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The European Commission published a staff working document (SWD) on February 14th 2013 on the proposed financial transaction tax (FTT). The SWD is entitled ‘Implementing enhanced cooperation in the area of financial transaction tax: Analysis of policy options and impacts’.
Since the publication of the SWD, stakeholders have raised questions with the Association for Financial Markets in Europe (AFME) as to the validity of the Commission’s arguments. In response, AFME commissioned Oxera to critically review the Commission’s assessment of policy options and impacts, and to comment on whether the Commission’s proposals are consistent with other regulatory objectives. This Oxera report builds on previous work done by Oxera on the impact of the FTT.
Oxera finds that the FTT will make some transactions uneconomic, including some activities involved in market making, trading of government debt, and repurchase agreements (repos). The Commission assumes that the transactions that are deterred have little or no wider economic value, despite there being evidence that these transactions do have value.
In summary, Oxera finds the following.
- The effect of taxing intermediate transactions would be either to multiply the costs to end-users (such as end-investors and companies raising capital) and/or to reduce market making and therefore reduce liquidity—neither of which is in the interests of end- users.
- The extent by which taxing secondary market transactions in government debt will increase sovereign borrowing costs and reduce market liquidity could be greater than the Commission assumes—these impacts are not consistent with the objective of reducing the burden of sovereign debt costs.
- The effect of taxing repos would be to make many valuable transactions uneconomic, and to introduce inefficiency into the repo market itself, and inefficiencies into those activities that use repos as a mechanism to reduce their costs and/or risks—these costs would ultimately fall on end-users.
- Taxing derivatives will hit some hedging activities much harder than others, deterring some forms of prudent risk management—this means that the Commission’s assumption that the loss of derivatives trading will have no wider economic impact is less tenable.
- The effect of taxing transactions undertaken by pension funds, together with the effect of taxing intermediate transactions, would be to reduce the returns of pension products—this is not in the interests of people saving for their retirement.
The detailed analysis is set out in section 3 of the Oxera report.
The European Commission’s proposals can be expected to make many current financial transactions uneconomic. Consequently, the Commission may have underestimated the reduction in trading and therefore underestimated the impact on liquidity. Furthermore, the Commission has not taken into account the negative economic impact of deterring financialtransactions that bring benefits to the wider economy.
