French FTT risks shift from equities
Plans by the
French government to introduce a financial transaction tax (FTT) will reduce
liquidity in the equity markets, with market participants likely switching to
other asset classes to avoid the levy.
On 8 February, a
draft article was introduced to the French Council of Ministers as part of the
country’s budget law.
The tax, which if passed would be levied from 1 August 2012, will impose a 0.1% tax on the purchase of
shares of companies headquartered in France that have a market capitalisation
of at least €1 billion. There are believed to be over 100 French stocks that
would fall into this category. The tax will be calculated based on the traded
price of a share and must be paid on the first day of the next month by the
entity that initiated the transaction.
participants have already argued that an FTT would primarily affect buy-side firms and
end-investors, as the extra charge would likely be passed through to them the way stamp duty has been in the UK.
credit default swaps would also be subject to a 0.01% tax based on the notional
value of a transaction.
legislation indicates that the tax would be applied at post-trade level, when shares are exchanged for cash. This process takes place at
the central securities depository (CSD) level – Euroclear France, in this
instance – for each transaction.
According to Tony
Freeman, head of industry relations at post-trade processing firm Omgeo, “Imposing
a transaction tax at the CSD level should be relatively simple from a
technical perspective, but the short timeframe and the disruption to existing
2012 development plans in France could prove challenging.”
adds that the tax could be easily avoided by using other instruments, such as
contracts for difference (CFD).
the holder the difference between the price of a stock at the start of the
contract and at the end.
“One impact from the imposition of a transaction tax
on French equities will be greater use of instruments like contracts for
difference, which typically do not settle or clear and would therefore incur no
revenue from a tax,” said Freeman.
France also wants
to capture high-frequency traders in its tax plans, and has proposed a charge
of 0.1%, which will be reduced to 0.01% for failed, cancelled or modified
orders as long as they stay below a certain daily threshold. However, the
French proposal does not include details on how they would levy the charge on
types of trades will not be possible at the post-trade level, given that
high-frequency trading firms typically end the day flat and therefore have no
need to settle. As such, the tax would need to be collected at the trading
level, something that Freeman suggests would not be welcomed by exchanges or
trading venues because of the reduction it would cause in revenues and
The French tax
proposals have come under fire across Europe, with the French Banking
Federation among the bodies that have aired their worries.
“A number of local banks and trade associations have
spoken out against the tax proposals, which is unusual in France and shows the
level of concern around the proposals,” said Freeman.
A European proposition
France’s plans are separate from a European proposal which is presently under debate.
The current proposal from the European Commission suggests collecting an FTT on a gross basis. The European proposal covers equities and
derivatives, both exchange-traded and over the counter. The EC claims
its pan-European tax would supply revenues of up to €57 billion annually. Member states
would be expected to implement the tax by the start of 2014.
However, details of how the tax would be practically
applied are lacking in the existing EC document, as it only states “the FTT shall become chargeable for each financial
transaction at the moment it occurs”.
The European Parliament is due
to provide an official opinion to the EC proposal in March, following a meeting
it held with stakeholders on 6 February. The meeting heard the views of Richard
Raeburn, chairman of the
European Association of Corporate Treasurers, Avinash Persaud, founder and
chairman of consultancy at Intelligence Capital, Sony Kapoor, managing director
at the Re-Define think tank, and Stephany Griffith-Jones, financial markets
program director at the Initiative for Policy Dialogue and Colombia University.
A statement from
the European Parliament said those involved in the meeting gave an “overall thumbs up to the
idea of a Eurozone financial transaction tax, with many arguing it could
actually lead to an increase in overall GDP”.
After Parliament has offered its opinion, a plenary vote will be held in May.
Instead of an FTT, Germany
has recently backed the idea of a ‘bourse tax’ that could be more tenable to the UK. So far, Britain has indicated it would veto current EC proposals. A bourse tax would likely be applied
to cash equities transactions on domestic trading venues.