Country Profile: France - 1Q 2013
The securities lending environment continues to evolve as jurisdictions and regulators propose and implement reform impacting even the most 'vanilla' of securities lending markets; France can be described as one of these markets. For many years referred to as stable and almost unexciting, today recent European tax rulings as well as the introduction of the Financial Transaction Tax continue to contribute to increased volatility and squeeze demand particularly for yield enhancement activity.
- The French Financial Transaction Tax (FTT) came into force as of August 1, 2012 - the first European country to impose a transaction tax of 0.2%, levied on acquisitions of designated listed French equities. While securities lending transactions are not directly affected because 'temporary transfers of ownership' are currently exempt from the tax, the underlying trades that drive borrower demand are impacted. As the tax increases the overall cost of these trades, this may eventually hurt revenue generation in the lending market. The industry continues to monitor this closely.
- Yield enhancement trading in France is a key source of income, but this activity has recently come under pressure after a ruling by the European Court of Justice ('ECJ') in August 2012 on the discriminatory nature of withholding the tax paid on French source dividends by foreign Collective Investment Funds. Until then, the French government had levied a withholding tax on foreign investment funds ranging anywhere from 15% to as much as 25%. Since the ruling, the withholding tax levied on dividends paid by French companies is now abolished for UCIT funds residing outside of France, however both the reclaim procedures to support the recovery of tax, and the impact of this ruling for non-European funds holding French equities (e.g., U.S. Investment Funds) remain uncertain. This greater harmonization of dividend tax policies in Europe continues to threaten the yield enhancement trade by reducing the supply of tax disadvantaged securities. Given the lack of clarity around the tax recovery process, J.P. Morgan has seen clients take a varied approach to manufactured tax rates going forward, with some keeping rates at the current level, and others moving to 100%.
Trading outlook for 2013
Despite the tax matters that are pre-occupying market participants, France continues to be an attractive market for Lenders. Firstly, entry remains straightforward, with no additional market documentation requirements. Lenders also benefit from a standard lending operation.Secondly, the trading outlook for 2013 remains relatively positive. While the equity market has led to a decrease in directional short activity in Europe, some analysts expect that company earnings should rise and economic growth will return to the region. If this is the case we should see an increase in corporate activity as we continue into 2013 and an increase in company dividends, which will be positive for dividend trading. Currently yield enhancement levels continue to be volatile. Companies continue to announce scrips in 2013 and clients who are able to cash guarantee on their scrip elections will be able to maximize their revenue opportunity.
Sectors in which we are seeing directional demand include the automobile and communication sector, most specifically securities such as Peugeot-Citroen and Pages Jaunes.
If you would like to understand more about lending your securities in France, please contact your Agent Lending relationship manager.