Trading volumes could flee from Paris-based exchanges now that France has vowed to go it alone with a financial transaction tax and market participants are already working on how they would avoid a French ‘Taxe Tobin’.
It is yet uncertain how a French transaction tax would be collected – whether at each transaction or only at settlement, but many believe it will be fiercely avoided by investors who may take their business elsewhere.
“People will quickly try to find a way around this and it would very likely put France at a disadvantage. There are plenty of ways to gain exposure to French equities without buying them in Paris,” said Diego Valiante, research fellow at Brussels think tank, the Centre for European Policy Studies (CEPS).
“You can buy them in London or buy other instruments that provide exposure, such as contracts for difference (CFDs), options or ETFs,” he added. Some twenty multilateral trading facilities for equities are currently registered in the UK alone.
One head of a London-based trading venue who wished to remain nameless so that he could speak freely agreed the move would trigger an increased use of CFDs and a new market for derivatives.
“This could raise particular problems for French-only instruments like stocks or bonds and the question remains what will happen if trades are wholly executed overseas?” he said, providing as example two American companies exchange a French stock in the US. “The move could be quite dramatic for French markets.”
The current European Commission proposal for the transaction tax does not indicate at what stage of the process a transaction tax would be collected, only stating it would be up to financial “institutions” to deliver it to tax authorities. Sarkozy has given no clear indication how a French tax would work, other than it would follow the Commission’s plans.
Tony Freeman, executive director of industry relations at post-trade services provider Omgeo warned while the financial transaction tax remained embryonic, momentum was growing and the industry should now start to take the subject seriously.
“The mechanics of FTT appear at first glance to be relatively straightforward but the complexities of defining an eligible transaction, who pays and, crucially, who is responsible for collection are quite daunting,” said Freeman. “On-exchange trades which are processed by a central counterparty (CCP) or a central securities depository (CSD) can be captured but this may not catch intra-day high-frequency trading activity that doesn’t go through a CCP or CSD. OTC trades present an extra level of complexity.”
Richard Parsons, head of sales and trading at agency broker Instinet Europe, said the French trading community were sceptical the tax would go ahead. “Many regard it as being politically motivated and potentially misguided as a result,” he said. “The risks are so great that it may prove impossible for France to go it alone. It could present substantial risk to volumes traded in French stocks.”
Migration en masse?
Citing industry estimates that around 40% of European volumes are high-frequency trading, Parsons suggested these participants would not likely stay in an environment where their margins were significantly cut, meaning trading activity could significantly decline. “In the current climate, France and the rest of Europe cannot afford a dramatic decrease in trading activity and a further undermining of the capital markets,” he said.
Parsons suggests one likely collection point for the tax may be the executing brokers. “It could be collected the same way stamp duty is collected in the UK,” he said. “It could mean that it would be difficult to avoid if you wanted to trade plain vanilla French equities, but it doesn’t mean that traders won’t look for ways to circumvent it.”
“France runs the risks of closing the door on an important subset of investors, and may make retail investors and pension funds the biggest contributors to any transaction tax,” he said.
However France has already indicated its mistrust of high-frequency trading last month when it urged the European regulator to develop tougher rules for the practice.
“Sarkozy’s transaction tax still remains undefined and could be more similar to a stamp duty on the purchase of shares. We can understand why he is attempting this but it is unfeasible and impractical and more of a political move,” said the CEPS’s Valiante.
In August, the European Commission (EC) proposed a Europe-wide financial transaction tax which could cost the industry about €57 billion a year.
“My conviction is that we should provide an example, or it will not be done,” French prime minister Nicolas Sarkozy told a press conference in Berlin yesterday after a meeting with German chancellor Angela Merkel. “France’s idea is to apply the [proposed] directive of the European Commission.”
The European proposal is for a tax to be levied on all transactions of financial instruments, except spot FX, between financial institutions when at least one party was located in the European Union (EU). The exchange of shares and bonds would be taxed at a rate of 0.1% and derivative contracts at a rate of 0.01%.
“We have fought for this at the table of the G20, at the table of the G8 and the top tables of Europe – and the Commission has used our idea to propose a directive,” said Sarkozy.
While Merkel saluted Sarkozy’s aim to lead by example, she did not signal any moves to similar such action in Germany.
Speaking on television in the UK yesterday, prime minister David Cameron confirmed he would veto any attempt to implement a European transaction tax if other international markets did not follow suit.
Last month Cameron vetoed a European treaty designed to save the euro and with the passage of many new pieces of key European legislation becoming increasingly politicised, many commentators believe the UK faces the prospect of becoming a marginal voice.
Oxford-based economic consultancy Oxera has warned a pan-European financial transaction tax could decrease overall tax revenues and not generate the extra funding the Commission hopes to generate. The report commissioned by investment trade body, the Association for Financial Markets in Europe, also asserted the Commission was ignoring the risk investment firms would migrate their trading businesses outside of Europe.