FTT to miss latest target
05 January 2016
The industry will be pleased to hear that the little regulation that shouldn’t has stalled
Image: Shutterstock
The European financial transaction tax (FTT), which could affect 65 percent of the European securities lending market, has been kicked into the long grass for yet another year, despite some progress being made over 2015 in confirming new details.
The participating member states have missed multiple deadlines for agreeing the terms of the tax but are now aiming to reach a final agreement by the middle of 2016.
The FTT, when it is finally realised, is aimed at recovering some of the taxpayer’s money used to support struggling banks, while also restraining risky trading and go some way to streamlining the various existing charges already in place in several EU member states. However, the existing terms of the tax have the potential to inadvertently cripple auxiliary finance industries such as securities financing, according to several figures within the industry.
This year has seen a number of key developments in the FTT’s development, including a proposal to introduce exemptions for repo trades, government bonds and market makers, along with a lessening of the tax’s impact on pension funds.
The FTT continues to garner significant controversy from different camps within the EU who claim that the nature of the tax threatens to negatively effect different EU states.
The International Securities Lending Association (ISLA) commented in September 2015 on the lack of a definitive exemption for securities lending, stating: “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.”
Institutional investors in Europe earned approximately €3 billion of revenue from lending their securities in 2013. It is estimated that €2 billion of revenue would be seriously at risk if the FTT is implemented on securities lending transactions, according to ISLA.
Last year’s controversy came to a head in December when Estonia refused to sign up to the latest terms of the tax and eventually pulled out of the initiative altogether, claiming the tax would do more harm than good for its economy.
The latest update came on 8 December with a provisional version of the tax was produced—notably the confirmation or dismissal of any exemptions remained elusive. Although the EU Council did concede that, in order to sustain liquidity in illiquid market configurations, a narrow market-making exemption might be required.
In its report on the meeting, the EU Council stated: “In its proposal, the commission did not foresee an exemption for market making activities. However, from the start of the negotiations in council the need to include such an exemption in the future FTT was raised and extensively discussed.”
“In its meeting on 25 November 2015, the working party focused on the definition of market-making activities that could potentially be exempted. Should such an exemption be part of a final compromise on the FTT, a suitable and operational definition would have to be designed, which would not hinder efficient administration and collection of the FTT.”
“For example, it could be considered, whether it is technically feasible to foresee that such a specific exemption, designed solely for FTT purposes, could be narrowed down to, for example, illiquid markets.”
Regarding shares, the parties agreed that all transactions including intra-day should be taxed and all transactions in the chain should be taxed, except agents and clearing members (when acting as facilitators). It was agreed that the territorial scope of the tax should follow the European Commission’s proposal for both derivatives and shares transactions. However, it was not confirmed whether it is more sensible to start taxation with only shares issued in the member states participating in ‘enhanced cooperation’.
The taxation for derivatives should be based on the principle of the widest possible base and low rates and it should not impact on the cost of sovereign borrowing, according to the EU Council, while, for option-type derivatives, the tax base should preferably be based on the option premium.
Despite noteworthy progress being made, the negotiations between 11 EU member states temporarily stalled in early December when Estonia refused to sign the latest version of the FTT. Estonian representatives claimed that the current terms of the FTT would actually disadvantage their economy by incentivising traders to leave the country while bringing in very little revenue due to the fact very little of its trades would be eligible for tax by the Estonian regulator.
The remaining 10 member states—Germany, France, Italy, Austria, Belgium, Greece, Portugal, Slovakia, Slovenia and Spain—have since signed up to the 8 December agreement and made further progress.
“Following Estonia’s withdrawal, 10 member states are currently participating in the enhanced cooperation procedure on the proposed directive, with all member states participating in the discussion,” reported the Luxembourg government, which held the EU Council presidency.
Valdis Dombrovskis, vice president for the euro and social dialogue at the European Commission, stated: “The ministers of the 10 member states had reached an agreement in principle and I believe that the details should be addressed before the summer.”
“The commission will offer its support in order to translate this agreement into legislative terms and will ensure that the text complies with EU and international law, in particular with regard to the rights of member states not participating in the FTT.”
Dombrovskis also stressed that the future FTT must comply with measures at a European level, particularly the banking union.
There are still several key aspects of the FTT that need to be addressed if even the revised 2016 deadline is to be met. The issue such as whether the ‘issuance’ and ‘residence’ principles could be combined in defining the scope of the future FTT has already been subject of an extensive exchange of views at the EU Council.
