UK FTT could open up “significant operational issues”
16 September 2019 London
Image: Shutterstock
The UK’s Labour party is reviving plans for a financial transaction tax (FTT) for the country that would include over-the-counter (OTC) trades in foreign exchange (FX), commodities and related derivatives.
A FTT-style has been proposed several times in recent years by various parties across the EU but concerns around how it would disproportionately impact the securities finance market, among other hurdles, have so far scuppered wide-spread adoption.
This week, Labour’s shadow chancellor of the exchequer John McDonell expressed support for an FTT in response to a report published in May by Intelligence Capital, which called for a move away from ‘fast finance’ which the report’s author, Avinash Persau, described as “fundamentally flawed”.
“As Avinash Persaud says, we need to move beyond a world dominated by fast finance,” said McDonell in a statement.
“This report presents one way to achieve that: through a comprehensive financial transactions tax that doesn’t leave loopholes for major areas of financial activity.
McDonell added that the tax “can raise revenue for our under-resourced public services, improve the resilience of financial markets, and ensure that finance serves the people and the wider economy”.
As part of its 2017 election manifesto, the Labour Party announced that it would extend the UK’s partial financial transactions tax, which currently applies to the purchase of shares, to corporate bonds and equity and credit derivatives transactions, as well as amending the intermediary exemption on share transactions.
An FTT would require taxes to be collected for regular cash market transactions, such as securities lending and repos.
Back in 2015 when concerns around the negative impact of an FTT on securities finance markets in the EU were last raised, the International Securities Lending Association outlined how explained in a market report that applying an FTT to securities lending transactions would result in a large reduction in securities lending activity in the countries affected as the economics of these short term, low risk and return transactions, would be dwarfed by the tax.
“This would have very negative implications for the functioning of the wider financial markets, and for the successful delivery of a European capital markets union.”
However, for the UK, an new FTT is a possibility that could come to life in the next general election, which many political commentators now predict to be coming soon as a result of the on-going uncertainty around Brexit.
Reacting to McDonell’s pro-FTT comments, Daniel Carpenter, head of regulation at Meritsoft, the provider of software solutions, said that while the cost of the tax will be front of mind, it would also open up significant operational issues.
Carpenter has also suggested that further automation and a speedier process for identifying these taxable transactions will help heads of desks and compliance teams enormously.
"OTC markets are inherently more complicated than exchange traded markets, with different pockets of trading relationships centred around numerous dealers,” he said. “Therefore, any tax on FX, commodities and related OTC derivatives transactions will open up significant operational challenges.”
According to Carpenter, this is why an increasing number of firms are seeking out new ways to industrialise the automation of their tax operations, minimise tax obligations through accurate processing and cut the time and cost it takes to process transactions across a growing array of taxes.
He added: "Automatically identifying transactions where an FTT is levied, in addition to having all the compliance information about a specific trading position prior to settlement, is absolutely key to saving time and reducing costs."
A FTT-style has been proposed several times in recent years by various parties across the EU but concerns around how it would disproportionately impact the securities finance market, among other hurdles, have so far scuppered wide-spread adoption.
This week, Labour’s shadow chancellor of the exchequer John McDonell expressed support for an FTT in response to a report published in May by Intelligence Capital, which called for a move away from ‘fast finance’ which the report’s author, Avinash Persau, described as “fundamentally flawed”.
“As Avinash Persaud says, we need to move beyond a world dominated by fast finance,” said McDonell in a statement.
“This report presents one way to achieve that: through a comprehensive financial transactions tax that doesn’t leave loopholes for major areas of financial activity.
McDonell added that the tax “can raise revenue for our under-resourced public services, improve the resilience of financial markets, and ensure that finance serves the people and the wider economy”.
As part of its 2017 election manifesto, the Labour Party announced that it would extend the UK’s partial financial transactions tax, which currently applies to the purchase of shares, to corporate bonds and equity and credit derivatives transactions, as well as amending the intermediary exemption on share transactions.
An FTT would require taxes to be collected for regular cash market transactions, such as securities lending and repos.
Back in 2015 when concerns around the negative impact of an FTT on securities finance markets in the EU were last raised, the International Securities Lending Association outlined how explained in a market report that applying an FTT to securities lending transactions would result in a large reduction in securities lending activity in the countries affected as the economics of these short term, low risk and return transactions, would be dwarfed by the tax.
“This would have very negative implications for the functioning of the wider financial markets, and for the successful delivery of a European capital markets union.”
However, for the UK, an new FTT is a possibility that could come to life in the next general election, which many political commentators now predict to be coming soon as a result of the on-going uncertainty around Brexit.
Reacting to McDonell’s pro-FTT comments, Daniel Carpenter, head of regulation at Meritsoft, the provider of software solutions, said that while the cost of the tax will be front of mind, it would also open up significant operational issues.
Carpenter has also suggested that further automation and a speedier process for identifying these taxable transactions will help heads of desks and compliance teams enormously.
"OTC markets are inherently more complicated than exchange traded markets, with different pockets of trading relationships centred around numerous dealers,” he said. “Therefore, any tax on FX, commodities and related OTC derivatives transactions will open up significant operational challenges.”
According to Carpenter, this is why an increasing number of firms are seeking out new ways to industrialise the automation of their tax operations, minimise tax obligations through accurate processing and cut the time and cost it takes to process transactions across a growing array of taxes.
He added: "Automatically identifying transactions where an FTT is levied, in addition to having all the compliance information about a specific trading position prior to settlement, is absolutely key to saving time and reducing costs."
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