Financial Newsletter Amafi INTERNATIONAL AND FRENCH MARKET NEWS LES PROFESSIONNELS DE Association française December 2011 No15 desLA BOURSE marchés & financiers DE LA FINANCE The Not-So-Merry Robin Hood Tax The formal review of the Markets in Financial Instruments Directive Feature and Market Abuse Directive is underway. In mid-October the published draft legislation – a directive and regulation in both cases – for the European Editorial Council and the Parliament. The proposals are Editorial fundamentally important. Not only do they underpin the framework in which the financial market activities represented by AMAFI are conducted. Also, and perhaps more importantly, they seek to correct certain shortcomings in the financial markets and restore their credibility, which has been seriously undermined both by these shortcomings and also by the crisis. The analytical work and the quest for alternative or complementary solutions undertaken by AMAFI, as reflected in this newsletter, will be taken forward with that fact in mind. Increasing calls for a tax on financial Yet the proposal by the European Commis- This is because markets need the trust transactions, including a draft EU sion to apply a small levy to , of issuers and investors in order to fully directive, have triggered heated and derivatives trades hardly seems earth- perform their role of financing economic reactions, especially in Britain. Just shattering. So why the hostile reactions? activity and hedging risk. how dangerous – or how beneficial Regrettably, that goal may not be fully – is the so-called Robin Hood Tax? As the economic crisis worsens, pressure attained. Without a proper debate on for the financial world to contribute to a the market model that Europe wants to solution has been building, notably in the adopt to meet the needs of its economy, A bullet aimed at the heart of run-up to the recent summit in Cannes. the Commission’s proposals raise a number London” is how UK Finance Minister For “contribution”, read “taxation”. On 28 of difficulties. These problems are all “ George Osborne describes plans to September the European Commission pub- the more unacceptable because they will tax financial transactions. The Adam Smith lished a draft directive on a common system hamper the process of smooth, harmonised Institute, a free-market thinktank, warns of financial transaction tax (FTT). implementation needed to build an integrated that the City is being hung out to dry. A market. The key issue for AMAFI in the Conservative MP argues that the plan adds months ahead will be to contribute to the weight to a press campaign to get Britain deliberations of European institutions as out of Europe. And even the normally un- 1/2/3_Feature they seek to clarify the legislative framework flappable , the UK prime The Not-So-Merry Robin Hood Tax and ensure that it can meet its objectives minister, reportedly pondered asking the 4/5/6/7_News effectively. French if they would accept a cheese tax. International, Europe, France Pierre de Lauzun 8_AMAFI Highlights Chief Executive, AMAFI New members 1 December 2011 Amafi Financial Newsletter No15

