ICAP warns of potential impact of financial transactions tax

ICAP plc, a global interdealer broker and provider of post trade risk and information services, has warned that the introduction of the proposed Financial Transaction tax (FTT) will have adverse consequences for the economies of adopting countries and for funding costs for governments and corporates.

Eleven countries have provisionally agreed to introduce the FTT with the stated objective of raising public finances and reducing risk taking.

ICAP believes the FTT would in fact increase systemic risk and lead to the migration of markets rather than a net global reduction of risk, as well as running conter to European Union Treaty freedoms.

Commenting on the proposals Michael Spencer, group CEO of ICAP (pictured) said: “The proposed FTT is a misguided policy which would be severely detrimental to both EU economies and businesses. According to our research, if implemented, it would severely damage the functioning of debt markets which are essential for governments and companies to raise finance. It would increase both their borrowing and operational costs and lead to a flood of financial activity being moved outside the FTT zone.”

He added it was “particularly ironic” that London would generate the lion’s share of the revenue and “act as collection agent” despite the UK being outside the FTT zone and the government being vehemently opposed to the introduction of the tax.

The ICAP report says that while the FTT proposal includes an exemption for Debt Management Offices (i.e. the issuers of public debt) it does not seek to safeguard secondary market trading in public debt, which would result in an increased cost of funding and capital burden for governments.

Bank of America Merrill Lynch has estimated the FTT will result in an increased annual interest cost of €6.5bn – €8.5bn for Germany, Italy and France in the first year.

The FTT would significantly raise costs for corporates based in the FTT-zone, which will find it more expensive to issue debt and equity. It will also be more expensive for them to modify their risk exposure, the report charged.

Repo is within the scope of the FTT and this would significantly increase banks’ short-term funding costs. “This would almost certainly be largely transmitted to the private sector, resulting in negative effects on investment, employment and output.”

In addition to this, firms around the world will need to undertake major systems change in order to be able to collect the tax as there is currently no collection mechanism in place.

Most damaging is that while the stated aim of the FTT is to reduce risk taking, systemic risk could in fact increase, the report noted. The FTT runs counter to G20 objectives and obligations under the European Market Infrastructure Regulation by disincentivising central clearing.

It also appears to run counter to established EU Treaty freedoms. Specifically, it runs counter to the freedom of movement of capital, and, treating overseas branches of FTT-zone firms less favourably than those operating through subsidiaries is not compatible with the freedom of establishment required under the EU Treaty.

The full ICAP document can be viewed here.

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