Study – Proposed EU Commission Financial Transaction Tax Impact Analysis on Foreign Exchange Markets (Oliver Wyman)
On 28th September 2011 European Commission President José Manuel Barroso unveiled the EU Commission’s proposal for an EU wide Financial Transaction Tax (FTT) which would take effect from 1st January 2014. The tax would be levied on all securities and derivative transactions executed within the EU. For Foreign Exchange (FX) instruments spot has been exempted from taxation, however cash (defined as FX forwards and swaps) and derivatives (defined as options) have been included.
This study evaluates the impact of the proposed EU Financial Transaction Tax on European FX markets. We aim to quantify the impacts of the FTT on FX cash and derivative markets, both in terms of the transaction costs and the effects on the participants in these markets. Previous studies have shown that introducing an FTT results in the primary impacts of an increase in the cost to transact, geographic relocation of trading, substitution and a general reduction in notional turnover. In addition, the secondary impacts are a reduction in liquidity and increased market inefficiencies. This can lead to an increase in short-term price volatility and widening bid/ask spreads.