There have also been concerns raised by non-participating EU members that the FTT should not “go against the interests of non-participating member states”.
The participating member states have missed multiple deadlines for agreeing the terms of the tax but are now aiming to reach a final agreement by the middle of 2016.
The FTT, when it is finally realised, is aimed at recovering some of the taxpayer’s money used to support struggling banks, while also restraining risky trading and go some way to streamlining the various existing charges already in place in several EU member states. However, the existing terms of the tax have the potential to inadvertently cripple auxiliary finance industries such as securities financing, according to several figures within the industry.
This year has seen a number of key developments in the FTT’s development, including a proposal to introduce exemptions for repo trades, government bonds and market makers, along with a lessening of the tax’s impact on pension funds.
The FTT continues to garner significant controversy from different camps within the EU who claim that the nature of the tax threatens to negatively effect different EU states.
The International Securities Lending Association (ISLA) commented in September 2015 on the lack of a definitive exemption for securities lending, stating: “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.”
Institutional investors in Europe earned approximately €3 billion of revenue from lending their securities in 2013. It is estimated that €2 billion of revenue would be seriously at risk if the FTT is implemented on securities lending transactions, according to ISLA.
Last year’s controversy came to a head in December when Estonia refused to sign up to the latest terms of the tax and eventually pulled out of the initiative altogether, claiming the tax would do more harm than good for its economy.
The latest update came on 8 December with a provisional version of the tax was produced—notably the confirmation or dismissal of any exemptions remained elusive. Although the EU Council did concede that, in order to sustain liquidity in illiquid market configurations, a narrow market-making exemption might be required.
In its report on the meeting, the EU Council stated: “In its proposal, the commission did not foresee an exemption for market making activities. However, from the start of the negotiations in council the need to include such an exemption in the future FTT was raised and extensively discussed.”
“In its meeting on 25 November 2015, the working party focused on the definition of market-making activities that could potentially be exempted. Should such an exemption be part of a final compromise on the FTT, a suitable and operational definition would have to be designed, which would not hinder efficient administration and collection of the FTT.”
“For example, it could be considered, whether it is technically feasible to foresee that such a specific exemption, designed solely for FTT purposes, could be narrowed down to, for example, illiquid markets.”
Regarding shares, the parties agreed that all transactions including intra-day should be taxed and all transactions in the chain should be taxed, except agents and clearing members (when acting as facilitators). It was agreed that the territorial scope of the tax should follow the European Commission’s proposal for both derivatives and shares transactions. However, it was not confirmed whether it is more sensible to start taxation with only shares issued in the member states participating in ‘enhanced cooperation’.
The taxation for derivatives should be based on the principle of the widest possible base and low rates and it should not impact on the cost of sovereign borrowing, according to the EU Council, while, for option-type derivatives, the tax base should preferably be based on the option premium.
Despite noteworthy progress being made, the negotiations between 11 EU member states temporarily stalled in early December when Estonia refused to sign the latest version of the FTT. Estonian representatives claimed that the current terms of the FTT would actually disadvantage their economy by incentivising traders to leave the country while bringing in very little revenue due to the fact very little of its trades would be eligible for tax by the Estonian regulator.
The remaining 10 member states—Germany, France, Italy, Austria, Belgium, Greece, Portugal, Slovakia, Slovenia and Spain—have since signed up to the 8 December agreement and made further progress.
“Following Estonia’s withdrawal, 10 member states are currently participating in the enhanced cooperation procedure on the proposed directive, with all member states participating in the discussion,” reported the Luxembourg government, which held the EU Council presidency.
Valdis Dombrovskis, vice president for the euro and social dialogue at the European Commission, stated: “The ministers of the 10 member states had reached an agreement in principle and I believe that the details should be addressed before the summer.”
“The commission will offer its support in order to translate this agreement into legislative terms and will ensure that the text complies with EU and international law, in particular with regard to the rights of member states not participating in the FTT.”
Dombrovskis also stressed that the future FTT must comply with measures at a European level, particularly the banking union.
There are still several key aspects of the FTT that need to be addressed if even the revised 2016 deadline is to be met. The issue such as whether the ‘issuance’ and ‘residence’ principles could be combined in defining the scope of the future FTT has already been subject of an extensive exchange of views at the EU Council.
There have also been concerns raised by non-participating EU members that the FTT should not “go against the interests of non-participating member states”.
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