ICMA: “Repo should be exempt from FTT”
09 April 2013 Reading
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The proposed EU Financial Transaction Tax would cause the short-term repo market in Europe to contract by an estimated amount of at least 66 percent, according to a study commissioned by the European Repo Council of the International Capital Market Association.
The study, authored by Richard Comotto, senior visiting fellow at the ICMA Centre argues that it is essential for secured financing, such as repo and securities lending, to be exempted from the FTT to ensure an efficient debt capital market and support the continued collateralisation of the financial markets.
The shrivelling of the repo market and the lack of viable alternatives would pose serious problems to institutional and corporate investors, forcing them into unsecured bank deposits or into seeking to escape the FTT by transferring funds out of the EU11 through the untaxed channel provided by unsecured deposits, said Comotto.
“Such a capital flight would cut EU11 bank funding and thus lending to the real economy, as well as exacerbating the fragmentation of the eurozone, undermining the Single Market and complicating the conduct of monetary policy."
"Bank lending in the EU11 would also suffer because, without repo and money market securities (which would also be rendered uneconomic by the FTT), access by EU11 banks to non-bank financial investors such as money market mutual funds would be severely constrained, forcing a disorderly acceleration of the current process of deleveraging,” he said.
The problem would be exacerbated by the difficulties faced by EU11 banks in managing their marginal liquidity in the interbank market, where would be restricted to seeking and making unsecured deposits.
A copy of: ‘Collateral damage: the impact of the Financial Transaction Tax on the European repo market and its consequences for the financial markets and the real economy’ is available here
The study, authored by Richard Comotto, senior visiting fellow at the ICMA Centre argues that it is essential for secured financing, such as repo and securities lending, to be exempted from the FTT to ensure an efficient debt capital market and support the continued collateralisation of the financial markets.
The shrivelling of the repo market and the lack of viable alternatives would pose serious problems to institutional and corporate investors, forcing them into unsecured bank deposits or into seeking to escape the FTT by transferring funds out of the EU11 through the untaxed channel provided by unsecured deposits, said Comotto.
“Such a capital flight would cut EU11 bank funding and thus lending to the real economy, as well as exacerbating the fragmentation of the eurozone, undermining the Single Market and complicating the conduct of monetary policy."
"Bank lending in the EU11 would also suffer because, without repo and money market securities (which would also be rendered uneconomic by the FTT), access by EU11 banks to non-bank financial investors such as money market mutual funds would be severely constrained, forcing a disorderly acceleration of the current process of deleveraging,” he said.
The problem would be exacerbated by the difficulties faced by EU11 banks in managing their marginal liquidity in the interbank market, where would be restricted to seeking and making unsecured deposits.
A copy of: ‘Collateral damage: the impact of the Financial Transaction Tax on the European repo market and its consequences for the financial markets and the real economy’ is available here
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