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.

Market 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.

Naked sovereign credit default swaps would also be subject to a 0.01% tax based on the notional value of a transaction.

The proposed 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.”

However, Freeman adds that the tax could be easily avoided by using other instruments, such as contracts for difference (CFD).

CFDs pay 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 high-frequency traders.

Capturing these 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 liquidity.

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.