The current proposal is for a minimum flat rate tax of 0.1 per cent on the gross market value of cash transactions with financial institutions located in the 11 EU member states which have signed the enhanced cooperation regime. The flat rate is applied regardless of the length of term of the repo, making repo trading for terms of less than 12 months, (and possibly longer), economically unviable.
A major contraction in the repo market of the EU11 would have a number of unfortunate consequences.
The loss of repo and the lack of an alternative secured financing instrument would pose serious problems for institutional and corporate investors, who would be forced into unsecured deposits which are not subject to FTT.
Lending by banks to industry would be compromised by banks being unable to readily borrow from institutional investors and manage their liquidity in the interbank market. The absence of an efficient repo market to underpin primary and secondary debt market activities would make it harder for financial institutions and firms in the real economy to raise adequate capital from banks but especially for non-bank investors. The difficulty of raising working and investment capital would impose a competitive disadvantage on EU11 financial institutions, corporates and governments.
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