French FTT could be extended to derivatives, says senior cabinet members

InvestorsLegalOperational RiskRegulation
16 Oct, 2012

Senior cabinet members at the French Ministry of Economy and Finance have said they will not rule out extending the country’s Financial Transactions Tax (FTT) to some derivatives, and rejected criticism that the rules were extraterritorial.

The French FTT, introduced in August 2012, levies a 0.2% tax on transactions covering listed equities with a market value of more than €1 billion although it does not apply to derivatives, which has led some to predict there will be a surge in riskier synthetic products as the tax starts to bite.

“The tax has only been in force since August and it is still too early to speculate whether there has been a surge in derivatives products because of the tax.  If it becomes apparent that there has been a surge in synthetics being traded, we would not rule out applying a transaction tax to certain derivatives trades. It would be incredibly difficult technically to tax all derivatives transactions, which is why we would focus on specific derivatives such as contracts for difference, for example,” said the senior cabinet member whose remit is the Financial Transaction Tax at both the French and EU-level, speaking anonymously in Paris.

A transaction tax applicable to derivatives and equity transactions could be costly for the French economy at a time when it is already struggling. A report by the European Commission said EU GDP would decline by anywhere between 0.53% and 1.76% were a 0.1% tax on equity and bond transactions, and a 0.01% on exchange traded and OTC derivatives imposed. Ernst & Young said these figures were optimistic as the Commission had failed to take into account the fall in other tax revenues that would arise from lower GDP growth.

The senior cabinet member highlighted the European Commission’s figures assumed the tax was being imposed on all derivatives transactions. Nevertheless, he acknowledged changes could be made to the rules if the French tax led to serious or unwanted consequences. “If there were serious economic ramifications to the tax, we would seek to amend it and improve it. It would be politically very difficult to scrap the tax but we do not expect problems to arise,” he said.

The cabinet member also dismissed claims the French FTT was extraterritorial and rejected forecasts French financial institutions would relocate to less well regulated or friendlier jurisdictions. “The FTT will apply to financial institutions transacting French-issued shares anywhere in the world. This is similar to the UK stamp duty and financial institutions do not complain about being hit by that,” he said.

Sweden introduced its own FTT in the 1980s only to see a flight of financial institutions to London. “The Swedish FTT was designed in a way that enabled loopholes to proliferate in that people could escape the tax by executing the trades overseas. This will not happen in France as it applies to transactions in French issued shares all over the world. Furthermore, I do not expect financial institutions to leave France en masse. While there is a risk some issuances of shares might move out of France, we doubt this will be a significant sum,” commented the cabinet member.

Confusion about how the French will actually collect the tax remains. Several broker dealers have complained there is continued uncertainty about how they will collect and pay the tax on behalf of their clients to Central Securities Depositaries (CSDs). “The French FTT is not too dissimilar to what CSDs do in the UK with their stamp duty. We feel we have been clear on how the tax will be collected and we have given financial institutions plenty of time to get to grips with the rules,” said the cabinet member.

This is at odds with a Euroclear paper published in June 2012. “Due to the nature of the tax, which requires declarations to be provided on the basis of net declarable positions (excluding exemptions) per client, Euroclear UK & Ireland is not in a position to provide a central process to calculate the tax due, as it does for SDRT and Irish Stamp Duty. It is not yet clear whether securities in CDI form in the CREST system are intended to be covered by the FTT. As such, we recommend that clients wishing to settle transactions in the CREST system in impacted securities should seek their own advice to ensure they comply with their legal and tax obligations,” it read.

It was also agreed earlier in October that 11 eurozone economies would impose a transactions tax using rules that enable a bloc of countries to implement policies among themselves without agreement from all 27 member states. This “enhanced cooperation” by the 11 member states on FTT is being spearheaded by a Franco-German alliance. The proposals are likely to impose a 0.1% tax on equity and bond transactions, and a lower tax on derivatives transactions.

“We are not confident the tax will become EU-wide anytime soon but we are optimistic the 11 countries which have signed up to implement “enhanced cooperation” will continue on the right path. However, there are some countries, particularly in Eastern Europe, whose views we cannot be totally sure of. But we do expect some proposals to be drafted within a month,” said the cabinet member.

The proposals are still at very early stages nonetheless. “There is a lot to be discussed still. We still do not know whether the rules will apply to shares issued in those eurozone countries, nor do we know the derivatives products and transactions on which the tax will be levied. Nevertheless, all of the major eurozone financial centres have signed up to this so we are confident about progress and we expect more will join us,” commented the second cabinet member.

The FTT has been slated by countless industry associations including AIMA. It warned in a paper that an EU FTT would impact pension funds and conservative fixed income portfolios by forcing them to undertake greater risks to deliver consistent returns. Furthermore, it warned the FTT would lead to increasing spreads in the market and reduce liquidity, while ultimately leading to diminished investment in the real economy. Others are even more apocalyptic about the eurozone’s FTT plans predicting a two-tier European Union or worse, a gradual break-up.

AIMAderivativesErnst & YoungEUEuropean CommissioneurozoneFinancial Transaction TaxFranceUK