GFMA's Global Foreign Exchange Division (GFXD) authored a briefing note on the impact of the proposed European Union Financial Transaction Tax (FTT) on Foreign Exchange (FX) markets.
The related Press Release is available at the following link:
The Foreign Exchange (FX) market underpins international commerce and investment by allowing governments, businesses, investors and individuals to convert one currency to another. In addition to FX Spot transactions, other FX Products (FX forwards, NDFs, FX swaps, FX options) enable participants to transact with certainty over the exchange rate and therefore the value of the transaction, whether for issuing a bond to international investors, purchasing raw materials abroad, exporting goods overseas, or protecting the value of pension investments made in other currencies.
Europe is focused on restarting economic growth. The ability of European companies of all sizes to remain active on the global scene - by exporting European goods while securing a stable income at home despite volatility in currency markets - is crucial to this economic growth. FX Products are central to that ability.
To preserve the usefulness of FX markets, the proposed Financial Transaction Tax (FTT) should not create barriers or prevent European companies and investors from being active in international commerce and investment. The inclusion of these FX Products in the scope of any FTT would significantly raise the cost for end-users if they are to remain active in international commerce. Our analysis shows:
- For EU corporates, their FX transaction costs will rise by up to 700%. With just a single dealer a corporate based in the tax zone could see its annual FX transactions costs rise from $2.4m to $20.4m.
- For a pension fund or fund manager, the impact is even greater, due to the double-sided nature of the proposed tax. These users could see their transaction costs rise by around 1,500% and possibly by as much as 4,700%. For a pension fund manager whose annual FX transaction costs with a single dealer are currently $1.6m, this will mean that, once taxed, transaction costs would exceed $75m.
Imposing an FTT on these FX Products (FX forwards, NDF, FX swaps, FX options) may well cause companies and investors to move away from hedging the risk of their international activities, increasing their earnings volatility and business risk or pushing up costs that will reduce returns for investors. It risks discouraging them from being active in international commerce or creating costs that are a drain on firms’ financial resources that they could otherwise have deployed to fund their growth plans.
The European Commission3 has already recognised that including FX spot transactions in the FTT would infringe the movement of capital under The Treaty on the Functioning of the European Union and in 2011 raised concerns with regards including other FX Products. Given these other FX Products are used for the same purposes as spot transactions - for payments, investing and funding - we suggest that these FX Products – FX swaps, forwards, options and NDFs - should, as is already the case in relation to FX spot transactions, be excluded from the scope of any FTT proposal.