We’ve noted a bunch of interesting news stories this past week that we haven’t been able to comment on until now. Here’s the summary in an update for Finadium research subscribers.
The biggest story is the FT’s coverage of the impact that the Financial Transactions Tax would have on securities lending (“Financial transactions tax could ‘wipe out’ securities lending,” August 4, 2013). The story cites ISLA that the FTT could reduce securities lending revenues by 2/3rds, a conclusion that we agree with the way that the proposed rules are written. The article also has a rebuttal from a German MP who basically says, “so what.” A good read.
As if the tragic tale of Sweden’s experience with an FTT years ago wasn’t enough proof of political follies, a recent article in Reuters noted the declining trade volumes in French and Italian securities since the implementation of the FTT in those countries (“Impact of trading taxes seen in declining French, Italian stock turnover,” August 2, 2013). According to the article, “Since their taxes on trades were launched – August 2012 for France and March 2013 for Italy – their market shares have fallen as much as 30 percent and 45 percent, respectively, Thomson Reuters Equity Market Share Reporter data shows.” The CFD and single stock futures trades, meanwhile, are booming. This was expected: haven’t these regulators ever seen Whack-a-Mole?
Revenues from FTTs are also much lower than expected, and this points to more divisions among the other countries that have planned to implement the tax. According to Reuters, “With the tax raised less than expected, more pressure is piling on the other nine countries debating a European Commission proposal for a tax across multiple markets, as they decide if and in what form to adopt the plan.”
Lastly, International Financing Review worries about what a new focus on the Leverage Ratio could do to global liquidity (“Leverage rule adds new threat to liquidity,” August 7, 2013). In pretty strong language, IFR says that “The sudden decision by regulators to focus on bank leverage ratios will hobble the industry’s core trading businesses, dramatically slash the liquidity available in the capital markets, and bring about the most sweeping changes to investment banking seen in a generation.” We’re not sure that we agree with all of this, including the idea that the change is sudden nor that liquidity would be dramatically slashed from current levels. Certainly, less leverage = less liquidity. But banks are already planning for increased leverage ratios. The biggest change, as IFR notes, is in the fixed income business.
The article really hits home though in its conclusion on what happens next: “There is some hope that other changes starting to sweep the industry, such as moving to central clearing and trading instruments at exchanges, could prove to be a lifeline for plain vanilla trading activity. But overall the market structures needed are still nowhere near ready. And in the meantime, the proposals coming from the Basel Committee look set to dwarf any would-be improvements in market functioning elsewhere. According to the old adage, liquidity is never there when you need it. The shadow cast by the new regulations suggests that, in future, liquidity will hardly ever be there at all.” Hmm, a tough final sentence to argue, but you get the point. These are important topics these days.