France and Germany have to reduce speculation in the international the country was not a member of the single thrown their full weight behind currency markets. In 1989 another Ameri- currency, it still had a responsibility for the the proposal: in a joint letter can economist, Larry Summers, who went success of Europe. to the European Commission, on to serve as Treasury Secretary under their finance ministers, François President Bill Clinton, argued for a “securi- Nevertheless, Europe seems to be moving Baroin and Wolfgang Schauble, ties transaction tax” to curb speculation- closer to an FTT. This raises two major con- said a tax would guarantee a driven inefficiency, reduce the diversion cerns for the financial industry, summed up level playing field worldwide of resources into the financial sector and by Marc Touati, head of economic research and ensure significant reve- lengthen the horizons of corporate manag- at Assya Compagnie Financière. “The big nue-raising potential. But the ers. And in the 1990s the anti-globalisation problem is feasibility. If only a handful of two countries’ efforts to drum movement, notably the Attac association, countries introduce the tax, we will be up wider support have run into founded in France, called for a “” faced with a competitive imbalance. Even tough international opposition – to counter the excesses of finance (though if the aim is to combat speculation, a com- not only from the United States Tobin himself disavowed Attac). In the UK, plex and costly system of oversight will and the UK, which has threat- the supporters of an FTT call it the Robin be needed to distinguish between purely ened to use its veto under the Hood Tax and have mounted a campaign speculative transactions and those that Lisbon Treaty, but also Canada, backed by charities, green groups, trade are economically useful. And assuming Australia, Russia and India. unions, celebrities, religious leaders and that hurdle is are overcome, data collection politicians. The movement calls itself “a and supervision mechanisms will also be Feature The Commission – not origi- force to be reckoned with”. needed, and they too will be costly. If we’re nally an ardent backer of an going to regulate finance, then surely it FTT – claims that 65 per cent of would be better to beef up the existing reg- European citizens support the Divisive issue ulatory framework”. That concern is already proposal and that the tax will materialising. Failure to reach an agreement bring in 57 billion euros annu- The draft EU directive puts forward three at the G20 summit, which merely acknowl- ally without adversely affecting reasons for an FTT: to ensure that financial edged “initiatives in some of our countries the financial industry, which institutions contribute to the cost of fis- to tax the financial sector for various pur- it says is undertaxed. Under cal consolidation, create disincentives for poses”, means that Europe will have to go the directive, stock and bond transaction that do not enhance the effi- it alone. Even so, despite the assurance trades would be taxed at 0.1 ciency of financial markets, and strengthen of politicians such as Wolfgang Schauble, per cent and derivatives at 0.01 the single market by harmonising the exist- the FTT is unlikely to be adopted by all 27 per cent. The tax would apply ing system. An estimated 10 of the 27 EU member states, given Britain’s hostility to to all trading on regulated and member states already have some form the plan – the notorious “bullet aimed at non-regulated markets. At first of tax, although the mechanisms vary and the heart of London”. There is even a lack glance the plan seems benign, are not actually comparable to the FTT of consensus within the euro zone. Aside simple to apply and easy to in practice. The UK for example has the from France and Germany, which are in the defend. But in fact it raises Stamp Duty Reserve Tax, introduced in driving seat, only Belgium, Spain, Portugal plenty of questions, both theo- 1986, which applies to a narrower scope and Finland are openly in favour. retical and practical. of trades than does the EU’s proposal. The pro-Robin Hood Tax camp claim that Brit- The first big question is the very ain already has transaction tax that works. Threat to competition purpose of an FTT. Is the aim Critics of the FTT proposal, who outnumber to stem speculation, raise addi- its supporters, insist that the tax is not only As a result, the riskiest of all scenarios is tional budget revenue or make inefficient but also dangerous. Some point shaping up, namely a decision taken by a the financial sphere contribute to Sweden’s ill-starred experiment with a small number of countries that could affect to solving the crisis? Oppo- securities tax in the 1980s, which led to a their markets and drive investors away. nents say the tax would actually steep drop in trading and a rise in govern- Critics stress that the proposal tabled by increase volatility, reduce liquid- ment borrowing costs. France and Germany could skew the level ity and lead to higher unem- global playing-field. Under their plan, the ployment. Arguments over tax- Whatever the pros and cons, the issue is burden of the FTT would be shared equally ing financial transactions are certainly divisive. In a recent article George between counterparties resident in the EU, nothing new. The idea of an FTT Osborne said that Europe should not be but if one of the parties to a trade is outside has been around for decades. creating new burdens and pointed to the the Union, then the EU counterparty would And it is not a European inven- Commission’s admission that the FTT would stump up for the whole amount. Moreover, tion. In the 1970s James Tobin, cost hundreds of thousands of jobs. And tax experts stress that the yield would fall a US economist and Nobel tempers flared when a senior German politi- short of the Commission’s 57 billion euro Prizewinner, mooted a tax on cian, Volker Kauder, publicly accused the annual revenue target. The narrower the foreign exchange transactions UK of being selfish, saying that even though territorial scope, the smaller the tax base.

