End-investor in the crosshairs

In its current draft form, a potential pan-European financial transaction tax will hit pension funds alongside other market participants, which has both buy- and sell-side firms questioning the core aims underpinning the levy.

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How might the European financial transaction tax (FTT) hit pensioners?

The 11 EU member states backing the tax are still working on its details in technical working groups, but the European Commission's initial proposal released in February shows that pension funds would not be exempt from the levy. This will likely be cause for debate among member states, but any specific exemptions are yet to be mooted by either the Commission or member states backing the tax.

As such, pension funds would be hit with the 0.1% tax on equity and bond transactions and 0.01% levy on derivatives transactions. In June, these levels, suggested by the Commission in its February draft of the tax, were reported to be under review by member states, and could drop to 0.01% for equity and bond transactions and less for derivatives.

Speaking last year when the 11 member states revived initial 2011 plans to develop a pan-European FTT, Matti Leppälä, secretary general and CEO of the European Federation for Retirement Provision, said pension funds stand to lose out in particular.

"Pension funds and other institutions for occupational retirement provision would be deeply affected by this type of a tax. It would increase costs, which would in the end be borne by beneficiaries," Leppälä said. "Many pension funds need to protect their liabilities from market volatility with derivatives. Increasing costs for this and putting disincentives for using protection would increase risks."

What safeguards are expected to protect end-investors?

Exemptions will likely be sought for pension funds, although no formal requests have been made public by the 11 member states. If any such exemptions were crafted, pension funds may stand first in line to receive them.

An FTT implemented in Italy from March includes exemptions for pension funds, although buy-side participants suggested the paperwork for this was lengthy and posed delays and inefficiencies to the trading process.

Furthermore, the process of 'enhanced cooperation' used by the 11 member states to develop the tax means the details of the levy will be generated in the technical working groups before political-level discussion takes place. Concerns for pension funds join industry fears that the structure of the tax will incur multiple exposures for a single transaction due to extended links in the trading process. This has led to concerns the repo market will be hit, with a considerable flow-on effect for market participants, themselves forced to seek increased collateral for OTC derivatives under the European market infrastructure regulation.

Do buy- and sell-side concerns for the tax differ?

The European FTT has attracted widespread criticism from market participants who believe it will limit economic growth in the region and was designed as a punitive measure in the wake of the 2008 financial crisis. As such, members of the sell-side have warned of multiple exposures for one transaction, the universal nature of the tax, and whether it will tax the notional value of derivatives. The buy-side shares these concerns, although will push for pension funds to be exempt from the tax, as taxing end-investors was not a goal originally set by the Commission or the supporting member states.

Adrian Fitzpatrick, head of investment dealing at UK institutional investor Kames Capital, believes the tax will hit end-investors, not banks, and is evidence of undue political interference in financial markets.

"The underlying client will have to pay the charge, not the institution. Those penalised will be the pension funds, which are invested in by regular savers," Fitzpatrick told theTRADEnews.com last year when plans to create a pan-European FTT were revived by the 11 member states.