The idea of a Financial Transaction tax (FTT) in Europe and perhaps beyond is building up steam these days. French President Nicolas Szarkozy has promised to implement one on his own in advance of the rest of the European Union, hoping to roll that into an eventual euro wide FTT. A year ago such a proposition seemed laughable and while perhaps still a longshot, the FTT idea does seem to be picking up speed as explored by Steve Zwick in: “The financial transaction tax: Panacea, pathogen, or just a bitter pill?”
A blog on Forex trading firm OANDA’s web site opposes such a tax, arguing that full transparency of trades would provide a more effective and cheaper solution. While it is no surprise that a forex broker would oppose such a tax, OANDA is not a typical player, having in general, been more open to tighter regulation. For example they limited leverage on forex transactions to 50-1 when there was no regulatory mandate to do so.
Given the carnage in financial markets and trading in recent years along with viewing the sausage making of regulatory policy, their arguments seem to make sense. Let’s start with the MF Global situation. Had their massive bets on foreign debt been widely known by their end user customers in real time what do you think would have happened?
Anecdotally we can say customers—as well as ratings agencies — would have become weary of this practice and would have voted by moving their accounts, which they did but in a fire sale fashion. There were rumors and inklings of the direction Jon Corzine was moving the firm in the summer of 2011 and the amount of customers segregated funds at MF Global dropped considerably in the months prior to the crisis. The firm had more than $8.8 billion in segregated customer funds at the end of July when it also was forced to report a shortfall in its excess net capital due to securities regulators demanding MF Global put up more capital for those positions. According to the MFGI trustee their segregated fund at the time of bankruptcy should have been just under $6 billion. About one third of customer assets were pulled before the bankruptcy filing, but interestingly the biggest drop came in the August report with seg funds dropping to $7.2 billion. Given just a little information about its trading activity, customers voted with their feet and if this activity was more transparent it is likely that Corzine’s sovereign debt bet wouldn’t have grown to $6.3 billion.
Think about the credit crisis in 2008. If the massive size and scope of all the collateralized debt obligations (CDOs) and ohter mortgaged backed assets held by all the investment banks been apparent, would the bubble have been able to grow out of control? OANDA doesn’t think it would.
Goldman settled a suit with the Securities and Exchange Commission in 2010 related to its ABACUS 2007-AC1 CDO. Transaction transparency probably would not have forced Goldman to reveal that the CDO was largely put together by a hedge fund intent on shorting it while Goldman marketed it to others, but it would have been out there so that questions could have been asked.
One complaint we heard from many in the Futures industry—obviously before the MF Global debacle — is that they were facing greater regulation despite the Futures regulatory model working, while the large investment banks through its lobbying efforts were gaining exemptions to many of the new Dodd-Frank rules. In the end you can end up with the side of the industry, the regulated market, facing more changes than the side that helped create the crisis.
It seems that powerful interests can work most complex efforts at reform in its favor so a better solution may be to require as much transparency as possible so the broadest section of the marketplace can apply a smell test to the trading activities that too often occur in the dark.