and Italian experiences has demonstrated the costliness and inefficiency of these tactical solutions. As each country implements


their own unique version of the FTT, capital markets, asset management and custodian firms will potentially need to develop a unique set of rules for each jurisdiction. For the Head of Operations or IT, the solution they deploy


Best Execution | Summer 2013


will also need to interface with in-house ledgers, MI systems and other applications both up and downstream. Ideally the solution should also embrace the whole lifecycle of a trade, including pre-trade ‘what if’ analysis. There are obviously huge advantages to be derived from having one central tax repository that can provide a dashboard representing the effects of the tax on all potential trades across multiple jurisdictions. The current situation is that institutions are capturing the trades from multiple upstream systems (systems that may cover different regions or even different instruments). Once the Operations teams have captured all of that data from the trading platforms, they then need to apply the rules regarding which trades are subject to FTT and which are not. In operational terms, the


requirement is for a system that is capable of identifying the, say, 25 trades out of 100 that attract FTT and disregard the rest. At the moment this task is being undertaken in a very manual fashion or at best via a batch process: it is not a scalable system that can accommodate the addition of new countries with their own unique set of rules.


The need for scalability Any form of transactional tax generates a huge workload for the Operations team in terms of capturing the trades, sifting


through them to determine those that are exempt, performing the tax calculations and generating the messaging to the relevant authorities. To do this manually for one country is not really feasible, let alone 40 countries. Indeed at an FTT seminar of


30 prime brokers, custodians and consultants (hosted in London during June 2013 by GBST) the view was expressed that the tactical French and Italian solutions that have been deployed to date are unlikely to scale sufficiently to handle further jurisdictions. The compelling drivers for a strategic solution to the FTT question that emerged from the seminar were competitive advantage, future proofing, risk mitigation and cost reduction.


Conclusion While the FTT may reduce in scope in terms of European jurisdictions, at a global level the scope is actually growing for the Tax and Operations teams within institutions. While up on the Bridge, the


politicians and industry bodies debate the whys and wherefores of an EU transaction tax, down in the engine room of financial institutions the Operational staff are already getting their feet wet and desperately need a strategic solution. The Compliance and Risk teams are only too aware of the perils of failure to introduce a truly scalable, global, tax processing methodology. n *Denis Orrock is CEO, GBST


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