The plan supported by 11 European countries to introduce a financial transaction tax (FTT) runs counter to the G20 mandate to limit the impact of rules beyond borders, says a group of financial markets associations.
In a letter to G20 finance ministers, heads of the Australian Financial Markets Association (AFMA), the Global Financial Markets Association (GFMA), Investment Industry Association of Canada (HAC), Japan Securities Dealers Association (JSDA) and the Korea Financial Investment Association (KOFIA), wrote that the FTT “conflicts with repeated calls by the G20 to avoid measures exhibiting extraterritorial effects.” It added that the G20, in its last communique in February 2013 committed itself to minimizing any negative spillovers.
But the FTT as it is proposed creates that spillover. According to the European FTT proposal, the tax, slated to be implemented at the start of 2014, would apply to all transactions where:
(i)either the buyer or seller is resident in an EU11 country;
(ii) the security was issued in an EU11 country; or
(iii) an EU11 financial institution, or any of its foreign branches, is involved in the transaction.
“For example, the FTT would apply to the sale of corporate bonds of a French company by a Japanese bank to a Canadian bank through a US broker-dealer,” the associations wrote in their letter.
The associations’ letter also reflects what many feel will be a blow to the global economy that is already struggling to get back on its feet. “The FTT will increase the cost of equity and debt financing for both governments and corporates, increase the cost of hedging transactions undertaken in the real economy in order to manage risk, and create a further headwind to the global economic recovery,” the associations wrote.
And, as the market digests the proposed tax, it looks like it will have the biggest impact on small and mid-size companies based in within the tax zone. It could also present an unusual choice for multinational corporations, which may have the resources to choose between jurisdictions with the new derivatives rules that hurt them the least.
And one outcome that seems fairly certain for all, according to a study conducted by Marsh & McClennan’s Oliver Wyman research unit, is that nonfinancial corporates and other end users will face significantly higher costs to hedge risk. Not a good thing when risks continue to proliferate for corporations.