ECB enters the fray
The European Central Bank (“ECB”) has entered the debate on the proposed Financial Transactions Tax (“FTT”). Benoit Coeuré, an ECB executive board member, has said that the bank is willing to “engage constructively with governments and the European Commission to ensure that the tax has no negative impact on financial stability”. This highlights one of the key concerns of central bankers in relation to the FTT: namely, that it will increase the cost of sovereign borrowing, and remove a weapon of financial management, as central banks are active participants in the repo market. For instance, the Czech government has estimated that the annual FTT charge on the repo of government bonds would amount to 25%.
If the FTT is implemented as it currently stands, it is possible that very short term repos would need to be supplanted by a different mechanism, as otherwise the commercial rationale for such repos would be eroded over a short space of time by repeated payments of the FTT. It is possible that arrangements such as pledges could be used to fill the gap, as the tax would likely not arise if title was not transferred outright. This, however, replaces a clear contractual position in relation to collaterised financing with an untested alternative. Regardless, the reluctance of the ECB to endorse the proposed FTT, coupled with its public offer of assistance in its reformulation, suggests some very deep-seated worries present in Frankfurt.
If the ECB pushes to exempt or exclude certain types of transaction from the FTT, then the extent to which the FTT can proceed at all will be in doubt. The motivation behind the FTT is to catch a wide variety of transactions, decrease “risky” trading activity and remove the economic incentive for financial intermediation. Notwithstanding that it may not achieve those ends even in its current form, to the extent that the ECB is successful in exempting certain transaction types, it is likely simply to create an economic bias towards exempt transactions.
European Commission Directorate General responds to questions
In April 2013, a series of questions on the functioning and mechanics of the FTT was sent to the European Commission by the 11 participating member states in the process. The Directorate General, in what is termed a “non-paper”, responded to the questions in some detail in early May.
Some points of note from the replies:
- The opinion of the Commission is that given attractive untaxed alternatives, that the FTT will not “have a measurable impact” on the repo market.
- Repos and FX swaps will constitute a single transaction for the purposes of the FTT, as opposed to two individual taxable transactions.
- Netting and settlement will have no bearing on determining if the FTT arises in a given transaction – it will arise at the exact moment at which the transaction occurs.
- It was confirmed that the timing of the transaction is irrelevant and that therefore in cases of intraday high-volume trading, each transaction would be caught.
- It was confirmed that financial institutions within an FTT jurisdiction will be liable for unpaid tax when trading with those outside the FTT-zone who fail to cooperate.
The Directorate General, in providing these replies, is making it clear that an unapologetic position is being taken with regards to the likely consequences of the FTT.