They also raised the point that a 0.1% uniform tax rate might create an inappropriate burden on short-term bonds and repo operations compared to long-term bonds. This suggests sensitivity (at least in places) to the impact on money markets and short-term funding costs that we havent seen previously, says Hans Lorenzen, credit strategist at Citi, who warns, however, that any resultant lower rate on short-dated instruments might be offset by higher tax levels on less desirable instruments such as OTC derivatives for now subject to a proposed 0.01% tax.
Icma is calling for secured financing, which includes repos and securities lending, to be exempted from the tax. It is also calling for the exemption of primary dealers and market-makers or brokers in fixed-income securities markets. FTT treatment of various parts of the fixed income market is crucial to the viability of the tax itself as these instruments will provide the lions share of projected revenue.
The Commission calculates that a narrower regime focused on equities would raise just 0.06% of the GDP of participating states (4 billion to 5 billion) as opposed to the 30 billion to 35 billion it reckons it can raise from the current proposals, or 0.4% of their GDP. The inclusion of repo would have limited economic benefit, yet would close one of the main arteries of the financial system, says Lorenzen. Our expectation is that some of the most far-reaching elements of the proposal are likely to be eliminated or watered down and the timeline for implementation will slip well into 2014 if not 2015.