The Financial Transaction Tax (FTT) could have a considerable impact on the effectiveness of TARGET2-Securities, according to James Cunningham, external and regulatory affairs, BNY Mellon.
From 2014 all securities and derivative transactions will be taxed at 0.1% and 0.01% respectively. Free of payment securities transactions will be taxed too, where the basis for the tax will be the market value of the securities. On Nov. 15, the European Parliaments Committee on Economic and Monetary Affairs gave its assent to a report outlining cooperation on a Europe-wide FTT. The report, a procedural step in the move to harmonize the tax, contains a framework for enhanced corporation among member states, giving consent to begin the legislative procedure
The 27 finance ministers are expected to vote on the proposal in December. However, on Nov. 8, the Hungarian Government published a proposal to modify the law on the FTT approved in July.
Commenting on the tax, Cunningham said a high level concern is that FTTs introduced by different European countries have the same set of rules i.e. take the same approach with respect to definition of liability, definition of scope, and definition of obligations on intermediaries in the custody chain: If there are different rules across different European countries, then this will place a very high burden and very high risk on end investors investing in securities from those countries, and on their intermediaries, and will create very significant difficulties for the operation of the TARGET2-Securities, the future pan-European securities settlement platform that will start operation in June 2015, he said.
For example, the UK and Ireland collect taxes through their settlement system Crest, which collects the information on stamp duty and makes the calculations and debits the amount for that money. In Europe, T2S will be the core settlement system of issuer CSDs and multiple investor CSDs. If the Italian authorities introduce an FTT and decide to use the settlement infrastructure of their CSD to collect the tax information, then from June 2015 it will be T2S that will be used. So it will be T2S and other CSDs and non-Italian securities and non-Italian transaction liabilities for Italian tax passing information onto the Italian CSD to do the calculations. This wont work in T2S environment. If they say that T2S has to find a mechanism to solve this problem the ECB would have to solve it.
France has decided that its core settlement system will not be involved in the core settlement and settlement calculation for FTT, and it uses an alternative communications method to transmit the tax information.
If other markets follow the French model they would be compatible with T2S.
The other key concern is that any FTT be operationally manageable from a securities processing perspective. One key consideration is whether the tax is on trading activity or on settlement activity. If the tax is on trading activity, then the tax collection process should not be built into the settlement process; because of netting, settlement flows do not necessarily match trading flows, said Cunningham.
(JDC)