FTT Letter

7/30/2019 FTT Letter

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Mr Michael NoonanPresident of the ECOFIN CouncilIreland Minister for Finance 23rd April 2013

Email:[email protected]

Dear Mr. Noonan,

Re: IBFed1 Comments on the European Commissions proposal for a Council Directiveimplementing enhanced cooperation in the area of financial transaction tax

The IBFed would like to express its strong opposition to the decision taken by the EuropeanCommission (EC) to allow its proposal for a financial transaction tax (FTT) to be pursued throughthe Enhanced Co-operation Procedure. We set out below our broad concerns over the FTT, whilethe Annex provides more detail on the potential impacts of the tax.

Numerous governments, independent research studies, financial market experts, tax experts, andprominent market commentators have all expressed their concerns over an FTT and identified itsmany shortcomings. These concerns are based on the negative impact the tax would have onmarket efficiency and liquidity, its harmful economic impacts, its hindrance to achieving regulatoryobjectives, and past failed experiences with an FTT in other jurisdictions.

While some supporters feel that FTTs often fail to achieve their objectives because manyjurisdictions do not participate in multi-jurisdictional FTT proposals, we believe the lack ofparticipation is actually recognition of the failings of FTTs. The IBFed is worried that the EC andsome EU Member States fail to understand that the reluctance of a majority of EU Member Statesto participate in the FTT proposal is due to their negative assessment of its merits.

Continuing to pursue an FTT in these circumstances has resulted in a design that makes a bad tax

even worse. To deal with the consequences of tax avoidance, this proposal adds complexity andinappropriate extraterritoriality that produce economic inefficiencies by creating an unnecessarydeadweight loss. The fact that these inefficiencies are transmitted through the financial sector

1The International Banking Federation (IBFed) is the representative body for national and international banking federations from

leading financial nations around the world. Its membership includes the American Bankers Association, the Australian BankersAssociation, the Canadian Bankers Association, the European Banking Federation, the Japanese Bankers Association, the ChinaBanking Association, the Indian Banks Association, the Korean Federation of Banks, the Association of Russian Banks and the Banking

Association South Africa. This worldwide reach enables the Federation to function as the key international forum for consideringlegislative, regulatory and other issues of interest to the banking industry and to our customers.
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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should not be taken to mean that the costs are not borne by ordinary citizens or taxpayers. Theywill bear the burden of this tax but will do so in unexpected and opaque ways. The cascade effectof the tax also means that it will be most pronounced on end users such as non-financial corporatesand Small and Medium Enterprises.

Extraterritoriality: making a bad tax worse

The IBFed is extremely concerned over the broad scope and extraterritorial nature of the FTT. Alarge number of the IBFeds member banks are established in non-FTT jurisdictions, but willnevertheless be subject to the tax because of its extraterritorial scope. We strongly believe that theextraterritorial scope of the proposed FTT runs counter to internationally accepted tax principlesand creates an unnecessary deadweight loss.

Those outside the FTT jurisdictions will seek to minimize their financial transactions andengagement with financial institutions which give rise to the FTT, and will also attempt to protectthemselves from costly compliance whenever possible. They will begin to reduce their exposure tofinancial institutions and businesses within FTT jurisdictions, even though they are home to some ofthe largest financial institutions and businesses in the world. Since capital is highly mobile, we

expect financial instruments issued in FTT jurisdictions, including government debt securities, to bequickly and negatively impacted as the tax gets factored in to the purchase decision. Governmentswhich already find it difficult to sell their debt will find it even more difficult in the future.

In addition, the FTT will be a deterrent for counterparties in non FTT jurisdictions and they willdemand rate or price adjustments to compensate for the tax. Other counterparties may choose notto transact with financial institutions or in financial instruments subject to the tax since they do notwant to bear, directly or indirectly, the cost of establishing the infrastructure required to submit thetax. The end result would likely be a reduction in the profitability, size, and strength of financialinstitutions within the FTT jurisdictions, with a detrimental effect on the non-financial economywithin these jurisdictions. Supporters of this proposal appear to have a nave view of how marketswork and how that behaviour affects tax incidence. It is that behaviour which will lead to most of

the costs being borne within the FTT jurisdictions. However, due to the extraterritorial nature of thetax, non-FTT jurisdictions will also bear some of the burden of the tax.

