Plans by European Union (EU) countries to introduce a financial transactions tax (FTT) could impact upon international trade and investment, according to a new report from the Association of Financial Markets in Europe (AFME), as well as driving down volumes.
The report by AFME, the European affiliate of the Global Financial Markets Association (GFMA) suggests that businesses across Europe can expect transaction costs to rise by 300% to 700%. It calls on European policymakers to exempt foreign exchange (FX) derivatives from the FTT tax because of the potential for sharp cost increases.
The tobin tax could also of course lead to less volatility, volume and trading room for FX currency dealers looking to gain an edge, which is a legitimate fear of AFME’s members. The FTT has already attracted fierce opposition from other trade bodies such as the International Capital Market Association (ICMA).
AFME claims that pension fund managers would be hit hardest by the FTT, with costs rise by 700% to 1,500% a possibility in this sector. In cases where transactions involve short-dated swaps, the figure could reach 4,700% as the transaction cost is very low but the tax will be charged on the nominal value of the currency involved in the trade.
The European Commission (EC) proposes an FTT rate of 0.01% on derivatives trades and 0.1% of share and bond trades on all deals done either in the EU or with any counterparty from the EU. It argues that while this will have a negative effect on trading volumes and financial markets, it is needed to make the financial sector pay for the damage of the crisis and to stabilise markets by reducing speculation.
The FTT is being developed by 11 EU member states on the basis of enhanced cooperation, a mechanism that allows laws to be passed with the backing of at least nine countries.
“Given the need for Europe to kick-start economic growth, it is crucial to ensure that European companies of all sizes are able to compete internationally,” said AFME managing director, James Kemp. “FX products are central to their ability to do this. In addition, the proposed tax risks becoming a disincentive for businesses to hedge risk which could increase their earnings volatility and business risk.”