Bloomberg News

CBOE’s Brodsky Says Transaction Tax Would Harm U.S. Liquidity

March 04, 2013

The European plan to impose a levy on financial transactions will affect investors and companies trading in the U.S. and may harm market liquidity, William Brodsky of CBOE Holdings Inc. (CBOE:US), said today.

The EU on Feb. 14 unveiled its proposal for taxes of 0.1 percent on stock and bond trades and 0.01 percent on derivatives. To prevent traders from escaping the levy by operating outside the tax’s zone, the EU plan invokes “residence” and “issuance” ties to firms in participating nations. That means, for example, that a French bond traded in London would still be affected.

“All of it is very disturbing,” Brodsky, chairman and chief executive officer of CBOE, said in a presentation at the exchange’s Risk Management Conference in Carlsbad, California. “It’s intended to have an extra-territorial reach,” he said. “It would affect companies such as a Royal Dutch and Unilever that trade in the U.S. even though the tax applies in Europe.”

Some Democratic lawmakers in the U.S., including Senator Tom Harkin of Iowa and Representative Peter DeFazio of Oregon, back similar proposals in the U.S. While Algirdas Semeta, the European Union’s tax commissioner, last month urged U.S. supporters of a financial transaction tax to keep up their efforts, the proposal has gained little momentum in Congress and with the administration of Barack Obama. The Treasury Department opposed the EU tax, warning about the effects on U.S. investors.

Liquidity Concern

“It’s very concerning because at a time when the market structure is very changed from the way it was years ago, I worry about liquidity,” said Brodsky, who is stepping down as CEO of Chicago-based CBOE in May. The exchange is the largest options market by volume. “Any of you, particularly institutional investors, who understand how important liquidity is to be able to get things done, to have things that will throw sand in the gear does not to me look very helpful.”

Europe’s plans have been dubbed the Tobin tax after U.S. economist James Tobin, who in 1972 suggested taking a cut of foreign-exchange trades to limit currency speculation. History is littered with government attempts to extract revenue from financial transactions, not all of which were successful and most of which had unintended consequences.

The proposal, which seeks raise revenue for national governments, excludes certain types of trading: day-to-day transactions by individuals and non-financial firms; primary offerings of stocks and bonds; and trades with central banks, the European Stability Mechanism and other official institutions. The tax also excludes primary-market trades in units of collective investment funds along with certain restructuring operations.

To become law, the proposal must be approved by the EU nations that agreed to consider imposing the tax. They now include Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia.

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net


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