Markets step up fight against EU transaction tax

Mon Apr 8, 2013 10:39am EDT

Related Topics

* Report says short-term repo market will shrink by 66 pct

* Industry to call for exemptions from transaction tax

* EC says repo market concerns were taken into account

* ICAP warns tax will harm wider EU economy

By Huw Jones

LONDON, April 8 (Reuters) - Opponents of a proposed financial transaction tax said the new charge would lead to a massive upheaval in the financial services industry, shackle investors and harm the economy.

Stepping up their lobbying against the tax, which 11 euro zone countries plan to introduce next January, critics said repurchase transactions and market-making in government bonds should be exempt to avoid bumping up costs for governments.

The 11 countries have agreed in principle to impose a tax from January 2014 to make banks pay for help in the financial crisis. The other European Union states have refused to join in.

The bloc's European Commission has drafted rules to implement the tax to raise up to 35 billion euros annually but they have yet to be approved by the 11 countries.

It will be imposed on stocks, bonds, derivatives, repurchase agreements (repos) and securities lending with trades anywhere in the world linked to securities from the 11 markets covered.

The repo industry stepped up its lobbying on Monday to water down the tax by publishing a report that challenged the motives behind the tax and outlining the impact it could have on repos.

"The specific intention of the authors of the FTT is to sweep away the current system of financial intermediation by primary dealers and secondary market-makers, and build an entirely new financial system," a study commissioned by the European Repo Council, part of the International Capital Market Association (ICMA), said.

New issues would be distributed directly to investors who would be taxed out of the secondary market and confined to passive strategies such as buy-and-hold, the study added.

The study said the tax would be at a flat rate of 0.1 percent, high enough to make short-term transactions which have very narrow bid and offer price spreads uneconomic.

"It is clear that the tax liability of a market marker would dwarf his revenue," the study said.

Repos are the sale of securities under an agreement to buy them back at a later date. They are used by financial institutions to help fund themselves and lend on to the economy.

The European Commission said in a statement on Monday the repo market's concerns were taken into account by applying the tax only once to a transaction and not to both sides as with other securities.

"Moreover, other forms of short-term financing for businesses are excluded from the scope of the tax, so businesses will not have disruptions in access to finance," it added.

The study was written by Richard Comotto of the ICMA Centre, a specialist financial learning centre set up with funding from ICMA at Reading University in England.

The study recommended lobbying for repos and securities lending to be exempt from the tax, along with primary dealers and market makers operating in bond markets.

Without exemptions the "seismic change" would lead to short-term repos shrinking by two-thirds in Europe, harming lending to the economy, the report said.

ICAP, the world's biggest interdealer broker, said separately the tax would bump up trading costs, damage the economy and see some trading move to outside the tax zone.

"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," ICAP CEO Michael Spencer said in a statement on Sunday.

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