The European Union’s (EU) proposed introduction of the Financial Transactions Tax (FTT) in 2016 will expose asset managers to further complexities in tax aggregation, says a new report from GBST.
The regulation is aimed at standardizing FTT applicability, charging and collection across the participating member states. The framework applies to banks, brokers, custodians, asset managers and potentially group treasury functions. Rather than equities, bonds and derivatives all being within scope, as originally proposed, a first phase FTT applying to equities (and equivalent securities) only is widely expected.
France also subsequently expanded the range of in-scope assets to include depositary receipts since the original publication of the FTT. Ongoing change has resulted in greater complexity, more processes, and increased trade volumes requiring processing. Whilst brokers involved in the execution of a transaction are responsible to collect, pay and report the tax in their absence custodians are responsible, with asset managers typically having to provide the custodian with core information.
“Clients’ expectations, particularly among the assets managers are that their broker dealers and custodians are compliant,” says Dennis Orrock, chief executive of GBST. “However, the asset mangers now need to aggregate their FTT positions and allocate down to block trades and into the underlying fund.
“Furthermore when you delve into trades, and the concept of an underlying security in an HFT (high frequency trading) environment, that becomes difficult for an asset manager.”
The FTT seems likely to increase the compliance burdens across a number of markets and create major operational processing issues that financial markets participants will need to consider and address, says GBST.
In a report, jointly produced with Deloitte, the technology vendor notes the French Transaction Tax, launched in 2012, introduced daily netting in certain circumstances (whilst being a positive move in that it gives participants a way to simplify their compliance obligations and potentially to reduce their tax liability) added to the operational processing complexity.
It is widely anticipated that national interests and financial markets will result in divergences in the tax rates above a prescribed minimum and available exemptions, as well as potentially different collection, payment and reporting mechanisms
Resolving current French and Italian processing issues or limitations and creating a solid foundation for the EU FTT has to be the key in implementing a strategic solution, says GBST.
Commenting on the early lessons from the implementation of the tax in Italy and France, Orrock says: “Off the back of our recent implementation, it’s not a simple problem. To do it properly is going to require a bit more thought from financial institutions.
“It will be a challenge internally for an investment bank in terms of accessing all of the data, interfacing with multiple systems, ensuring source data is core, tax rules are understood and netting is done correctly and rebated back to the end client.”
“The management of declarations and reporting requirements are also a challenge. People had tactical solutions in place and tried to extend those to Italy for more scalability.
“Our clients have made the investment and have taken a strategic view in terms of headcount and it’s been a positive experience. However for institutions that attempt to take a tactical solution for what they did in France and Italy and try to extrapolate that nine times they wouldn’t want to end up with FTT teams of 100 people.”
There is a possibility that repo will be taken out of the EU FTT. More guidance on what the regulation will look like will be released in September. “Hopefully the E.U. will come up with a more solid framework but countries could still set their own in-scope and out of scope rules,” says Orrock.
Report Reveals Further Headaches For Asset Managers Ahead of the EU FTT
The European Union’s (EU) proposed introduction of the Financial Transactions Tax (FTT) in 2016 will expose asset managers to further complexities in tax aggregation, says a new report from GBST.
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