Financial Transaction Tax Roils Markets

Terry Flanagan

Europe’s Financial Transaction Tax has financial market participants scrambling to meet obligations under the new regime.

“The Financial Transaction Taxes represent an operational challenge for financial institutions due to the complexities of identifying securities in scope and determining the level of tax on those instruments,” said Anthony Belcher, director of EMEA pricing and reference data at Interactive Data Corp.

Interactive Data, a provider of global pricing, reference and corporate actions data, recently launched a service to support the identification of instruments subject to recently implemented French and Italian Financial Transaction Taxes (FTTs).

Financial organizations may be required to determine and collect applicable transaction taxes under the French and Italian FTTs.

“The FTT would have unprecedented extraterritorial impacts, contrary to G20 principles, and will harm economic growth,” said Simon Lewis, CEO of the Global Financial Markets Association, in a letter sent April 16 to G20 finance ministers. The letter was also signed by representatives of industry groups from Australia, Canada, Japan, and Korea.

The tax rate for equity transactions under the Italian FTT law will be set at 0.12% for 2013 from March 1 before decreasing to 0.1% from 2014. Over-the-counter equity transactions will be taxed at 0.22% in 2013, decreasing to 0.2% in 2014.

Equity derivatives transactions will also be subject to various fixed charges, with taxes on these instruments becoming applicable from July 1.

High-frequency trading also comes under fire from the new Italian law with a separate 0.02% tax to be imposed on transactions in the Italian financial market if an order is issued and then amended or cancelled within half a second, and the ratio between the cancelled or amended orders and the completed ones is greater than 60% per single financial instrument.

The International Capital Markets Association estimates that the FTT would cause the short-term European repo market to contract by at least two-thirds, causing capital flight that would decimate bank funding within the 11 EU states. London Economics estimated that the increased cost of capital for corporates would lead to a 3.6% drop in business investment and a 1% reduction in GDP in the 11 participating countries.

The European Commission has predicted a 75% plunge in derivatives trading volumes and a 15% drop in cash trading.

Interactive Data’s new service is designed to help financial institutions with this process by identifying instruments that may fall within the scope of the French and Italian FTTs.

The service compiles a list of instruments meeting the market capitalization, location of issuer and other criteria specified in the French and Italian FTTs. This information is updated on a daily basis to reflect instrument level changes and additions, including those arising from corporate actions such as rights issues.

“Our new service enables firms to determine the securities that may fall under the scope of the transaction tax within each jurisdiction whilst removing the need to maintain these lists themselves,” said Belcher. “This is just one of many reference data services we provide that support compliance with tax-related and other regulations such as EUSD, MiFID, U.S. federal income tax withholding obligations and the UK offshore funds distributor/reporting status.”

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