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Stéphane Deo, Head of Euro- pean Economic Research at UBS explains, “The FTT’s sup- porters say that one of its pur- poses is to quell volatility. But if investors are deterred, liquidity will decline and that, in turn, Pierre de Lauzun, AMAFI Chief Executive will push up volatility! A side- effect would be to reduce the j What do you think of the FTT plan in its current shape? number of potentially taxable To be effective, a transaction tax would need to be applied on a worldwide basis, and trades. It’s a classic example given the outcome of the G20 summit in Cannes, that is a highly unlikely scenario. If the of the crowding-out effect: as tax is confined to a particular region, the initial consequence would be to drive financial soon as you impose a tax, you activity away and thus eliminate the jobs and wealth that go along with it. But the key automatically shrink its base by issue is not, as many people think, that “evil” market participants will go elsewhere driving investors away”. That is and carry on making large amounts of money. It is that market efficiency hinges on why France and Germany are their ability to match capital or hedging requirements with money seeking a profitable moving towards a system of investment. At present, that match is made globally. But why should capital flows head national FTTs with the broad- for a region that is taxed if they have an opportunity to avoid it? Economic agents in the est possible territorial scope.

Feature taxable region will suffer as the supply of funds dwindles. And the cost of satisfying In this way, non-FTT countries their requirements will rise inevitably, and by much more so than the tax-induced will be encouraged to join the costs. system and recoup via a double tax treaty the proceeds of the tax, which is levied on their j What would be the impact of introducing an FTT? own nationals but collected by another country. Suppose Europe goes it alone and introduces the tax. It will also have to study the impact on market structure. As the proposal stands, the FTT looks very much like an The other major concern for the old-fashioned sales tax. Unlike value added tax, therefore, it would be cumulative. financial industry is that the FTT This is an important point because many of the transactions that serve to finance could have unintended conse- economic activity rely on several other transactions, so the participant that executes quences for some products or them will have to pay tax on each one. Admittedly, this would reduce the number of activities. Although the Euro- complex financing deals that may or may not be genuinely useful. But at the same pean proposal for a 0.1 per cent time it would have an adverse effect on all the other transactions that certainly do levy seems small, and hence serve a purpose. A better targeted measure would surely be more effective. That is totally reasonable in view of the why I insist on the need for an overarching analysis of market functioning in order to trading volumes concerned, in identify any shortcomings and remedy them one by one. practice it will affect different financial activities in very dif- ferent ways. If the project goes ahead as planned, the politi- cians will have to set not one rate but several, depending on the type of product. UBS’s Déo says, “The tool has been poorly designed and could But not everyone in the Anglo-American finance government spending?) and, above have unwanted consequences. world is totally hostile to taxing financial all, its geographical reach. At the Cannes A tax is supposed to create as transactions. Prominent figures ranging summit, hinted that he few distortions as possible. But from and Adair Turner to Bill would introduce an FTT in 2012, whereas with the FTT, transaction costs Gates and Warren Buffet have all expressed Barack Obama came out firmly against it. would rise by at least 100 per support for some kind of tax, be it Tobin, Just recently, David Cameron refused to cent, and much more in certain Robin Hood or FTT (though, as sceptics back a tax, and said she cases”. point out, so have Fidel Castro and Hugo would not take his “no” for an answer. Chavez). But the main problems – aside Since an FTT cannot be successful unless Some commentators in Britain from political posturing – are to determine it is global, the current proposals will not and the United States believe the scope and rate of the tax (all transac- throw “sand in the wheels of markets”, as that their financial sectors tions, equity and bond trades only but at the James Tobin argued for, so much as fuel on stand to benefit as activities same rate?), its purpose (to curb specula- the flames of an already heated argument. migrate from FTT countries. tion, meet the cost of crisis management or Anthony Bulger

