EUROPE - European pension funds and asset managers could be deeply impacted by the introduction of the Financial Transaction Tax (FTT) - also known as the Tobin Tax - as transaction costs could soar by 18 times, a new report has warned.
The study published by the Global Financial Markets Association (GFMA) suggests the cost of foreign exchange trading would jump by 3-7 times and by as much as 18 times for the most traded part of the market if the European Commission proceeds with the implementation of the tax.
GFMA added that, given the tight margins in foreign exchange markets, this increase would, in turn, hit the real economy.
The costs will be passed onto all end-users, such as Europe’s financial institutions - including pension funds, asset managers, insurers - as well as corporates, the report stressed.
The report points out that global foreign exchange is currently the most liquid market in the world, with an average daily turnover of $4trn (€3trn), according to the Bank for International Settlements.
It also insists that such a tax could see 70-75% of tax-eligible transactions being relocated outside EU tax jurisdiction.
As a result, GFMA argues that the Tobin Tax will have a limited impact on speculative trading, as this activity will most likely relocate outside the EU.
James Kemp, managing director of GFMA’s Global FX division, said: “The foreign exchange industry is an essential part of a stable and sustainable economy, underpinning international trade and investing.
“This study shows the proposed tax would in effect penalise Europe’s businesses for sensible risk management - by using FX products to manage currency fluctuations - and also threaten to impose further costs on the investment returns of pension funds and asset managers.”
GFMA claims that, for every €1 raised, Europe will lose more than €1 from lost liquidity in the FX markets.
Kemp said: “The combination of direct costs and indirect costs, arising from reduced market liquidity and wider bid/ask spreads, means raising €1 in tax is likely to cost users more than the amount of the tax itself.”
Another report from the Alternative Investment Management Association (AIMA) claims that the tax could also lead to a significant decrease in cross-border trading of financial instruments in the EU, undermining the single market.
AIMA chief executive Andrew Baker said: “Our analysis concludes the EU’s proposed financial transaction tax will reduce or eliminate a vast amount of cross-border share and bond trading activity within the European Union, thus undermining the single market.
“And we are not talking about complex financial transactions, but very simple buying or selling of shares undertaken by ordinary investors.
“This could have very serious unintended consequences - including a further tightening of financing conditions for business - at a critical moment for the European economy.”