Թ

Home   News   Features   Interviews   Magazine Archive   Symposium   Industry Awards  
Subscribe
Թ
Leading the Way

Global Թ Finance News and Commentary
≔ Menu
Թ
Leading the Way

Global Թ Finance News and Commentary
News by section
Subscribe
⨂ Close
  1. Home
  2. Industry news
  3. Clock is ticking to save Germany’s lending market
Industry news

Clock is ticking to save Germany’s lending market


07 December 2017 London
Reporter: Drew Nicol

Generic business image for news article
Image: Shutterstock
The German securities lending market may be on the verge of a mass exodus next month if greater transparency and standardisation isn’t brought to the German Investment Tax Act (GITA 2018), according to the International Թ Lending Association (ISLA).

GITA 2018 will introduce a 15 percent tax on incomes from manufactured dividends and lending fees on German equities, as of 1 January, through the Manufactured Dividend Rule.

In a statement on the rule, an ISLA spokesperson explained that the working group was focused on making the rule, as it is written, workable, with specific attention to the time sensitive parts, which have the greatest potential to disrupt the German equities market.

“Due to a lack of clear understanding across the industry, lenders may determine that the risk of lending securities is no longer low and therefore will withdraw from the market, rather than accept a higher level of risk or uncertainty,” ISLA warned.

“A number of members have indicated that they may have to cease securities lending activity in German equities mid-December in order for positions to be fully returned by borrowers before January 1, 2018. It should be noted that a wholesale withdrawal of liquidity over the typically lightly traded Christmas period, could have an unpredictable and outsized impact on equity markets.”

The association's working group sent a letter outlining its concerns and included a long list of questions they required answers for to the German Federal Ministry of Finance on 5 December.

In order to ensure that the market can continue to operate from January, ISLA has called on the ministry for early guidance if it disagrees with the industry’s understanding of key aspects of the act, including details of in-scope transactions, tax base, collection of tax and application of a double tax treaty.

“Getting a concession on lending fees and that borrowers cannot be forced to withhold, along with acknowledgement of the character of other income for tax treaty purposes, is the maximum ISLA hope for within the time frame,” ISLA added.

“If their objective is achieved and the tax is limited to the manufactured dividend, then they have bought some additional time to work out the details ahead of the main dividend season in May.”

“However if agreement on these points is not met, ISLA believe the outlook is poor.”

The rule is aims to complement the general taxation of German dividends paid to investment fund and should prevent any potential for circumventing the taxation on genuine dividends, where investment funds engage in securities lending and repo transactions.

ISLA countered that, its its opinion, “the existing anti-cum cum legislation is robust”.

The association highlighted that the 45-day holding period, meaning the need for outright economic exposure on a substantial part of the long position and the disallowance of tax benefits where there is a contractual obligation to make an onward payment of income received as dividends, all work together to prevent cum-cum trading.

Accordingly, even without the new legislation, the residual tax arbitrage risk, if any, should be very low.
← Previous industry article

Natixis and BHF-Bank consider equity market deal
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Թ Finance Times
Advertisement
Subscribe today
Knowledge base

Companies in this article
→ ISLA

Explore our extensive directory to find all the essential contacts you need

Visit our directory →
Glossary terms in this article
→ ISLA
→ Dividend
→ Liquidity
→ Repo
→ Arbitrage

Discover definitions, explanations and related news articles in our glossary

Visit our glossary →