A financial trading tax (FTT) planned by a group of euro zone nations could leave major banks, its main target, relatively unscathed while less nimble smaller trading houses, pension funds and asset managers bear the brunt.
Germany, France and nine other countries are pushing ahead with the tax on trades in stocks, bonds and derivatives, keen to show voters they can claw back some of the taxpayers' money used to bail out banks during the 2007-2009 financial crisis. ID:nL6N0AR2K5]
However, bankers and finance industry experts are sceptical about a tax that will not be imposed even in all 17 euro zone members, let alone in Europe's biggest financial centre, London.
"The idea of an FTT just within a small group of countries and leaving out the rest of the world is not the brightest," said Chas Roy-Chowdhury, head of taxation at the ACCA, an international accounting body.
"Banks in countries that have adopted the FTT will have the minimum level of transactions and will shift as much as possible to London."
Under a previous proposal, which will be used in designing the tax, the levy would be imposed on both buyers and sellers if either party is in a participating country. But Britain and Switzerland will remain on the outside its scope.
Major banks such as Deutsche Bank, BNP Paribas and Unicredit already have big London legal entities and operations that handle much of their wholesale operations and could shift more to them if it proved cheaper.
"This is not a question of evasion. They (banks) have a duty to their customer to ensure they are operating in the most efficient manner," said one financial industry source, declining to be named because of the sensitivity of the topic.
By contrast, smaller operators without an international network would have fewer opportunities, if any, to move their transactions out of the participating countries.
Centres such as London and Zurich or further afield in the United States and Asia could benefit, but the tax is likely to be bad overall for the financial industry, particularly as vital details, such as whether market-making will be exempt, are unclear.
An EU official told Reuters on Wednesday that the European Commission had yet to decide whether the tax would also cover securities issued by a company within a participating country.
If this were included, trading houses in Asia and the United States would have to pay a tax on bonds and stocks issued by companies and governments in the participating countries – Germany, France, Spain, Italy, Belgium, Estonia, Greece, Austria, Portugal, Slovenia and Slovakia.
Estimates of how much income will be raised range from 10 billion to 35 billion euros annually. Had all 27 European Union states opted to participate, 57 billion euros was expected.
Even 35 billion euros – loose change when set against the $4.6 trillion committed to the EU's banks by taxpayers – may not be achievable if the tax hits trading volumes.
"However it's applied, it will be damaging," said Marco Sturlese, fund manager at Luxembourg-based fund Fenice, suggesting volatility could increase if trading volumes drop.
Currently, the tax is set at 0.1 percent for bonds and equities and 0.01 percent for derivatives. As it is levied on each transaction, it is expected to affect high frequency trading disproportionately.
Germany and France have criticised high frequency trading – which uses technology and computer algorithms to carry out huge numbers of transactions rapidly – as purely speculative with no economic value. As profits per trade are often tiny, such strategies rely on the very high volumes to be succeed.
High frequency traders account for up to 40 percent of share transactions, according to Bank of England estimates, and even a 10 basis point levy would wipe out profits for many of them.
"Equities will suffer but the traders will find a way and if they don't they will just move to other asset classes or jurisdictions which are exempt from the tax," said Hirander Misra of Forum Trading Solutions, a trading consultancy.
The International Swaps and Derivatives Association (ISDA) expects derivatives activities to drop by between 60-90 percent in countries where the tax is introduced.
Sweden's relatively short experiment with financial transaction taxes in the 1980s shows how they can backfire if they are not implemented universally.
"The tax was introduced for political reasons after financial overheating as a way to punish yuppies in the finance sector who were opening champagne and having parties," said Knut Hallberg, an economist at Swedbank who worked on dismantling the tax for the Swedish Finance Ministry.
"It was a bit of a play to the gallery, people were annoyed at bankers and politicians tried to find a way to punish them. But the tax was negative for Sweden, trade worsened and moved to London and it cost jobs. Greater volatility also meant that interest rates rose."
Sweden's tax on the purchase or sale of equities and bonds prompted more than half of all Swedish equity trading to move to London by 1990. The volume of bond trading fell by 85 percent in the first week, and futures and options trading almost disappeared.
Trading volumes recovered and grew substantially in the 1990s after the tax was scrapped. Unsurprisingly, tax income was disappointing and offset by a fall in capital gains tax.
More recently, the imposition of EU rules restricting short selling of sovereign credit default swaps led to a surge in futures contracts trading, while French investors have turned to derivatives after a 20 basis point tax was applied to equities last year.
"In the European market, increasingly clients are moving from holding cash positions into synthetic, and that's partly been driven by the financial transaction tax, most notably in France," said the head of the European prime finance division for a U.S. bank.
Italy is expected to bring in a tax on equities from March and on derivatives from July, and Britain has a 0.5 percent stamp duty on share transactions, which has also helped a shift to equity derivatives.
But the proposed new FTT is broader in scope than the UK and French taxes and while the European Commission has said the tax could be in place by January next year, this could be delayed and much of the detail changed.
"The tax is one of the symbolical measures in the post-crisis context just to show they are doing something," said Karel Lanno, an expert in EU regulation at Brussels-based think tank, the Centre for European Policy Studies.
"But I don't expect a quick agreement even amongst the 11 on how they will introduce and execute the FTT. It remains to be seen whether they will agree a common tax rate and common tax base. Banks will find ways to get around it – that's for sure."