Drafting new legislation is difficult and consulting the industry beforehand is sensible. Granted, where financial transaction taxes (FTT) are concerned this is tricky because no practitioner has anything good to say about it. However, beyond the mere purpose of FTT, the operational implementation is at least equally important. The current Italian FTT law has a number of issues relating to its implementation that are far from straightforward and seem to achieve nothing but increased complexity.

Estimating HFT tax
The Italian FTT consists of two components: (1) a regular FTT on executed volumes; and (2) an additional HFT tax on the notional volume of all amended and cancelled HFT orders that exceed a pre-defined threshold. Many exchanges have already implemented fee schedules charging for excessive system load. However, those models only consider the number of messages and not the notional volume. The approach by exchanges is logical, because system load is created by excessive numbers of messages and not by the size of the orders. Why Italian legislators have chosen to go down a different path is unexplained.

Small cap exemption
The Italian FTT exempts firms with less than €500m market cap. This makes sense, because small and medium firms generally struggle to find financing through capital markets. However, it makes no sense that this exemption only applies to on-exchange trades.

FTT for derivatives
The European FTT draft proposes a flat rate of tax for derivatives of 0.01% of the notional volume traded. The Italian FTT (not considering their HFT tax) intends to implement a complex table of fixed rates based on the notional volume. Again, the benefit of the Italian approach is not obvious. It is a shame, though, that by making it more complicated the fact that the proposed Italian tax rates are considerably lower than those in the European version may go unnoticed. How that will align once the European FTT is introduced remains to be seen.