LONDON (Reuters) - The European Union’s proposed financial transaction tax (FTT) risks limiting companies’ and pension funds’ access to liquidity and funding, a senior HSBC official said on Monday.
Speaking at the Reuters FX Summit, Vincent Craignou, global head of FX and precious metals derivatives, said a one basis point tax on short-dated currency swaps would be “enormous” and drive up the spread between the bid and offer by 15-20 times.
“If you would want to pass the FTT to the end-user, it would have unintended consequences in the ability of the players to access liquidity or funds,” Craignou said.
Although spot FX trades would not be subject to the proposed tax, derivatives such as swaps and forwards would.
The tax will be imposed by 11 of the EU’s 27 member countries. Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia have said they will levy 0.1 percent on stock and bond trades and 0.01 percent on derivatives.
Its advocates say the tax will ensure banks, which received taxpayers’ money during the financial crisis, contribute to the public coffers.
Bankers say its impact will be felt far beyond the financial sector and some are campaigning to have it changed.
Others describe it as simply unwieldy, particularly when taken in conjunction with the U.S. regulatory overhaul of financial markets known as Dodd-Frank.
“If everything that was talked about in the European Union parliament and elsewhere were to come to fruition, we would be overwhelmed,” said Bob de Groot, global head of FX spot trading at BNP Paribas.
“A financial transaction tax would be difficult for the whole industry and have repercussions.”
Many companies use currency forwards to hedge against currency and interest rate risks. Pension funds widely use currency swaps to protect their foreign currency positions.
In the latest Bank of England semi-annual survey, outright forwards accounted in October 2012 for a daily average volume of $151 billion in London out of a total of nearly $2 trillion.
For foreign exchange swaps, the daily turnover was $920 billion, more than the $678 billion of spot transactions.
Craignou said that under various regulatory changes proposed worldwide since the global financial crisis, such as the Dodd-Frank reforms in the United States, foreign exchange swaps and forwards have so far been exempt.
“As an industry we will have to be involved in the consultation with the European Commission and parliament. We have to make sure the foreign exchange market doesn’t get affected by the tax,” he said.
Luxembourg said on Monday it would support Britain’s legal challenge to the FTT. London is the world’s biggest centre for foreign exchange and bonds.
Follow Reuters Summits on Twitter @Reuters_Summits
Additional reporting by Anooja Debnath, editing by Nigel Stephenson