The Financial Transaction Tax introduced by France in August is intended to deter speculative investor behaviour, but the execution looks likely to miss the target.

What is happening?

The final draft of France’s Financial Transaction Tax (FTT) was published in President Francois Hollande’s first fiscal package in July 2012, due to come into effect from August 2012. In theory, it includes three components: an equity transaction tax, a tax on high frequency trading (HFT), and a tax on so-called 'naked' sovereign credit default swaps (CDS) that are not matched by underlying credit exposure.

The government expects to raise about €1bn per year from the package, which compares with £2.5bn earned by the UK Treasury from the stamp duty on UK equity transactions, and €200m on a similar French stamp duty before its abolition in 2006. Gunther Capelle-Blancard, assistant director of French economic and financial research institute CEPII, says the figure looks realistic, but adds that the first of the three taxes is likely to contribute the vast majority of the €1bn.

“The first tax is more of a revenue-raising measure, the HFT and CDS taxes are really intended to change market behaviour. Clearly, if they worked perfectly, you would expect to raise no revenue at all as people would move away from such transactions altogether,” he says.

How will it work?

The equity tax of 0.1% applies to the value of transactions in any companies listed in Paris that are headquartered in France and have a market capitalisation of more than €1bn as of the start of the calendar year – a total of 108 stocks for 2012. The French government is still considering whether to double the rate to 0.2%. The tax will be payable by the broker executing the order, or the custodian if no broker was involved. The tax is charged irrespective of the nationality of the broker or custodian or the tax residency of the investor.

The HFT tax will be 0.01% payable on the portion of automated electronic orders cancelled or modified in less than one second that exceeds a certain threshold. The threshold has not yet been set, but will be a minimum of 66% of orders – an initial consultation suggested 80%.

The CDS tax, at 0.01% of the nominal value of the contract, is charged to the acquirer of sovereign credit default protection if they do not hold assets correlated to the value of that sovereign’s debt. The HFT and CDS taxes will only apply to entities resident in France.


All three taxes exempt market-making activities, but precise ways of defining these remain unclear. In an investor briefing note, Société Générale says it assumes that market-making activities may be defined narrowly as providing liquidity for listed securities, but not for anything construed as index arbitrage or directional trading. The equity tax also exempts primary market issuance, clearing houses, employee share purchase schemes, and securities lending and repo contracts.

Who will be affected?

A difficult question to answer, especially since the implementation is rushed, to say the least. A consultation period only closed less than a month before the tax was due to be implemented, and the government’s response to the consultation had not been published at the time of going to press.

“There is still uncertainty about whether derivatives will be included in the equity tax. If they are excluded, then there may well be a switch to trading contracts-for-difference, as in the UK. That would mean most larger institutions will avoid the tax, whereas smaller players and individuals are more likely to be hit,” says Rebecca Healey, senior analyst at financial markets research firm Tabb Group and a former electronic trading specialist for Credit Suisse and Goldman Sachs.

Mr Capelle-Blancard notes that, ironically, the equity tax will not hit the high-frequency traders who are under fire from politicians. The tax is levied on transfers of legal ownership, which only happens at close of business under French constitutional law, so intra-day trading will not be affected.

Indeed, Ms Healey says there is still profound uncertainty about how the HFT tax itself will work. The initial plan seems to be to levy it via clearing systems, but many HFT strategies end the day flat, which means they would not make use of clearers. In any case, she notes, the attention of HFT funds is already shifting away from equities towards foreign exchange.

Time to leave Paris?

Olivier Dauchez, tax partner at law firm Gide Loyrette Nouel, says the challenge for the French government is to achieve EU co-ordination. The European Commission has submitted its own FTT draft, but the early signs are not promising – Luxembourg has already indicated that it will not implement an FTT.

“It is politically impossible now for the French government not to follow through, but if the cost of trading on the French market exceeds the cost on other European markets, it would be surprising if this does not have an affect on the level of trading on French equity markets,” says Mr Dauchez.


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter