Under Attack?

These days it does seem a little like commodity markets aren’t the flavor of the month? In recent days as I work on the European Regulatory study report (sponsored by TriOptima), I have also observed;

1. how the commodity transaction tax in India has been introduced and already had a significant dampening effect on transactions,
2. how the EU parliament continues to congratulate itself for staying the course on introducing a financial transaction tax here (at least in 11 countries across Europe),
3. how the clearers are now being pointed at as ‘systemic risk’ requiring further regulation and
4. Now it seems the traders are under scrutiny too as a ‘risk’ because their access to ‘easy money’ allows them to grow their physical positions too quickly.

The commodity transaction tax in India is probably an indicator of how things may go across European jurisdictions that may adopt a similar financial transaction tax. The Indian finance ministry imposed a 0.01% tax on the trading of all non-agriculture and some agriculture commodity derivatives on July 1 to boost revenues. The result is that trading volumes are off up to 30%, prices are down and so are volatilities but the cost of hedging is of course, up. The government might argue ‘objective achieved’ in that speculators have been forced out of the market, others might say that derivatives, which are used mostly for hedging, should not be taxed. Time will tell.

Meanwhile, eleven countries in the EU are pushing on with the implementation of a similar tax with rates of 0.1% for trades in stocks and bonds and 0.01% for those in derivatives. However, the EU also says participating countries should be allowed to apply a higher rate to riskier “over the counter” trades. The 11 participating member states are Austria, Belgium, Estonia, France, Germany, Italy, Greece, Portugal, Slovakia, Slovenia and Spain. The tax aims to discourage speculative trading and ensure that the financial sector pays back part of what it received from taxpayers during the financial crisis. It has faced a barrage of criticism from the banks and other EU countries and progress has been slow. Many issues are yet to be resolved probably most importantly being how it would be collected for certain derivatives and whether other countries not involved would need to collect the tax for entities trading there but based in one of the 11 countries.

Meanwhile, the banks have started pointing fingers at the clearers and asking the regulators to look at what they claim is simply a shifting of systemic risk. As regulation and industry trends have moved trading more towards cleared transactions where the clearer sits between two counterparties and takes on the risk, more risk has been transferred there. The banks also claim that the clearinghouses are asking for lower quality collateral further increasing that risk. While this just may be a case of the banks trying to slow the move from bilateral OTC to electronic trading platforms, further regulatory involvement at this time is perhaps undesirable.

As if all of this were not enough, two research companies in Brussels came out with a report criticizing the growth of traders. “The use of financial leverage to increase physical holdings, through the easy access to international finance helped by accommodating monetary policies, may have systemic implications,” they say and again seek further regulation to obtain disclosure of physical holdings and other information required to reduce the risks for governments. They also cited easy to come by finance as part of the problem!?

There is a pattern here, which is one of rapidly increasing regulation and oversight adding burden and costs across the entire industry in Europe. While there probably is a need for some further regulation, it seems regulation has become the flavor of the year and may well damage an entire industry if these issues are not more carefully thought through. Already quagmired in trying to figure out how to prepare for EMIR, REMIT and other yet, still half-defined and hurried regulations, the industry looks to be under attack from all sides right now.

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