3 December 2011 Amafi Financial Newsletter No15

j Visit to Washington 3 and 4 October 2011 As in previous years AMAFI organised Atlantic issues with their American talking high-level meetings with members of partners. the US Congress (Senate and House of The main focus, naturally, was on the finan- Representatives) and financial authorities cial regulations currently being drafted on (Treasury, Federal Reserve, SEC, CFTC) on both sides of the Atlantic, particularly in the behalf of the European Forum of Securities areas of derivatives and prudential rules, Associations (EFSA). The EFSA delega- especially where major issues of territori- tion, comprising the Association for Finan- ality and coordination between authorities cial Markets in Europe (AFME), AMAFI, are involved. Also on the agenda were the News represented by Chief Executive Pierre de European crisis and, more generally, the Lauzun and International and European global economic and financial outlook, Affairs Director Véronique Donnadieu, and issues in which Congressmen, Treasury the Swedish Securities Dealers Association staff and the CFTC President showed a (SSDA), discussed a broad range of trans- keen interest. Véronique Donnadieu

j Anti-money laundering The Financial Action Task Force is organis- ing another meeting with the private sector on 5 and 6 December to examine proposed amendments to its recommendations, decided at its plenary committee meeting on 27 and 28 October. ICSA will attend the meeting to stress the issues it has already raised, notably in the response the FATF’s September consultation (available on the AMAFI website).

Following the recent publication of its guide- lines on beneficial owners, which were broadly targeted, the Autorité de Contrôle Prudentiel is examining the specific case of investment funds (FCPs, SICAV, foreign funds, hedge funds, etc.). AMAFI, via its AML/CTF working group, is taking a particular interest in this issue, since funds often account for a substantial portion of its members’ clientele. Stéphanie Hubert, Marie Thévenot

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j MiFID review

The European Commission ƒƒThe regime for financial published official proposals on institutions based in third 20 October for the review of countries: aside from a lack the Markets in Financial Instru- of clarity, the proposals fail to ments Directive (MiFID), in give sufficient weight to the the form of a regulation and a principle of reciprocity. j Competition and market directive. Building on the work infrastructures on the preliminary draft of the A number of more “technical” proposals that were circulat- issues have also been identified. In light of the changes prompted by the ing in early September, AMAFI These include no longer being review of European directives on the continued its analysis through able to use retail clients’ assets organisation of market and post-trade the working groups set up for as collateral for their positions services, as well as by planned mergers News this purpose. On the subject vis-à-vis clearing houses, the among exchange operators in Europe, of market organisation, spe- conditions for dealing with AMAFI’s Board addressed the issue of cial attention is being paid at products and services relat- competition among market infrastructures this stage to issues relating to ing to high frequency trading, (AMAFI / 11-40). equity markets. and the possibility for firms to become members of organised Starting from the observation that the pol- Several priorities for assess- markets without having been icy choice of a European model based on ment have already been authorised for order execution competition among market infrastructures identified: or proprietary trading services has still not been properly implemented in ƒƒConsolidation of post trade and hence be regulated as certain areas, notably clearing for cash and data: the lack of ambition such. index derivatives markets, AMAFI identi- evident in the Commission’s fied several areas on which the authorities proposals is worrying; AMAFI will take its analysis fur- responsible for markets and competition ƒƒLinks between different ther during the coming weeks could usefully concentrate: trading systems (regulated with a view to preparing draft ƒƒFor cash clearing, it is vital to make markets, multilateral trading amendments and presenta- interoperability among infrastructures facilities, organised trading tions for European institutions are reality, by ensuring that: facilities, systematic inter- and the French authorities. The - a clearing infrastructure belonging to nalisers): the proposals need aim also is to make AMAFI’s a silo cannot refuse to handle external to be clarified in light of the contribution part of a broader transactions under the same terms and objectives, especially pre- review of the market model that conditions it applies to the silo’s own trade transparency; Europe should aspire to. This is trading infrastructure ƒƒLinkage between domestic vitally important to ensure that - participants in regulated markets and and European authorities’ the Association’s views are multilateral trading facilities are given a powers (Commission or heard amid the ongoing public real choice between at least two differ- ESMA): it is vital to maintain debate on these issues. ent clearing infrastructures to handle a level playing field that is Véronique Donnadieu, their business. consistent with the needs of Emmanuel de Fournoux an integrated market. ƒƒFor index clearing, steps should be taken to ensure that index- related operating licences allow market participants that create index derivatives to clear them, under fair terms and con- ditions, outside the silo that holds the licence.

