04 August 2013

FT: Financial transaction tax could 'wipe out' securities lending

The mooted tax will wipe out 65 per cent of lending activity in Europe. It will slash the €3 billion a year of windfall revenues earned by long-term asset owners such as pension funds and mutual funds by more than €2 billion, according to the International Securities Lending Association (ISLA), a trade association.

The proposed FTT is designed to discourage “excessive” short-term trading. It will try to achieve this by throwing grit into the wheels of finance in the shape of a tax of 0.1 per cent on the trading of equities and bonds, and a 0.01 per cent levy on derivatives. Some politicians also view it as a way to force banks to help pay the costs of the financial crisis.

11 eurozone countries, including France and Germany, currently aim to introduce the tax, although horse-trading is continuing over possible exemptions for pensions funds or the trading of sovereign bonds, small company stocks and some derivatives. However, as things stand, Kevin McNulty, chief executive of ISLA, says the FTT “would effectively close down” the securities lending markets in the 11 countries.

Mr McNulty estimates that only the 35 per cent most profitable trades would remain viable in the 11 participating states, and that securities lending fees would need to rise by more than 400 per cent to maintain current revenue levels for the asset owners that lend out their holdings. He foresees other side effects too. Without ready access to a thriving securities lending sector, market-makers have to widen their bid-offer spreads to cover their increased market risk. Almost €500 billion of eurozone government bonds would be removed from the lending market, reducing the quantity of high-quality collateral available to back derivatives trades and other transactions. The lack of available inventory would increase the risk of “settlement fails” by as much as 100 per cent, increasing systemic risk.

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