FX swap cost could rise from €279 to €2,779 under EU tax, warns Oliver Wyman

The introduction of a financial transaction tax (FTT) across the European Union could increase transaction costs by up to 18 times for the most liquid and short-dated parts of the foreign exchange market, according to research published today by consultancy Oliver Wyman.

The FTT, proposed by the European Commission (EC) in September 2011, would impose a tax of 0.1% on equity and bond transactions and 0.01% on derivatives from the start of 2014, raising an estimated €57bn per year.

Financial institutions in London have reacted in anger to the proposal, arguing it is a serious threat to the City’s future as a financial centre, but the 24-page Oliver Wyman report, commissioned by the global foreign exchange division of the Global Financial Markets Association (GFMA), offers the first quantitative glimpse of the potential impact on the forex industry.

“The tax will dramatically increase the cost to transact, with particular impact on the most liquid, most traded products. It will predominantly hit the real economy – pension funds, asset managers, insurance companies and corporates – as both direct and indirect costs will largely be passed on to the end-users; these end-users will be the least able to move transactions to jurisdictions not subject to the tax,” the report states.

While spot foreign exchange would be exempt from the tax, forex swaps and forwards would be included as cash products and forex options as derivatives. The FTT would directly increase the cost of those transactions by between three and seven times, according to Oliver Wyman, and by up to 18 times for the most liquid products, such as forex swaps with a maturity of less than a week, which the firm estimates to account for more than half of the tax-eligible cash and derivatives market.

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