AFME the Association for Financial Markets in Europe, has released a paper (in conjunction with Oliver Wyman), that shows the proposed European Financial Transaction Tax (FTT) would increase FX transaction costs by between 9 and 18 times.
The report highlights both the primary impact of the tax – increased transaction costs, relocation of trading and reduction in nominal turnover, but also looks at the secondary impact – reduction in liquidity, leading to widening of bid/ask spreads:
- Directly increase transaction costs by 3-7 times, and up to 18 times for most actively traded segments
- Potential relocation of 70-75% of tax eligible transactions outside the EU
- Real economy hit most: Pension funds, Asset managers insurers and corporates
- Limited impact on speculative (leveraged money), which could/would relocate outside EU
- The combination of primary and secondary impacts would result in marginal FTT of over 100%
Under the proposals, the FTT would be levied at a rate of 0.1% on all transactions between institutions when at least one party is based in the EU. Derivative contracts would be taxed at a rate of 0.01%.
Proposed FX products impacted and pct of daily FX volumes according to latest Bank of England FX survey data
OTC FX cash (fwds and swaps) ($1,082bln – 49%)
OTC FX derivatives (options) ($139bln – 6%)
Listed FX futures & options
FX spot has been exempted ($919bln – 42%)
Full report here