We believe that such a development could not only lower other forms of tax revenues, but wouldalso unfairly marginalize financial institutions in the FTT jurisdictions. In the end, we believe thatthe costs of reduced economic activity in the FTT jurisdictions will far outweigh the perceivedbenefits of the tax revenues that will be collected under the FTT regime.

We also note that the impact analysis suggests that the FTT will result in a significant decrease inmarket volumes, notably from market-makers, and a material reduction in the volume of derivativeswhich financial institutions use to manage their risks. The EC appears to welcome such astructural break, which in their view will force financial institutions to change their business modeland encourage them to make longer term investments. We do not agree with this view. First of all,it presumes these activities are either bad generally or just bad if undertaken by financialinstitutions. Neither presumption is valid. While we understand that one of the objectives of theFTT is to curb high frequency trading, we believe that market making and risk managementactivities play an important role in the financial system. The IBFed does not believe that marketmaking and risk management should be discouraged and that, if the concern is with respect to thebehaviour of banks, the FTT is not a good policy lever.


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We thank you for taking our comments into consideration and would be pleased to discuss theseissues further at your convenience.

Yours sincerely,

Mrs Sally J ScuttManaging DirectorIBFed


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ANNEX Potential Impacts of the Proposed FTT

Financial Market Impacts

Increased cost of funding the cost of funding obtained from financial institutions in FTTjurisdictions would increase.

Increased cost of FTT-related businessas a result of the issuance principle, the cost oftransacting in financial instruments issued in FTT jurisdictions would increase.

Increased cost of repo funding repos provide an important source of liquidity for financialinstitutions through the interbank market and through interactions with the central bank.The FTT would significantly increase borrowing costs in this market; in one simpleexample, the annual aggregate cost to both parties to a transaction could be as high as252 x 0.2% = 50.4%. In addition, the FTT could also have implications for the use of reposas a monetary policy instrument.

Financial Stability Impacts

Increased cost of diversification the FTT would increase the cost of doing business withFTT jurisdictions or holding financial instruments issued in FTT jurisdictions and thereforeincrease overall concentration of financial exposures.

Increased cost of hedging when combined with the cascade effect, the FTT willsignificantly increase costs for both financial and non-financial institutions, which willreduce their ability to hedge against risk, which is inconsistent with other regulatoryobjectives. We believe that this is inconsistent with what regulators are trying to achieve

from a risk management and systemic stability perspective.

Increased deterrent to the use of central counterparties for derivative clearing althoughCentral Counterparties are exempt from the FTT, those institutions which transact withthem are not. This may lead to an increase in transactions which are not cleared throughCCPs, which is inconsistent with several other regulatory objectives.

Increased risk to all market participants the negative impact on market liquidity and thecorresponding increase in volatility will increase risks for both financial and non-financialinstitutions.

Dislocation of business away from the regulated sector the FTT will create an incentivefor customers to transact without involving financial institutions, and as such, business maybe driven away from the protections offered by regulated marketplaces towards theshadow banking sector.

Wider Economic Impacts

Increased cost for bank stakeholders the costs of the FTT could be passed onto financialinstitution customers and other stakeholders through lower returns to depositors andinvestors, increased cost of credit for borrowers, and reduced shareholder returns.


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Tax cascading the application of the FTT to intragroup transfers and multi-stagetransactions may create cascading tax impacts on financial institution customers.

Increased cost of savings and retirement products the FTT will be passed on to financialinstitution customers (including residents of non-FTT jurisdictions) through its application totransactions initiated by or on behalf of investment and pension funds with financialinstitutions in FTT jurisdictions or involving financial instruments issued in FTT jurisdictions.

FTT Letter

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Transcript of FTT Letter