European bankers are increasingly concerned that the EU’s proposed financial transaction tax could harm the OTC derivatives market, perhaps even shut it down. The cause for their worry is the lack of an exemption for market makers – unlike FTTs elsewhere that have such exemptions. The proposed 10 basis point tax would make high volume OTC business, needed not only to service clients and keep markets liquid, but to delta hedge positions.
Speaking at the International Swaps and Derivatives Association’s Annual General Meeting in Singapore last month, TJ Lim, global head of markets at UniCredit, voiced concern that, while regulators may exempt repos, they generally dislike derivatives and there’s therefore little hope for an exemption.
Making matters worse, the tax would apply to all derivatives written on an underlying that is domiciled in Europe. If two US dealers trade a CDS on some Italian bank’s debt, for example, they would owe the tax.