17/01/2012
By Adam Cadle
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.”
Other stories you may find of interest:
EU proposal risks distorting financial markets
An EU proposal for the public disclosure of the net short positions of individual managers risks distorting financial markets an independent study by international management consulting firm Oliver Wyman has found
