Certain European Union ("EU") countries have proposed a financial transaction tax ("FTT") which could cause severe harm to segments of the repo market. The FTT would impose a 10 basis point fee on every transaction involving equity or fixed income securities, including repos and derivatives. However, the fee would not be annualized, and for short dated repos in particular, the FTT would dramatically increase costs. The International Capital Markets Association ("ICMA") estimated that the FTT would make any repo subject to the tax with a term of one year or shorter uneconomical for dealers.

The proposed FTT would apply to

counterparties located in; 

the markets of; and

securities issued in--

Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovenia, Slovakia and Spain.

Repurchase agreements would be treated as one transaction and the FTT would be based on the market value of the repo collateral, not the purchase price.

The FTT, as proposed, would dramatically alter the repo market for participants and transactions subject to the FTT, primarily due to the effect of a flat 10 basis point fee regardless of the term or rate of the repo. These changes will impact U.S. repo market participants who enter into repos based on securities issued in the European countries listed above or with counterparties located in those countries.

The text of the FTT proposal is here. The ICMA report on the FTT can be found here.