The French financial transaction tax (FTT), expected to be implemented in August, will make the country the fourth most expensive place to trade in Europe and add substantial costs to firms running active funds.
The claims come from recent research by Credit Suisse titled ‘Europe’s Dalliance with FTTs’, which examines the potential impact of the French proposal as well as an EU-wide proposal for a transaction tax that was introduced by the European Commission in September last year.
According to the Swiss bank’s research, the French FTT – which imposes a 0.1% levy on net buy trades in French headquartered firms with a market capitalisation of over €1 billion – would add an extra four basis points per year to an active fund that has a portfolio turnover of 20% per quarter.
For passive funds, the research suggests the low level of the tax would mean it could be easily absorbed and have a “negligible impact on investor returns”.
“Analysis of CAC 40 quarterly review rebalancing from 2002 to 2011 suggests that the French FTT would only cost (on average) an additional 0.5 bps per year, compared to current total expense ratio of 25 bps for a typical CAC 40 ETF tracker,” stated the paper.
In terms of total trading costs, Credit Suisse identifies France as one of Europe’s cheaper markets, in terms of market impact estimates, behind others including UK, Italy, Austria and Denmark. However, it estimates that the addition of an FTT would make France the fourth most expensive European market to trade in, behind only Ireland, Greece and the UK, which imposes its own share trading levy in the form of stamp duty.
France has also supplemented its FTT with a 0.01% charge for high-frequency trading (HFT) firms operating in the country. But the research claimed the charge could be easily circumvented if HFT firms relocated outside France or register as market makers.
France has moved ahead with its FTT plans quicker than the Commission’s tax plan, which is scheduled for implementation by 2014. The EU-wide FTT will levy a 0.1% charge on all non-derivatives products and a 0.01% of all derivatives trades. But the Credit Suisse research cast doubt on the likely success of the current plan.
“Political wrangling within the EU, and even between Eurozone countries, means that it is highly unlikely that the EU FTT will be adopted by all 27 EU countries,” read the note. “It is much more likely in our opinion that a smaller set of countries either implement a modified version of the EU FTT or follow France’s lead by introducing an individual tax on equity trading."