AMAFI has sent its contribution to the French and European regulators concerned. Emmanuel de Fournoux

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j Automated trading ESMA guidelines j Review of the Market Abuse Directive „„ Do not create the AMAFI responded (AMAFI / 11-38) to Alongside proposals for the MiFID impression of enhanced the ESMA consultation on Guidelines review, the European Commission protection because it will not on systems and controls in a highly published draft amendments to the exist automated trading environment for Market Abuse Directive, also in the trading platforms, investment firms form of a regulation and a directive, The proposals imply that all mar- and competent authorities. It argued whose objective is to harmonise kets will be protected uniformly that implementing the guidelines was criminal penalties for abuse. The and exhaustively. But this is highly very important in light of the recent overall ambition of the Commission is unlikely. First, all financial instruments growth in automated trading, pro- to strengthen market integrity. would have to be supervised, even vided that regulators reach formal though national authorities are strug- agreement to apply them in a similar AMAFI fully endorses that aim but is gling to cope with their current scope way. paying close attention to two crucial of supervision. Second, regarding News aspects. inside information, the waivers pro- More specifically, a detailed analysis posed by the Commission, especially showed that some of ESMA’s propos- „„ Make sure the for mid cap issuers, raise questions als could be implemented forthwith arrangements are unambiguous about the level of integrity that the because they raise no particular and transparent so that they markets concerned will be able to problems while others need further will be effective guarantee. Last, in some markets, consideration. The latter category To meet the aims of the review, the such as the commodity derivatives includes proposals that firms should key concepts on which the arrange- market, the concept of inside infor- check clients’ ability to honour their ments are based need to be unambig- mation relies on insufficiently stan- settlement obligations and that inter- uous and transparent. This is vital to dardised basic information. nal control teams should monitor ensure that the competent authorities Some of the key questions raised order flows in real time. and criminal courts are able to exer- by the proposals concern mid cap Emmanuel de Fournoux cise their powers properly, especially issuers. The idea that companies not given the extended scope of criminal listed on regulated markets should law. But it is also vital to underpin the not be saddled with a top-heavy j Carbon and energy efforts made by financial institutions administrative burden is certainly markets in particular to monitor and prevent laudable, but it also clashes with the market abuse. Commission’s objective to enhance The AMAFI Commodities closely investor protection and market integ- monitored the EU Regulation on However, since the Commission has rity. Moreover, it raises questions Energy Market Integrity and Trans- sought to address a wide range of about the scheduled phase-out of parency (REMIT), adopted by the market abuse situations, it is relying accepted market practices, especially on 19 October and on concepts that are broadly defined. liquidity contracts. This practice has due to be published shortly. As a result, its proposals are hard to been adopted by a growing number put into practice and could spark of European countries and plays a In carbon markets, the migration of controversy. In particular, the con- useful role in the functioning of mid the system based on national regis- cepts of “behaviour”, “attempt” and cap markets – and other markets as tries to a single European registry, “relevant information” (included in the well. It is therefore a central focus of scheduled for 1 January 2012, must definition of inside information) need AMAFI’s discussions, both at present be closely monitored because of to be precisely defined. and in the months ahead. the potential impact on intermediar- ies. The same applies to protecting the trading and holding of CO cer- Stéphanie Hubert, Sylvie Dariosecq 2 tificates. Aside from the important issues of liquidity and confidence, care is needed to ensure that the new system, which hinges on the buyer’s “good faith”, can be implemented uniformly regardless of the domestic legal environment in which this con- cept will be used. Dominique Depras

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j Major shareholding notifications

AMAFI was consulted once again, informally and urgently, by the Treasury on a draft reform to the treatment of cash-settled finan- cial instruments. The new plan differs from the proposal tabled by Senator Philippe Marini before the summer since it recommends that cash-settlement instruments be treated as shares only for transparency purposes, not in connection with takeover bids, for News which they are specifically ruled out.

