FTT to Affect 65 Percent of Securities Lending Market in Europe, Says ISLA

The Financial Transaction Tax (FTT) will directly influence 65% of the securities lending market in Europe, according to an analysis by the International Securities Lending Association (ISLA).

The European Commission proposes that the FTT would apply to securities lending transactions, with both borrower and lender paying 10 basis points on the value of the securities lent.

Key markets such as Germany and France will all but disappear as a result of the tax, leading to lower returns from long-term investors and further implications for financial stability, says ISLA’s analysis.

The analysis is based on data provided by Market Securities Finance. Using the data, ISLA calculates that annualized global securities lending revenues are €8.1 billion of which €3.1 billion is directly attributable to activities involving European issued securities.

The association adds that in Europe, the EU 11 government bonds would be the most impacted assets, while investors would also move away from EU 11 securities. The cost of raising finance for EU 11 corporations and governments will therefore rise as investors demand a higher premium for these poorer secondary market conditions.

Other findings of ISLA’s analysis include:

– Short-term transactions would also be impacted, with the risk of settlement fails increasing by as much as 100%. Securities lending fee levels would need to increase by over 400% just to maintain current revenue streams for long term institutional investors.

– Meanwhile, approximately €500 billion of government bonds would be removed from the lending/ collateral markets, and over €2 billion of revenues would be lost to long-term investors. The loss of this revenue stream will directly impact pension funds, insurance policy holders and a wide array of institutional investors.

– The cost of sourcing high quality collateral will rise for all market participants. As collateralized business disappears, banks will be forced to shrink their balance sheets, reducing their capacity to support the wider economy.

– Financial stability would also be impacted. Settlement failure rates will increase, leading to greater costs and risks within system. Market volatility will increase and liquidity fall as market makers have less access to securities lending and repo markets. Hedging techniques will also become more expensive.