Financial transactions tax may “wipe out” securities trading

by Calum Fuller

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02 Sep 2013

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European Parliament

A FINANCIAL TRANSACTION TAX currently being worked on by 11 EU nations could "wipe out" the securities lending industry, according to its trade association.

The International Securities Lending Association (ISLA) claims the proposed levy will eradicate 65% of lending activity in Europe, slashing the €3bn (£2.6bn) annual windfall revenues earned by long-term asset owners including pension funds and mutual funds by more than €2bn.

The proposals will see a 0.1% tax on the value of stocks or bonds and 0.01% on derivative contracts and will be introduced across 11 EU countries including France, Germany, Italy and Spain. However, some haggling is taking place over potential exemptions for pensions funds or the trading of sovereign bonds, small company stocks and some derivatives.

Chief executive of ISLA, Kevin McNulty, said the FTT measures "would effectively close down" the securities lending markets in the participating countries, before going on to estimate only the most profitable 35% of trades would be viable under the new regime.

He added securities lending fees would need to rise by more than 400% in order to maintain current revenue levels for the asset owners lending out their holdings.

Other side effects predicted by McNulty include almost €500bn of eurozone government bonds removed from the lending market, thereby reducing the quantity of high-quality collateral available to back transactions.

In a report posted on ISLA's website, he said: "Our analysis shows that over 65% of the securities lending market in Europe would be directly impacted by this tax with key markets, such as in Germany and France, all but disappearing. This would directly lower the returns that long term investors earn from these markets and would have further implications for both the economy and financial stability."

McNulty's concerns come after a memo leaked to think tank Open Europe in April, which raised a litany of questions over how the collection of revenues would work in practice, warning the tax would introduce additional and unsustainable costs for participants in the bonds market.

The document included criticism of the European Commission's impact assessment of the levy, noting it "is not fully clear on how the taxation on government bonds would interact with the cost of national debt", and queried whether an increase in the cost "could be counterbalanced by the revenues of the FTT".

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