ALFI: FTT is a major challenge for funds, warns Luxembourg minister of finance

18 Mar, 2014

The EU’s proposed Financial Transaction Tax (FTT) is a major challenge for the region’s funds industry while implementation of the rules could be extremely difficult, the minister of finance for Luxembourg has warned.

At present, 11 countries are actively pushing the FTT, which is seeking to apply a 0.1% tax on share transactions and a 0.01% levy on all derivatives trades. These countries hope to have an agreement on the FTT before May’s European Parliament elections.

Early predictions estimated FTT would generate between €30 and €35 billion for the participating countries although this figure has been revised downwards. Ernst & Young (EY) said these numbers were based on overly optimistic assumptions by the European Commission about the likely decline in trading activity once the FTT is introduced. EY also said the European Commission failed to take into account the fall in other tax revenues that would arise from lower GDP growth.

“The FTT is very worrying for the funds industry. We hope the FTT can be avoided as it will be a major obstacle for the funds industry,” said Pierre Gramegna, minister of finance in the Grand Duchy, speaking at the Association of the Luxembourg Fund Industry (ALFI) spring conference in Luxembourg.

Industry associations and fund managers have warned the FTT could have a devastating impact on the European economy. A letter penned by a group of 14 asset management firms and pension funds and sent to the ministers of finance in the 11 countries supporting the tax, the European Commission, the European Parliament and the Council of the European Union, warned the FTT would seriously damage citizens’ savings and hurt the real economy.

Signatories to the letter included Blackrock, Fidelity, Pimco Europe, Schroder Investment Management, State Street Global Advisors, UBS Global Asset Management, Allianz Global Investors and APG Asset Management, the Dutch pensions giant. Industry associations including AIMA have warned FTT could lead to a drying up of liquidity as high-frequency traders curtail their trading activities. The AIMA paper also said FTT would prevent buy-side firms and pension funds from legitimately hedging their risks through derivatives contracts.

Reports have suggested the FTT will be phased in gradually although there is a lack of clarity about how the revenues will be collected by participating member states, something the finance minister believes could be to the advantage of the funds industry. “It is going to be very difficult to put the FTT into place, which is a good thing I suppose,” said Gramegna.  

There is also uncertainty about the instruments which are going to be taxed. It is highly likely that repo-transactions, which play a huge role in delivering high-grade or eligible collateral to post as margin at central counterparty clearing houses (CCPs), will be exempted from the tax. Some countries in the participating 11 have urged an exemption for government and corporate bonds to avoid further stress on their sovereign debt and economies.

A number of EU member states are hostile to the FTT. The UK, for example, has mounted a legal challenge against the tax. Meanwhile, the EU Council legal service said in a September 2013 report that the FTT could fall foul of existing EU treaties and was discriminatory to non-participating countries.  Implementation of the tax on a pan-EU level is likely to be slow. “Progress on the FTT has been slow, which again is a good thing,” continued Gramegna.