You can’t have your cake and eat it

Extraterritoriality agreements are important for many firms because they can reduce the burden of redundant and conflicting rules across different countries. Last November, considerable concerns were voiced by numerous regulators around the globe with regard to the CFTC Cross-Border Guidance relating to the US swap markets. Among the protestors were representatives of the European Commission (EC) pointing out, rightly, that the EU already has a strong regulatory regime and there is no need for overreaching laws without proper extraterritoriality agreements. Maybe it’s about time that the very same EC starts to visit some of its constituent countries, namely Italy and Germany, to explain to them what sensible extraterritoriality agreements are good for.

Italy introduced the Financial Transaction Tax (FTT) on 1st March. The scope of the FTT depends on whether the issuing company is registered in Italy. Such a far-reaching definition even includes Prada, an Italian registered company with its primary market listing in Hong Kong. Considering that the FTT is nothing more than a VAT, it’s a bit like the Italian government applying VAT to ticket sales for a performance of Giuseppe Verdi’s Rigoletto at the Hong Kong opera house.

On 28th February the German Parliament confirmed the German HFT Act, which could enter into force as early as the end of this month followed by a 6 to 9 month implementation period. The Act requires HFT trading firms to become registered within BaFin even if they access German markets only indirectly via a DMA provider. While HFT firms might have the chance to passport within Europe, this will not help in countries such as the USA. Small, non-EU trading firms that choose to access German markets only indirectly, because setting up a local shop is just too expensive, will be forced to do exactly that. Whether this is beneficial for overall market liquidity is doubtful.

Maybe, it’s about time that representatives from Hong Kong and the USA travelled to Europe to explain to their German and Italian counterparts the strong regulatory regime they have in their respective home countries and the merits of extraterritoriality agreements.

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