French transaction tax favours structured products, swap-based ETFs
With derivatives so far immune to the French Financial Transaction Tax (FTT), which came into force in August, banks and providers are seeing the resulting benefits to sales of swap-based exchange-traded funds (ETFs) and structured products.
The FTT, which currently stands at 0.2%, covers the listed shares of French companies with a market capitalisation of more than €1 billion ($1.3 billion). Derivatives, bonds and other debt instruments are exempt from the tax unless their exercise or settlement gives rise to the physical delivery of eligible securities, according to an internal memo from a French bank.
“In case of physical delivery of eligible shares as the underlying of derivative products, the FTT is due on the exercise or purchase price as defined in the contract,” states the memo.
Investors who own French shares are selling them and taking positions on them through derivatives instruments such as contracts for difference, structured products and ETFs, according to a Paris-based lawyer. “Most structured transactions remain outside the tax,” he says. “It is due only if you have actually purchased the shares.”
Thomas Wulf, Brussels-based secretary-general of the European Structured Investment Products Association, says the FTT would only apply to structured products “when the structure provides the investor with physical ownership of the underlying”. Examples include reverse convertibles and discount certificates, he adds.
The FTT will give a clear tax advantage to ETFs based on swaps, says Isabelle Bourcier, director of business development at ETF provider Ossiam in Paris. “With a purely physical ETF, every time the manager buys the French stocks directly, the fund has to pay the FTT,” she says. “Because the banking swap counterparty is not charged the tax if they buy the stocks for hedging, a fund that receives the performance of the basket of stocks [for which the FTT is due] through the swap would be unaffected by the FTT.”
Other industry participants have noted the advantageous tax position of ETFs that use synthetic replication to gain exposure to an index.
“In the primary market, Lyxor ETFs following swap-based replication on equity indexes that contain French exposure, for instance, are not affected by the FTT when new fund units are created,” says Claus Hein, London-based head of Lyxor ETF institutional sales for the UK and Ireland, the Netherlands and Nordics.
“In contrast to physically replicating vehicles, the funds obtain synthetic exposure to a benchmark like the Euro Stoxx 50 index and do not need to buy the corresponding amount of French stocks directly.”
This article was first published on Risk