State Street Global Advisor’s Susanne van Dooting sees unintended consequences in use of ‘enhanced cooperation’ to push through FTT

Susanne van Dootingh, managing director and head of European Regulatory Strategy at State Street Global Advisors (SSgA), has said that the use of the ‘enhanced cooperation’ procedure by the EC to introduce the Financial Transaction Tax could have unintended consequences.

After the failure of the full European Union to agree unanimously on the FTT, 11 member states submitted a request to the European Commission to introduce a tax under the so-called ‘enhanced cooperation’ procedure.

As it stands, the proposal would impose a tax of 0.1% on all equity and bond transactions and 0.01% on all derivatives transactions taking place within or involving participants from the 11 EU Member States planning to adopt the legislation. This is the first time ‘enhanced cooperation’ has been utilised for such a large piece of legislation.

• The Commission expects the FTT to reduce derivative trading volumes by 75% and equity and bond trading volumes by 15%

• The European Fund and Asset Management Association (EFAMA) concludes that European long-term savers could lose almost 10% of the value of their pension funds through actual tax payments and reduced investment returns

• Significantly, the proposed flat rate tax could have unintended consequences for investor behaviour, especially behaviour related to fixed income exposures as the flat rate would have a relatively larger impact on short-dated fixed income investments than on longer-term investments. It also remains to be seen whether pension funds and other long-term investors would take steps to reduce turnover in an effort to reduce their tax liability if/when the FTT is implemented

• A change in the shape of the yield curve is another unintended potential consequence of the FTT. This would, in turn, impact the funding ratio of pension funds that are subject to regulatory requirements to discount their liabilities based on swap curves or ultimate forward rates

• It also appears that the posting and return of collateral for derivative contracts would be deemed a taxable event. As end investors and asset managers acting on behalf of end investors mainly use derivatives for efficient portfolio management purposes or hedging, treating the posting of collateral as a taxable event could significantly impact these investors’ ability to implement efficient portfolio management techniques.


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