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The impact of the Financial Transaction Tax on the European repo market

Richard Comotto, Senior Visiting Fellow at the ICMA Centre, Henley Business School, has recently produced a report for the International Capital Market Association’s European Repo Council (ERC) on the impact of the proposed European Financial Transaction Tax. The report, entitled: "Collateral damage: the impact of the Financial Transaction Tax on the European repo market and its consequences for the financial markets and the real economy", is available online from the ICMA website.

The report warns that the tax would create serious negative consequences for the repo and other financial markets, as well as the real economy, monetary policy implementation by the ECB, regulation and government funding. Richard Comotto states "The specific intention of the authors of the FTT is to sweep away the current system of financial intermediation by primary dealers and secondary market-makers, and build an entirely new financial system".

The report has received international exposure and has been featured widely in the financial media, including the Daily Telegraph. The study recommends exemption for repos and securities lending to be exempt from the tax, together with primary dealers and market-makers operating in bond markets.

The European Commission released a statement acknowledging the repo market's concerns but stated that these were previously taken into account, as the tax would only be applied once to a transaction and not to both sides as with other securities. Richard Comotto has since replied, stating that this was "perfectly well understood" in the report and suggested "that the Commission may not have understood the argument that a market-maker has to pay the tax twice, once on the repo with a counterparty buying collateral and once on the reverse repo with a counterparty selling collateral." He stated, "the main impact is that the tax is calculated at a flat rate of 0.1%, whereas repo spreads (the revenue to market-makers) is calculated at per annum rates. So, for an overnight repo, a market-maker would typically make EUR 1.39 for every million in deal size, whereas the tax would be EUR 2,000."

You can find more information on Richard Comotto and his role with the ICMA Centre on his biography page, together with details on the popular MSc module he delivers on short-term financial markets (FX, money markets and securities financing).

Published 10 April 2013

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