The Futures and Options Association (FOA) said it is disappointed by the release of a draft EU proposal for a directive introducing a European Financial Transaction Tax (FTT).
The legislation was proposed by the EU yesterday in order to raise about $78bn a year by applying a tax of 0.1% on the trading of stocks and bonds, with a 0.01% rate for derivatives contracts. If the directive is passed, these minimum rates would apply to all 27 member states from 2014.
Market users, including end users of financial products, and observers have already expressed their concerns about the proposals as they fear the impact a FTT would have on economic recovery and the competitiveness of Europe as a financial centre. The European Commission feels that the proposals would result in only small negative effects on GDP and employment [which] cannot be avoided, but the FOA feels that the economic impact of the proposals has been underestimated, and even a small negative effect on GDP in the current climate could significantly affect many people outside the financial sector.
The FOA believes that this tax, if introduced, would ultimately increase the cost of business for non-financial firms and the cost of saving for individual investors. At the same time, the additional burden faced by the financial sector would create barriers to entry, reduce liquidity and increase the cost of risk management in direct opposition to the aims of the G20, said the FOA in a statement released today. As a result, no such tax should be imposed without a comprehensive analysis of the economic and market consequences that could flow from its introduction, added the FOA.
Anthony Belchambers, CEO, said: This may be a politically populist initiative, but the Swedish experience in introducing a financial transaction tax in 1984 saw an 85% fall in bond-market volumes in its first week and a subsequent 98% fall in futures volumes with the result that the tax was abolished by the Swedish government in 1991 – after which volumes gradually returned to the Swedish marketplace.
The imposition of such a tax in the EU will be yet another cost that will be borne indirectly by market users and will further incentivise the migration of trade flows to untaxed jurisdictions and financial markets.
(JDC)