AMAFI supports this new plan (AMAFI / 11-35), which features several of its proposals, subject to certain technical modifications. It was introduced as an amendment in the Warsmann Bill on legal simplification and streamlined administrative formalities, which was adopted as-is by the lower house of parliament on first reading and is currently before the upper house. As it stands, the bill is broadly consistent with the principles set forth in the proposal for a direc- tive amending the Transparency Directive. Sylvie Dariosecq

j Public offerings Advertising materials

Following up on an issue raised by its Corporate Finance Commit- tee, AMAFI submitted proposals to the securities regulator, AMF, on the disclosure of risk factors in advertising materials, such as leaflets, that are published in connection with transactions involving a public offering of shares.

AMAFI proposed including a clear, legible and understandable reference to the risk factors discussed in the prospectus in order to meet the need for proper investor disclosure and satisfy the MiFID requirement that investment risk be presented in a way that is fair, clear and not misleading. Discussions on this issue are now underway with the AMF.

Sylvie Dariosecq, Marie Thévenot

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Should you require further information about any of the topics discussed in this Newsletter, contact the person(s) named at the bottom of the article in question. Dial (+ 33 1 5383) followed by the extension number, or send an email. j Philippe Bouyoux Ext. 00 84 [email protected]

jjDexia Crédit Local, a credit institution authorised to pro- j Sylvie Dariosecq Ext. 00 91 vide the main investment services, i.e. order execution for third par- [email protected] ties, investment advice and placing of financial instruments with and j Dominique Depras without a firm commitment basis. The company’s senior managers Ext. 00 73 are Jean-Luc Dehaene (Chairman of the Board of Directors) and [email protected] Alain Clot (CEO). j Véronique Donnadieu Amafi Highlights Ext. 00 86 jjGalaxy SAS, a market infrastructure whose main business [email protected] is to operate an organised unilateral trading facility on the fixed j Emmanuel de Fournoux income market for institutional investors. The company’s senior Ext. 00 78 managers are Philippe Buhannic (Chairman) and Jean-Philippe [email protected] Malé (CEO). j Stéphanie Hubert Ext. 00 87 jjJoh. Berenberg, Gossler & Co, a credit institution whose [email protected] main businesses are trading in transferrable securities for own j Alexandra Lemay-Coulon account and for institutional clients; and wealth management and Ext. 00 71 advice services. The company’s senior managers in France are [email protected] Dalila Farigoule and Christophe Choquart. j Bertrand de Saint-Mars Ext. 00 92 jjMirabaud France SA, an investment firm specialising in [email protected] discretionary investment management, order reception/transmis- j Marie Thévenot sion, investment advice and custody account keeping for private Ext. 00 76 clients. The company’s senior managers are Raphaël Spahr (CEO) [email protected] and Cécile Troger-Beltran (Deputy CEO). j Eric Vacher Ext. 00 82 [email protected]

Director of Publication: Bertrand de Saint Mars Editor: Philippe Bouyoux ASSOCIATION FRANCAISE DES Writer: Anthony Bulger MARCHÉS FINANCIERS Design: C’est tout comme - Layout: Sabine Charrier FRENCH FINANCIAL MARKETS ISSN: 1765-2030 ASSOCIATION AMAFI documents quoted in this Newsletter and flagged AMAFI with a reference number are on our website at www.amafi.fr 13, rue Auber – F-75009 Paris Most of them, notably AMAFI’s responses to public consultations, Phone: + 33 1 5383-0070 are freely available, but some are restricted to members only. Fax: + 33 1 5383-0083 www.amafi.fr

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