France
21 August 2012
The financial transaction tax is alive and well in France, but what about the country’s securities lending industry? SLT finds out
Image: Shutterstock
France introduced a new financial transaction tax after its parliament voted in favour of a 2012 finance bill in February. The tax became effective on 1 August.
The country’s former president, Nicolas Sarkozy, said the tax would place a 0.1 percent levy on all share purchases involving France’s biggest companies, but his successor, Francois Hollande, doubled it to 0.2 percent.
The tax applies to publically traded companies in France with capital of more than €1 billion and “transactions consisting of acquiring equity securities or similar securities of the French Monetary and Financial Code,” according to PricewaterhouseCoopers. “This would also include instruments giving access to capital or to voting rights in the company and includes securities issued under foreign law.”
Hollande beat the EU to the punch when he introduced the tax on financial transactions. The European Commission proposed a tax on stocks, bonds, derivatives and other transactions in 2011 that could reportedly raise more than €50 billion per year, but EU member states are divided on whether it will do more harm than good.
The UK’s prime minister, David Cameron, recently said that a financial transaction tax would increase the cost of insurance and pensions, and could make Europe less competitive.
PricewaterhouseCoopers has said that France’s tax will not apply to temporary transfers of securities, stock lending or stock borrowing or the lending or borrowing of other financial instruments, repo or reverse repurchase transactions, or buy-sell back or sell-buy back transactions.
David Lewis, senior vice president at Astec Analytics, a SunGard capital markets business, agrees. He says: “It is my understanding that the temporary transfer of securities, including lending and repo, are exempt from the financial transaction tax in France.”
But the investment research firm Finadium’s managing principle, Josh Galper, said in a recent blog post that the financial transaction tax could have an effect on securities lending and repo through its wider impact on French capital markets.
He said: “[T]his was a unilateral move by France’s government; many other nations including the UK and Sweden (and presumably Ireland and Luxembourg) are not following their lead. This opens up a massive hole for regulatory arbitrage by every financial participant who can engage in it. Right now, a French stock traded on the NYSE [New York Stock Exchange] by a US citizen would not see the tax. The NYSE and French companies would have incentives to move their listing, although the French government will certainly impose a political cost on those who try. While some members of the European Commission would like to expand the reach of the tax to avoid just this type of regulatory arbitrage, it is very unlikely to happen.”
“The difficulty for France … is that financial markets are diverse and global; a tax has to be made effective everywhere to work, otherwise it just hurts one economy or product in favour of another one. Markets take the path of least resistance. We don’t see good things happening for French financial transactions here.”
Regulatory woes
Sweeping regulatory changes in Europe are affecting securities lending business in EU member states. “Regulatory uncertainty and restrictions do create some inertia—what some have described as ‘funds sitting on their hands’— while investors and portfolio managers wait for regulations to be clarified for fear of transgressing any new laws,” says Lewis.
He explains that securities lending as an industry provides “useful, low risk returns”, but “those returns are not massive and additional frictions or uncertainties chip away at what can be achieved”.
“These costs can range from additional capital charges agents will need to take to support indemnification to systematic recording of ‘locates’ as detailed in the new ESMA SSRs [reforms]. We are working with several organisations at present who realise that the unique intraday data we provide will be vital for measuring whether a security is truly liquid or not, which directly impacts their procedures and reporting obligations.”
Yield enhancement trading dominates lending in France, according to Lewis. “Specials, such as Peugeot-Citroen and Alcatel-Laurent, for example, and general collateral trading are also present but the vast majority of activity can be seen around the April/May/June dividend seasons,” he says.
“France is one of the largest and most lucrative countries for yield enhancement activity, but there are actions based on the freedom of movement of capital—one of the ‘Four Freedoms’ of the EU—that are putting this activity under pressure.”
The Hot Stocks list in SunGard’s Astec Lending Pit shows two French securities that are attracting interest, partly due to financial difficulties facing companies in France.
Lewis says: “Shares on loan in Alcatel-Lucent have doubled in the last month largely due to the recent profit warnings and their plans to downsize, shedding 5000 jobs. Europe’s second largest car maker, Peugeot Citroen, has also seen significant short selling activity. Shares on loan have tripled since April as short interest has built up against the car-maker whose sales are down 23 percent since 2007 and has just announced plans to lay off 8000 staff across France.”
The securities lending industry in France—not to mention the country’s other industries— has a lot to contend with, but in a market that is home to the likes of BNP Paribas, Natixis and Société Générale, as well as international player such as HSBC, business is continuing. Like anywhere else in Europe, it seems that market players are being forced to adapt to new conditions.
