What difficulties will arise between member states in agreeing final rules for a European financial transaction tax (FTT)?
The European FTT is being etched out in working groups among the 11 EU member states supporting its development. Discussions between supporting states are based around the European Commission's February draft of the tax, which seeks to impose a 0.1% levy on equity and bond transactions and 0.01% tax on derivatives.
Initial discussions between member states have touched upon country specific concerns that may impede progress through the working groups. In light of widespread industry backlash over the Commission's plan, which would in effect form a global tax - hitting participants based in a supporting member state, or any market participant globally trading in an instrument issued within one of those member states - proposed changes have been mooted.
France is expected to push for the Commission's proposed model to closer resemble their equities-only FTT, which hits equity transactions of Paris-listed firms with a market capitalisation of €1 billion or more. Italy has also sought exemptions for sovereign bonds, which it sees as vital to the stability of its domestic market.
These conflicting agendas may stymie progress, although a recent meeting of the Economic and Monetary Affairs Committee (ECON) suggested the initial 1 January 2014 implementation date would still be sought. The ECON meeting also proposed halving the levy rate on equity transactions involving small-cap stocks, pension funds or sovereign bonds.
Could political considerations end the FTT's creation?
Germany's role in creating and backing the FTT is crucial for its development and experts have suggested the possible re-election of German Chancellor Angela Merkel in the country's September elections will be a key turning point for the tax.
Political and market commentators believe Merkel's pre-election backing of the levy will be used to show her strong crackdown on the financial sector, but will fall away if re-elected as German financial giants such as Deutsche Bank will suffer greatly, particularly with regard to their international operations. Under the current rules, a firm like Deutsche Bank would be hit on all transactions occurring globally (including in the US for example), which will severely limit the competitiveness of the bank, and incur active lobbying ahead of final decisions on the FTT.
German EU representatives' efforts to water down open access rules in MiFID II negotiations to protect the business of regional derivatives exchange and clearing giant Eurex in the Council of the European Union indicate the country's representatives are willing to support individual firm's interests at the EU level.
What other factors may thwart FTT development?
The complex nature of the 'enhanced cooperation' legislative tool used by the 11 member states to push through the tax may lead to further delays and possible restrictions in the FTT's development. A major issue will be legal challenges to the development of the levy, which have already begun with the UK commencing legal action earlier this year at the International Court of Justice, which focuses on the extra-territorial nature of the tax, which would ultimately affect UK markets and market participants. This has come at a time of intense national debate within the UK about its role in the EU, and growing support for an exit out of the union.
Formally, the UK has challenged the 'enhanced cooperation' tool - which lets a group of at least nine member states push ahead with legislation with backing by the European Commission - as its previous stance of abstaining could have negated future legal challenges. The lack of legal certainty around 'enhanced cooperation' and any legal challenges to it may further delay implementation, if not development, of the FTT.