Time to decide
30 September 2014
The European Beneficial Owners’ Securities Lending Conference in London saw attendees learn the latest about the FTT, transparency and indemnification
Image: Shutterstock
The EU 11 will come to a conclusion over the Financial Transaction Tax (FTT) before the end of the year, according to John Billige of State Street.
Billige was speaking at the European Beneficial Owners’ Securities Lending Conference in London in an effort to minimise speculation over the FTT.
He said that there is heated discussion among the EU 11—the EU countries that used enhanced cooperation to push through plans for an FTT in 2013—about when and how tax revenue is distributed. He expects a conclusion talks before the end of Q4.
“The directive itself hasn’t changed,” he explained, but the EU 11 is undecided on the so-called establishment and issuance principles, with the former coming first and the latter’s extra-territorial effect “clearing up”, and possibly getting in the way of distribution.
“I can’t see how they’re going to come up with something sensible,” added Billige.
An FTT on equities is due to launch in January 2016, while member states will be able to decide themselves when they introduce a tax on other instruments, such as fixed income or derivatives, before coming together again to consolidate their efforts.
This will create an imperfect tax, said Billige, and would not be good for securities finance, which is yet to be exempted.
There is no talk of exempting temporary transfers from the FTT, he explained, although repo transactions may be protected eventually.
This will see a 10 basis point charge levied on each lend and return, explained Billige, which will inevitably be passed on to beneficial owners because “banks wouldn’t wear it”.
A policy officer of the European Commission later promised that a directive aimed at improving transparency in securities finance will not adversely affect the business in any way,
Martin Mitov focused on the reporting of securities finance transactions in his speech.
Mitov said the European Commission’s proposal on securities finance transaction reporting, developed in response to the Financial Stability Board’s investigation into ‘shadow banking’, “is all about transparency—it doesn’t restrict the transactions themselves”.
The proposal will see market participants reporting to trade repositories “to achieve more transparent markets”. All counterparties doing business within the EU must report trades, including repo and securities lending and borrowing transactions.
Under the proposal, all UCITS and alternative investment funds must disclose more information about securities finance transactions to investors, while rules surrounding collateral rehypothecation will also change.
Counterparties will soon have to ask the permission of the giver before putting any collateral received to work. This will apply to any instruments as defined by the Markets in Financial Instruments Directive.
Mitov commented: “This proposal does not restrict market practice. It’s an important step in understanding and reducing risk.”
The increasing cost of indemnification was also a hot topic at the conference, with attendees hearing that agent lenders will soon offer a two-tier pricing structure in the future.
James Day of BNY Mellon said the increasing cost of indemnification will mean that agent lenders will have to offer fee splits with and without an indemnity, to give beneficial owners a choice.
Roelof van der Struik of PGGM Investments said that in the event that indemnification was not offered, it would be a case of measuring the increased risk against what is acceptable.
“We are not against risk—we just want to be rewarded for it,” he explained, adding that if indemnification is removed and risk increases, beneficial owners would want greater returns as justification.
Van der Struik went on to praise indemnification, saying that it gives agent lenders a stake in trades.
He added that an indemnity also puts a lot of pressure on the beneficial owner, because it has to be confident in the agent lender’s ability to complete a trade.
Billige was speaking at the European Beneficial Owners’ Securities Lending Conference in London in an effort to minimise speculation over the FTT.
He said that there is heated discussion among the EU 11—the EU countries that used enhanced cooperation to push through plans for an FTT in 2013—about when and how tax revenue is distributed. He expects a conclusion talks before the end of Q4.
“The directive itself hasn’t changed,” he explained, but the EU 11 is undecided on the so-called establishment and issuance principles, with the former coming first and the latter’s extra-territorial effect “clearing up”, and possibly getting in the way of distribution.
“I can’t see how they’re going to come up with something sensible,” added Billige.
An FTT on equities is due to launch in January 2016, while member states will be able to decide themselves when they introduce a tax on other instruments, such as fixed income or derivatives, before coming together again to consolidate their efforts.
This will create an imperfect tax, said Billige, and would not be good for securities finance, which is yet to be exempted.
There is no talk of exempting temporary transfers from the FTT, he explained, although repo transactions may be protected eventually.
This will see a 10 basis point charge levied on each lend and return, explained Billige, which will inevitably be passed on to beneficial owners because “banks wouldn’t wear it”.
A policy officer of the European Commission later promised that a directive aimed at improving transparency in securities finance will not adversely affect the business in any way,
Martin Mitov focused on the reporting of securities finance transactions in his speech.
Mitov said the European Commission’s proposal on securities finance transaction reporting, developed in response to the Financial Stability Board’s investigation into ‘shadow banking’, “is all about transparency—it doesn’t restrict the transactions themselves”.
The proposal will see market participants reporting to trade repositories “to achieve more transparent markets”. All counterparties doing business within the EU must report trades, including repo and securities lending and borrowing transactions.
Under the proposal, all UCITS and alternative investment funds must disclose more information about securities finance transactions to investors, while rules surrounding collateral rehypothecation will also change.
Counterparties will soon have to ask the permission of the giver before putting any collateral received to work. This will apply to any instruments as defined by the Markets in Financial Instruments Directive.
Mitov commented: “This proposal does not restrict market practice. It’s an important step in understanding and reducing risk.”
The increasing cost of indemnification was also a hot topic at the conference, with attendees hearing that agent lenders will soon offer a two-tier pricing structure in the future.
James Day of BNY Mellon said the increasing cost of indemnification will mean that agent lenders will have to offer fee splits with and without an indemnity, to give beneficial owners a choice.
Roelof van der Struik of PGGM Investments said that in the event that indemnification was not offered, it would be a case of measuring the increased risk against what is acceptable.
“We are not against risk—we just want to be rewarded for it,” he explained, adding that if indemnification is removed and risk increases, beneficial owners would want greater returns as justification.
Van der Struik went on to praise indemnification, saying that it gives agent lenders a stake in trades.
He added that an indemnity also puts a lot of pressure on the beneficial owner, because it has to be confident in the agent lender’s ability to complete a trade.
NO FEE, NO RISK
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