EUROPE: EFAMA Impact Analysis of the Proposed Introduction of the Financial Transaction Tax by the EU Commission

Fund Axis would like to draw your attention to a recent European Fund and Asset Management Association (“EFAMA”) publication issuing their position on the commission proposals in relation to a common European Financial Transactions Tax (“FTT”). EFAMA in this publication sets out its position on what impacts; it believes the introduction of an FTT would have on the asset management business within Europe. Needless to say, EFAMA through its research finds that the introduction of such a FTT would have a detrimental impact on the UCITS Industry, its clients and the European Economy and in this publication provides evidence to back up such claims. EFAMA also believes through its research that the EU Commission in its original proposal has significantly underestimated the impact of the FTT and therefore needs to take notice of the research provided by EFAMA as otherwise the FTT is not being approached in an eyes wide open manner and the consequences of the introduction of the FTT are not being fully taken into account.

EFAMA Impact Analysis of the EU Commissions Proposal for a Common Financial Transaction Tax

Highlights

EFAMA states that through its research it has discovered that the introduction of the FTT would have the following Macro impacts on the European Economy;

• The proposed FTT would put many money market funds out of business;

• It would also reduce the attractiveness of long‐term savings in equity, bond and balanced funds;

• The FTT would therefore reduce an important source of long‐term financing for the European economy and cause retail and institutional investors to switch their savings away from UCITS and towards savings deposits and life insurance products that are not covered by the FTT;

• As a consequence, the introduction of the proposed FTT would create an undesirable (and unacceptable) greater distortion of the relationship between providers of long‐term savings products, endangering the future of UCITS and ultimately reducing the choices available to EU citizens for savings.

• If applied at the beginning of 2011, the FTT would have had an impact of EUR 38 Billion and 67% of that FTT revenue would have come directly from Money Market Funds (“MMF’s”) therefore having a direct adverse impact on that particular fund structure.

 As we can see from the EFAMA research findings, this proposed FTT does have long term and serious consequences for the industry. These impacts are explored in further detail below both at the direct cost level as well as the indirect cost level.

Potential Impact of the FTT on the UCITS Industry

If introduced in its current format, the FTT would have the following direct cost impacts on the industry;

• The FTT (0.01%) is proposed to be applied to the value of the sales and redemptions of UCITS shares/units as well as to the UCITS portfolio transactions. If applied at the start of 2011, this FTT would have had the following direct impact on UCITS Funds, (Sub/Reds – UER 15 Billion), (Portfolio Transactions – EUR 23 Billion). Please refer to Annex 1 of the report, link below, for details of the figures and assumptions used in calculating these estimations of the impact of the FTT.

 EFAMA Estimations of the Impact of the FTT   

• The EFAMA research as presented also adversely impacts MMF’s more than any other type of UCITS structure. The reasons for this adverse impact on MMF’s are twofold per EFAMA;

• As cash management structures, investors tend to invest and divest continuously in MMF’s and therefore would be subject to the levy of the FTT upon each investment / divestment. This would have resulted in MMF’s paying EUR11.2 Billion via the FTT in 2011;

• Second, the weighted average maturity of MMFs is very short: 60 days maximum for short‐term MMFs and 6 months maximum for MMFs. Thus, the portfolio turnover of these funds is very high. This explains why the FTT tax levied on the portfolio transactions of MMFs would total EUR 14.5 billion in 2011 if applied; and

• The EFAMA research also shows the estimated FTT annual cost relating to portfolio transactions. In the central scenario, the average cost is 15 bps for equity funds, 20 bps for bond funds, 18 bps for balanced funds and 130 bps for money market funds.