New FTT solution tackles divergent rules

As market participants adapt to Italy's financial transaction tax, a new technology offering aims to help buy- and sell-side firms identify affected instruments and manage the associated payments.

As market participants adapt to Italy’s financial transaction tax (FTT), a new technology offering seeks to aid buy- and sell-side firms identify instruments affected and manage tax payments.

Trading solutions firm Interactive Data Corporation has launched a new data service that lists which instruments fall within the scope of French and Italian FTTs, to determine associated costs.

The French FTT, which kicked off in August, taxes transactions in Paris listed stocks of companies with a market capitalisation over €1 billion at 0.2%. The Interactive Data tool, which updates daily, reflects changes to the level of market capitalisation, helping firms access which stocks are affected.

The Italian FTT came into force on 1 March and taxes equity transactions on multilateral trading facilities (MTFs) and exchanges at 0.12% in 2013, which will drop to 0.1% thereafter, and equity trades on internal dark pools at 0.22% in 2013, which will drop to 0.2% from 2014. Derivatives are taxed on a sliding scale depending on type of instrument and size of order.

The discrepancy of taxing equity trades under the Italian FTT has recently caused a drop off in trading volumes and spurred some brokers to close their dark pools, subsidise trading in dark pools to maintain liquidity, or facilitate execution between two clients on-exchange after terms have been agreed in their internal pool – a process known as off-market, on-exchange trading.

“The financial transaction taxes represent an operational challenge for financial institutions due to the complexities of identifying securities in scope and determining the level of tax on those instruments,” said Anthony Belcher, director EMEA pricing and reference data at Interactive Data. “Our new service enables firms to determine the securities that may fall under the scope of the transaction tax within each jurisdiction whilst removing the need to maintain these lists themselves.”

Italy and France are the only European states to have implemented national FTTs, although Portugal has suggested it may implement its own levy in 2014.

These three countries are also part of an 11-state bloc which is pushing for the creation of a pan-European FTT. Last month the European Commission agreed a draft of the FTT, which is passing through the legislative process under ‘enhanced cooperation’ which lets a group of at least nine member states form EU legislation with backing from the Commission.

So far, the European FTT has gained considerable criticism for its universal reach, which would see the taxing of instruments created within one of the 11 member states, no matter where it was traded. The current plan would also tax transactions occurring on any venue in the world if a participant who is ‘established’ in one of those member states is involved.