Spreads to Widen on Index CFDs as Italy Embraces New Trading Tax

Italian equity derivatives traders will feel the brunt of a new tax introduced by the government from the 1st of September. Italy’s parliament approved the Financial Transaction Tax (FTT) bill in December 2012, a new charge that traders pay to trade in selected financial instruments. Italy and France have been the first of 11 European nations that have opted to introduce the financial transaction duty. The European Commission instigated talk about the FTT in 2011, a levy in financial transactions which aims to regulate and stabilise markets.

FXCM, a leading multi asset broker that is listed on the New York Stock Exchange, sent a notification about the new FTT rulings via an email to its clients today. The notification gave details about the proposed changes that will be affecting the FTSE MIB, on the FXCM platform the main Italian Stock Index is defined as the ITA40.

FXCM will widen the spread of the ITA40 by 10 pips (20 pips round turn) in order for the new levy to be paid. The FTT is to be paid by any client (regardless of their location) when transacting in Italian Equity Derivatives.

Reducing Liquidity

Challengers of the FTT have been arguing that the new tax will create an unfair advantage for instruments that are under the new regime, this will ultimately divert volume and liquidity to other asset classes that do not have additional transaction charges. Carlo de Casa, a Forex Analyst at Activtrades, believes that; “traders may consider other indices similar to the Italian one, such as the IBEX (the Spanish Index), or the popular and established, German DAX.”

The new tax may also change trader behaviour, as traders explore new strategies and mechanisms to surpass the tax. The tax is charged on the total value of the transaction, and as a result, traders may opt for lower value transactions. Forex Magnates believes that the new tax will have an impact on trading volumes, as seen by data on the Italian stock exchange post securities tax earlier this year and the Commodity Transaction Tax imposed by India’s government.

Italy introduced the first element of the FTT earlier this year in March. The tax was to be levied on equities. As expected, the market reacted negatively to the new charge and volumes significantly reduced. According to data from Bats Chi-X Europe, volumes dropped 12% in March from January and February, the total value of trades equaled €2.72bn for the month of March.

The EU’s key objectives

The financial transaction tax comes three years after the global economy suffered immensely due to the credit crisis. The EU Commission, the body that proposed implementation of the tax, believes the charges will have a key impact in ensuring stability and efficiency in the market. The EU Commission expects significant changes to the market place with the implementation of the FTT. The key objectives of the proposed FTT as per the EU Commission:

• To prevent the fragmentation of the Single Market that could result from numerous uncoordinated national approaches to taxing financial transactions;
• To ensure that the financial sector make a fair and substantial contribution to public finances;
• To discourage financial transactions which do not contribute to the efficiency of financial markets or to the real economy;

Italy and the FTT

The key points of the new law are as follows, from the official government website:

• The FTT will be imposed on shares issued by Italian resident companies with a capitalisation of more than EUR 500 million, ADRs and GDRs, and shares via convertible bonds;
• The rates for taxable transactions will be 0.1% if traded on regulated markets or Multilateral Trading Facilities (MTF), or 0.2% if executed over-the-counter (OTC). However, only for the financial year 2013, the applicable rates will be 0.12% if traded on regulated markets or MTF and 0.22% if executed OTC;
• Derivatives contracts traded OTC will be subject to a fixed amount between EUR 0.01875 and EUR 200 depending on the type of contract and its notional value. If derivatives contracts are executed on a regulated market or MTF, the tax will be reduced to 20% of the original notional amount;
• The tax liability will be levied on the buyer in case of cash equity, and on each party involved in the transaction for derivatives contracts, while the payment will be due by the 16th of the next month the transaction takes place;
• A tax of 0.02% on High-Frequency Trading Tax (HFTT) will be applicable in addition to the new FTT on the counter-value of orders cancelled or amended by HFT systems.

The new Financial Transaction Tax is expected to be rolled out across 11 major European countries. The eleven nations include France and Italy as well as; Germany, Spain, Belgium, Austria, Greece, Portugal, Slovakia, Slovenia and Estonia. The UK has been outspoken about the proposed tax and London’s Mayor, Boris Johnson has gone as far as saying: “German and Italian banks should move to the UK if FTT is introduced,” in a statement to the media.

The Financial Transaction Tax is expected to bring in around £30 to £40 billion per annum in revenue for authorities.