Clearing will magnify European FTT, warns UniCredit’s Lim

The proposed European Financial Transaction Tax (FTT) will make central clearing of over-the-counter derivatives prohibitively expensive, according to TJ Lim, global head of markets for Italy’s UniCredit.

Speaking at the annual meeting of the International Swaps and Derivatives Association in Singapore, Lim said the big problem with the FTT is that – unlike existing similar taxes in Italy and France – there is no exemption for intermediaries. This means the one-basis-point tax on OTC derivatives could be paid multiple times on a single transaction.

Lim said UniCredit research suggests the firm’s FTT exposure for just its repo business would sit at between €5bn and €6bn. Cleared OTC transactions would also be penalised by the FTT, he argued. In Europe’s clearing model, a clearing member firm acts as principal to the trades it clears on behalf of clients – so a single, bilateral trade would give birth to additional trades between the original counterparties and their clearing members, as well as between the clearers and a central counterparty.

“By the time the instruments end up at a clearing house, the FTT will amount to as much as 10 basis points, meaning the FTT could be bigger than the bid/offer spread. The FTT will kill the market. Politicians don’t really understand what they are getting into,” Lim argued.

He also pointed to the extraterritorial nature of the FTT, which would apply to instruments with specific underlyings, irrespective of whether the parties involved in the trade are based in one of the 11 countries.

Lim said the FTT could be scaled down before its introduction, but he was not optimistic: “Regulators don’t like OTC derivatives very much.”

Lim did not respond to the suggestion from fellow panellist Jonathan Hunter, global head of fixed income and currencies for RBC Capital Markets, that the decision to introduce the FTT was Europe’s way of compensating for the credit valuation adjustment capital exemption that appears in its version of the Basel III rules.

 

This article was first published on Risk

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