The country’s former president, Nicolas Sarkozy, said the tax would place a 0.1 percent levy on all share purchases involving France’s biggest companies, but his successor, Francois Hollande, doubled it to 0.2 percent.
The tax applies to publically traded companies in France with capital of more than €1 billion and “transactions consisting of acquiring equity securities or similar securities of the French Monetary and Financial Code,” according to PricewaterhouseCoopers. “This would also include instruments giving access to capital or to voting rights in the company and includes securities issued under foreign law.”
Hollande beat the EU to the punch when he introduced the tax on financial transactions. The European Commission proposed a tax on stocks, bonds, derivatives and other transactions in 2011 that could reportedly raise more than €50 billion per year, but EU member states are divided on whether it will do more harm than good.
The UK’s prime minister, David Cameron, recently said that a financial transaction tax would increase the cost of insurance and pensions, and could make Europe less competitive.
PricewaterhouseCoopers has said that France’s tax will not apply to temporary transfers of securities, stock lending or stock borrowing or the lending or borrowing of other financial instruments, repo or reverse repurchase transactions, or buy-sell back or sell-buy back transactions.
David Lewis, senior vice president at Astec Analytics, a SunGard capital markets business, agrees. He says: “It is my understanding that the temporary transfer of securities, including lending and repo, are exempt from the financial transaction tax in France.”
But the investment research firm Finadium’s managing principle, Josh Galper, said in a recent blog post that the financial transaction tax could have an effect on securities lending and repo through its wider impact on French capital markets.
He said: “[T]his was a unilateral move by France’s government; many other nations including the UK and Sweden (and presumably Ireland and Luxembourg) are not following their lead. This opens up a massive hole for regulatory arbitrage by every financial participant who can engage in it. Right now, a French stock traded on the NYSE [New York Stock Exchange] by a US citizen would not see the tax. The NYSE and French companies would have incentives to move their listing, although the French government will certainly impose a political cost on those who try. While some members of the European Commission would like to expand the reach of the tax to avoid just this type of regulatory arbitrage, it is very unlikely to happen.”
“The difficulty for France … is that financial markets are diverse and global; a tax has to be made effective everywhere to work, otherwise it just hurts one economy or product in favour of another one. Markets take the path of least resistance. We don’t see good things happening for French financial transactions here.”
Regulatory woes
Sweeping regulatory changes in Europe are affecting securities lending business in EU member states. “Regulatory uncertainty and restrictions do create some inertia—what some have described as ‘funds sitting on their hands’— while investors and portfolio managers wait for regulations to be clarified for fear of transgressing any new laws,” says Lewis.
He explains that securities lending as an industry provides “useful, low risk returns”, but “those returns are not massive and additional frictions or uncertainties chip away at what can be achieved”.
“These costs can range from additional capital charges agents will need to take to support indemnification to systematic recording of ‘locates’ as detailed in the new ESMA SSRs [reforms]. We are working with several organisations at present who realise that the unique intraday data we provide will be vital for measuring whether a security is truly liquid or not, which directly impacts their procedures and reporting obligations.”
Yield enhancement trading dominates lending in France, according to Lewis. “Specials, such as Peugeot-Citroen and Alcatel-Laurent, for example, and general collateral trading are also present but the vast majority of activity can be seen around the April/May/June dividend seasons,” he says.
“France is one of the largest and most lucrative countries for yield enhancement activity, but there are actions based on the freedom of movement of capital—one of the ‘Four Freedoms’ of the EU—that are putting this activity under pressure.”
The Hot Stocks list in SunGard’s Astec Lending Pit shows two French securities that are attracting interest, partly due to financial difficulties facing companies in France.
Lewis says: “Shares on loan in Alcatel-Lucent have doubled in the last month largely due to the recent profit warnings and their plans to downsize, shedding 5000 jobs. Europe’s second largest car maker, Peugeot Citroen, has also seen significant short selling activity. Shares on loan have tripled since April as short interest has built up against the car-maker whose sales are down 23 percent since 2007 and has just announced plans to lay off 8000 staff across France.”
The securities lending industry in France—not to mention the country’s other industries— has a lot to contend with, but in a market that is home to the likes of BNP Paribas, Natixis and Société Générale, as well as international player such as HSBC, business is continuing. Like anywhere else in Europe, it seems that market players are being forced to adapt to new conditions.
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