The so-called Tobin tax, named after economist James Tobin, is set to impose a levy of 0.1% on transactions in shares and bonds, and 0.01% on derivatives where at least one party to the transaction is established in an EU member state that has adopted the rules. The European Commission estimates the tax could bring in €30-35 billion a year. Currently some 11 EU members are signed up in principle, including Germany, Italy and France, which launched its version of the tax in August after the Commission dropped plans for an EU-wide levy, amid insufficient support. Italy’s tax comes into force on March 1, and covers equities, derivatives and high frequency trading.
The French iteration of the tax is aimed at equities but not derivatives, except for credit default swaps. The response of many French investors has predictably been less than enthusiastic and many have sought out alternative instruments to avoid paying the tax, such as contracts for difference and swaps.
“It’s relatively simple to enter into a contract with a bank which delivers the performance of a name or to buy a contract for difference,” said Fabrice Seiman, co-chief executive officer of Lutetia Capital, an asset manager in Paris that oversees $200 million. “For institutional investors it’s relatively simple to find alternatives.”
The low level of the FTT means that its impact on individual transactions is likely to be minor, Seiman said. However, it is vital the tax is implemented across Europe, because any failure to do so will lead to unfair competition and market distortions.
“FTT is not a bad thing per se, but it is vital the tax is implemented everywhere, because any failure to do so will lead to unfair competition and market distortions”, Seiman says.
“If you have two companies in the same sector with a similar valuation but listed on different exchanges, then retail investors will always prefer to choose the one they can buy without paying a FTT ” he said. “The most important thing is to have a level playing field.”
Given the controversy over the tax, Europe-wide adoption seems unlikely. The UK, which has charged stamp duty on the transfer of certain shares and securities since 1986, has been vocal in its opposition. It says any tax would have to be applied globally to prevent financial traders rerouting their transactions to countries outside of the EU.
In a highly critical report published in March last year, the UK House of Lords branded the tax “flawed” and warned its adoption by the UK would force banks to relocate from the City of London. In recent days members of Angela Merkel’s Christian Democrat-led coalition have also said they wanted the tax changed.
“Not all EU countries are in favour of introducing a financial transaction tax. The UK is opposed, as are Luxembourg, Malta and Sweden,” said Martin Walker, a director in Deloitte’s financial services tax team. “For that reason, the EU moved to its enhanced cooperation procedure (ECP) under which a minority of countries can proceed without the need for a unanimous vote.
A revised proposal for the FTT was published earlier this month. It must be approved by the ECP countries and is set to come into force on January 1 2014.
“In practice it seems unlikely that it can be agreed upon by the start of next year,” Walker said. “It will need not only political agreement to be reached between all 11 countries but also national legislation to be passed in each country to introduce the FTT.
One of the key initial drivers for a transaction tax in Europe was high frequency trading, which is acknowledged to account for around 70% of all ‘lit’ order flow on European exchanges, and which was vilified following the May 2010 Flash crash, in which the Dow industrials plunged nearly 1000 points in less than 20 minutes.
Alongside the FTT, France has enacted a tax on high frequency trading at a flat rate of 0.01%, applying to all entities carrying on high frequency trading in France. High frequency trading is defined as dealing with orders through an automatic device, provided the interval between such orders does not exceed half a second. The tax also applies when the rate of cancellation/modification of all orders in a trading day exceeds 80%.
Due its territoriality, the tax leaves the door open for relocations, and French firms may set up overseas to avoid paying, analysts say.
“Certainly banks and others operating on the continent are going to need to think about how they respond to this,” said Bradley Wood, a partner at consultant Greyspark Partners. “However, whether the tax is going to be enough to change strategies in high frequency trading it is probably too early to say.”