FTT Threatens to Derail Emir, Industry Told

Terry Flanagan

Market practitioners are warning that the introduction of a financial transaction tax across parts of Europe will likely endanger other post-crisis regulation, such as the European Union’s plans to regulate the over-the-counter derivatives industry for the first time.

The European Markets Infrastructure Regulation (Emir)—the new derivatives rules that will begin to take effect in earnest in the region from March 15—will mean increased margin and collateral requirements for the buy side as part of a push to see all standardized OTC derivatives contracts pushed through centralized clearing and on to exchange-like venues in a bid to increase transparency and reduce systemic risk following the financial crisis.

While the financial transaction tax, which is set to enter into force in January 2014 in 11 nations in Europe including Germany, France, Italy and Spain—but not the U.K.—will see a 0.1% tax imposed on all buyers and sellers of share and bond transactions issued in the participating areas and a 0.01% levy on derivatives trades. France and Italy already have their own versions of an FTT up and running.

“The FTT proposals put at risk the implementation of Emir, which requires the use of collateral for centralized and bilateral clearing,” said Godfried De Vidts, chairman of the International Capital Market Association’s European Repo Council. The ICMA is a self-regulatory organization and trade association for the global capital markets.

“As Esma [the European Securities and Markets Authority, the pan-European regulator] highlighted upon release of its first European Union securities markets risk report [last month]: the collapse of unsecured markets during the financial crisis, as well as regulatory initiatives, have led market participants to rely increasingly on collateral as a means of mitigating counterparty risk, stimulating the demand for collateral.

“Additional demand for collateral will exceed the additional supply of collateral in 2013-2014, making collateral comparatively scarcer.”

De Vidts added: “If the FTT on repo transactions—which facilitate collateral being available where it is needed—goes ahead, the regulatory collateral crunch will actually materialize. Is that what we really want to happen?”

Meanwhile, software provider GBST has launched a financial transaction tax solution that it says will give market participants in Europe the ability negotiate around the complexities of dealing with up to 11 different FTT schemes.

Called Syn~FTT, it has been developed to deal with variables such as netting and rebating, and will apply to a range of instruments.

“In addition to penalty clauses for non-compliance, brokers and custodians face an intricate set of challenges that extend across the accountable, declaring and reporting parties,” said Denis Orrock, chief executive of GBST’s capital markets division.

“What at first glance might seem a straightforward tax processing scheme belies a complexity that will involve frequency of declarations, amendments to back-dated trades and the retrieval of missing data.

“Add into the mix the varying systems interfaces and trading formats, and the differing roles of the broker and custodian, and one then begins to appreciate the task that capital market players face. Syn~FTT meets all these tax processing needs, across jurisdictions from a single instance.”

Torstone Technology, another software provider, has also launched a product for its clients to cope with the FTT as vendors begin to offer traders and investors solutions to allow them to negotiate the new tax process.

Called Inferno FTT, Torstone says its post-trade processing solution will give clients a speedy response to the new FTT market requirements.

“FTT is a core systems upgrade as far as we are concerned which means that it will be automatically provided to clients,” said Brian Collings, chief executive of Torstone Technology.

“The inherent design, support for a broad range of asset classes within one system and the ease of centralizing trade and reference data from disparate front office systems, has made it relatively straightforward for us to implement the changes in Inferno and provide the data required for FTT regulatory reporting.”

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