February 15, 2013

Despite protests from financial market players, this week the European Union decided to move forward with its controversial Financial Transactions Tax (FTT). Even though only 11 of the 27-eurozone member states have adopted it, the EU has enough of a majority to impose a levy on all securities transactions.

Despite opposition by the United Kingdom, four of the EU’s biggest economies France, Germany and Spain are among those that favor the tax as way to raise public funds and curb high speed trading by financial institutions. The new tax is set at 0.1 percent for stocks and 0.01 percent for derivatives, could raise 30-35 billion euros or $40-48 billion a year. The focus on derivatives is seen as a way to punish the toxic instruments that were used by banks during the financial crisis.

Though the UK has abstained, according to a Euromoney report, it’s expected that the tax will apply to any trades involving at least one counterparty who is based in any of the participating countries – even if the transaction takes place outside of the tax zone. This has sparked fears that FTT could entangle other non-participating countries in its web.

“We're delighted that in Europe at least, the public interest has trumped the profit of a privileged few,” said David Hillman a spokesperson for the Robin Hood Tax Campaign Now the question is whether the FTT will be exported to America?

Already, two US senators Senator Tom Harkin and Congressman Peter DeFazio are proposing to introduce a similar tax, which will collect 3bps on every trade and raise an anticipated $352 billion over ten years. While the same two senators proposed the tax on 2009 and 2011, when Wall Street was under attack, this time they are contending that Wall Street can afford it. Even though the SEC has not taken any action against high frequency traders, the US senators are positioning this to curtail volatility caused by speculative traders who flip hundreds of stocks per minute.

But the threat of a U.S. transaction tax hitting U.S. shores is quite real, regardless of whether or not anything new passes here. A letter by the Securities Traders Association (STA) sent to Congress asking it protect investors against such a foreign tax, explains that the French FFT, adopted in August 2012, impacts U.S. investors who reside in the U.S. and transact in French ADRs on US Exchanges and applies to exchange-traded funds (ETFs) within the US that involve the acquisition of French stock or ADRs representing French stock.

Reacting to the EU’s FTT move, financial market participants took to the Twittersphere to voice their protests or conversely, their zealous support. Was the #FTT a wise move? It depends on your vantage point.

1.Why the EU did not delay the FTT even though Britain objected?