Securities Regulation Daily Wrap Up, CFTC NEWS AND SPEECHES—CFTC Commissioner Chilton Argues for Derivatives Transaction Fee, (May 1, 2013)

By Lene Powell, J.D.

CFTC Commissioner Bart Chilton proposed a “Targeted Transaction Fee” on derivatives transactions. Chilton proposed the fee in remarks prepared for delivery today to the Energy Bar Association in Washington, D.C.

According to Chilton, speculators and particularly high frequency traders should have a transaction fee measured by volume. Under the proposal, the tax would be imposed based on market activity, not entity. End-users hedging their commercial activity would be exempt from the fee, but an end-user engaging in speculation would have to pay the tax.

CFTC funding. The tax, which Chilton proposes at .06 cents per $100, would provide funding to the CFTC to oversee the markets. He noted that the SEC is funded through transaction fees, and the CFTC is the only federal financial regulator that is not self-funded in some fashion.

The CFTC’s responsibilities expanded under Dodd-Frank to incorporate OTC derivatives, but it received only $205 million of the $308 million requested in last year’s budget. With the budget cuts from the sequester, this was reduced to less than $200 million, Chilton stated.

Chilton said that with an average volume of 20 million futures trades per day, assuming 95 percent of which are non-hedging, a fee of .06 cents would result in revenue of $300 million. This only considers futures trades and does not include swap trades.

High frequency trading. The second benefit, said Chilton, is that it would deter market participants from entering into non-bona-fide trading. The liquidity provided by high frequency traders is fleeting, and, according to one study, imposes quantifiable costs on small investors.

“In other words, if you’re using our markets like a slot machine, you’re gonna contribute to the oversight and enforcement services that need to be part and parcel to markets,” the commissioner stated.

Capital flight. The commissioner acknowledged that many would object to such a fee, arguing that liquidity will dry up, price discovery will be irreparably impaired, and markets will migrate to London or elsewhere. However, six one-hundredths of a cent is very minor, said Chilton. If traders leave markets due to that, they were looking for an excuse.

Chilton added that, since the financial crash of 2008, the most profitable sector in the economy, every single quarter, has been the financial sector. The commissioner said that according to the Bureau of Economic Analysis (reflecting Q4 2012), the financial industry made approximately $506 billion in 2012. J.P. Morgan made $21.3 billion in net income in the last year, ending March 31, 2013, and Goldman Sachs made $7.5 billion, said the commissioner.

Other financial transaction tax proposals. On February 28, Sen. Tom Harkin (D-Iowa) and Congressman Peter DeFazio (D-Ore) introduced legislation that would place a tax of three basis points (three cents on $100 in value) on most non-consumer financial trading including stocks, bonds and other debts, except for their initial issuance.

Under this proposal, if a company receives a loan from a financial company, that transaction would not be taxed. However, if the financial institution traded the debt, the trade would be subject to the tax. The tax would also cover all derivative contracts, options, puts, forward contracts, swaps and other complex instruments at their actual cost. The measure excludes debt that has an original term of less than 100 days.

According to a press release, in the last Congress, the Congressional Joint Tax Committee scored a similar proposal as raising $352 billion over 10 years.

Internationally, a proposed financial transaction tax continues to make headway in the European Union. The European Parliament has approved the European Commission’s proposal for a financial transaction tax, which would impose a 0.1 percent tax for shares and bonds and a 0.01 percent tax for derivatives. The legislation would establish a financial transaction tax for eleven Member States, including Germany and France.

In a letter to EU Tax Commissioner Algirdas Semeta and Commissioner for the Internal Market Michel Barnier, securities and business groups warned on the extraterritorial impact in the United States and other countries. The groups, which included SIFMA, the Investment Company Institute, the Chamber of Commerce and the Financial Services Roundtable, cited studies showing that a financial transaction tax distorts capital flows by discriminating against certain asset classes. Other negative results flowing from a financial transaction tax are reduced asset prices, substantial movement of trading to other venues, market dislocation, and a decrease in liquidity that can lead to higher, not less, volatility, said the industry groups.

RegulatoryActivity: CFTCNews CommodityFutures Derivatives