The implementation of a Financial Transactions Tax (FTT) levied across the European Union could increase transaction costs by up to 18 times in the foreign exchange (FX) markets according to a report from Oliver Wyman.

The report entitled Proposed EU Commission Financial Transaction Tax; Impact Analysis of Foreign Exchange Markets, found that the FTT which would take effect from 1 January 2014 could also reduce market liquidity and increase indirect transaction costs by up to a further 110 per cent. Furthermore, pension funds, asset managers and insurers would also be hit as both direct and indirect costs would largely be passed onto the end-users.

To demonstrate the increase in transaction costs, Oliver Wyman cited an example using the EUR/USD 1 week swap with a notional value of €25,000,000, as transacted between a bank and a financial institution. The current cost to transact for the end-user is €279. The additional taxation of this transaction at 0.01 per cent is €2,500 to the dealer and an additional €2,500 to the financial institution, resulting in a total cost of €5,279 or an 18-fold increase.

The Global Financial Markets Association (GFMA) Global FX Division’s managing director James Kemp said: “The foreign exchange industry is an essential part of a stable and sustainable economy, underpinning international trade and investing.

"This study shows that the proposed tax would in effect penalise Europe’s business 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.”

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