Nick Davis of J.P. Morgan gives SLT the low-down on the FTT, short selling regulations and what lies ahead in 2013
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France’s FTT does not apply directly to securities lending, but what are its indirect effects?
Íø±¬³Ô¹Ï lending is not affected, but the trades that drive securities lending are, for example, short selling. So the tax increases the cost of these trades, which may lead to a reduction in activity, especially for high frequency / quant strategies.
What about the European Court of Justice’s 2011 ruling that France’s 25 percent tax on dividends paid to foreign investors was discriminatory? How could France’s July 2012 decision to instead impose a 3 percent tax on companies that pay the dividends affect dividend arbitrage as a revenue stream for securities lending businesses, particularly if this is adopted in other European countries?
Harmonisation of tax rates has led to a reduction in the supply of tax-disadvantaged stock available to lend, including the recent events in France. The 3 percent would be taken into account when company dividends are announced or the company may issue a scrip option back to its shareholders. Scrips are exempt from the 3 percent tax levy and the revenue is significantly lower than doing the cash dividend trade over record date. One thing to note is that it is very dependent on the wording that each country will use when announcing the financial transaction tax (FTT). If the FTT is for all transactions and there are no exemptions, then it may have a severe impact on the market.
ESMA’s short selling regulations came into effect on 1 November—how will these affect business in France and will their introduction be positively received?
From a lending perspective, the short selling regulations do not have any direct impact, although we have seen an increase in short coverage. But there are broader market concerns around the disclosure rules and market-maker exemptions.
Yield enhancement trading is popular in France—how has this fared in 2012?
Yield enhancement trading was very volatile due to the introduction of the FTT but demand was constant throughout.
What are the up-and-coming forms of business in France, and how could future regulatory initiatives affect the possible popularity of these?
We expect to do more scrips in 2013 instead of cash dividends. We are also hopeful of more deal activity to help with the revenue stream. However, we also need to wait and see what the outcome is on the first collection of the FTT.
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