Financial Regulatory Forum

from The Great Debate:

Merkel and Sarkozy are right about a Tobin tax

By Mark Thoma
All opinions expressed are his own.

The financial transactions tax is back in the news today. According to reports, French President Nicolas Sarkozy and German Chancellor Angela Merkel will propose a financial transactions tax in September.

Is this a good idea? It would certainly provide needed revenue to cash strapped governments, but at what cost? Governments must raise revenue somehow, but is this the best way to get the cash they need? Some taxes have a large distortionary effect on economic activity -- with a financial transactions tax, the worry is that investment activity will be curtailed-- and others have a much smaller effect. Some taxes can even make markets work better, e.g. taxes that force firms to internalize pollution costs and other externalities improves the decisions firms make. From society's point of view, they are more, not less efficient. Thus, in designing a tax system, we should look for taxes that provide the most revenue at the least cost.

So is a financial transactions tax a highly distortionary, costly tax? The answer is no. The tax would discourage short-term speculative activity, but much of this activity provides little social value. It pushes money around among winners and losers, and traders like it for that reason, but if this activity is discouraged through taxation it would have little effect on long-term investment decisions by firms. For example, one thing this would discourage is high frequency computer trading to exploit minute differences in prices. Does it really matter for long-term investment if these differences persist for a few seconds or minutes more?

In fact, there's even an argument that this tax will improve the efficiency of financial markets. The late economist James Tobin, the originator of the tax, argued that speculative activity causes harmful fluctuations in financial markets. For example, pursuit of speculative gains can cause firms to increase leverage, and if a financial crisis hits it can be very disruptive to the economy when firm are forced to unwind that leverage quickly. That wouldn't be so much of a problem if the costs fell only on those making the decision to take on so much leverage. But, unfortunately, as we have seen in this crisis, the costs can be very large and spread beyond the firms and individuals making the decision to take on so much risk. Thus, just as with pollution there are externalities -- costs that fall on the innocent -- and to the extent that a transactions tax forces firms to internalize the costs of their decisions, it improves rather than hinders the efficiency of financial markets.

There is one potential problem however: the ability to avoid the tax by moving activity elsewhere. But I don't see this as a huge worry. Trading is mostly carried out on centralized exchanges, so keeping track of the transactions and taxing them isn't that hard (the UK has had a tax on stocks for some time, and that hasn't driven all activity elsewhere). Nevertheless, if the U.S. were to follow suit, as I think it should -- it could raise hundreds of billions a year in revenue with minimal distortions -- that would help to prevent evasive activity.

New Canadian compensation rules make work for issuers in coming proxy season

By John Mackie

Aug. 16  (Business Law Currents) With the recent announcement by the Canadian Securities Administrators (CSA) that changes in executive disclosure requirements will apply for financial years ending on or after October 31, Canadian issuers may want to do some advance planning in order to avoid last minute scrambling in the New Year.

The proposed amendments to Form 51-102F6 – Statement of Executive Compensation range from simple drafting changes and clarifications to new substantive requirements, and reflect both the proposal issued last November and the comments received in response.

Perhaps the biggest changes contemplated by the new form are the obligation to disclose an issuer’s risk management practices vis-à-vis compensation policies and practices, and the emphasis placed on discussions of performance targets. For issuers, the former may require stepping onto unfamiliar ground, and the latter may test their willingness to share financial planning data with the street at large.

Start-up rating agencies urge national regulators to promote competition, change

By Rachel Wolcott

Aug. 15  (Thomson Reuters Accelus) –  Even as national governments cry foul over recent sovereign ratings downgrades, new rules and regulation aimed at rating agencies is making it harder for newcomers to break into the ratings market. Standard & Poor’s (S&P), Moody’s Investors Service and Fitch Ratings may have come under renewed fire because of the sovereign debt crisis, but rules set out in the United States’ 2006 Credit Rating Agency Reform Act and the Dodd-Frank Act have yet to open up the market as hoped.

The European Union, via the European Securities and Markets Authority, has also taken steps to clamp down on ratings agencies, but there again the ratings oligopoly remains largely unchallenged. Now, new entrants to the ratings market are urging regulators and legislators on both sides of the Atlantic to focus their efforts on promoting competition in the sector.

(more…)

Shorting bans: What the four European regulators are prohibiting (and what they’re not)

By Peter Elstob

LONDON, Aug. 15 (Thomson Reuters Accelus) – The bans on short-selling the shares in a number of banks and insurance companies (and one stock exchange) that four member states imposed on Friday did not bring the single European rulebook any closer.

However, the European Commission will be hoping that the separate initiatives by the Belgian, French, Italian and Spanish market regulators, which came out of “coordinated discussions” during a conference call on Thursday evening involving all 27 members of the European Securities and Markets Authority, do not put it further away.

Some of the details of each national action are set out below, and they do indeed appear to be harmonised, at least to an extent. More detail, and also any updates to the lists of issuers included, should be sought on the respective regulators’ websites.

Chinese reverse-merger firms delisted in U.S. may go private, lawyers say

By Patricia Lee

SINGAPORE, Aug. 5 (Thomson Reuters Accelus) - Chinese reverse merger companies recently suspended or delisted from U.S. stock exchanges for various breaches may find it more viable to go private than to re-list in the U.S. or elsewhere,  lawyers said. The protracted investigations by U.S. regulators and the potential costs involved in settling the lawsuits mean that, for some companies, selling their entities would be a better strategy.

When the benefits of listing are outweighed by the time and expense, some companies might choose not to re-gain listing in the U.S. or in other jurisdictions, Barry Genkin, partner at Blank Rome and chair of the firm’s Asia capital market practice told Thomson Reuters.  ”In other situations, from a strategic prospective, it may make sense for the company to be sold,” he added. (more…)

Recent corporate disclosures reflect unease over U.S. debt ceiling impasse

By Thomson Reuters Accelus – Staff

NEW YORK, July 29 (Business Law Currents) The U.S. debt ceiling debate may be a lot of noise to some of  the public, but for companies and investment funds, the governmental standoff has real consequences. The ripple effect through the markets should the government of the United States default on its obligations can’t be fully appreciated. The inevitable credit ratings hit will drive up the already high cost of borrowing for taxpayers. For many companies, who are starting to discuss the debt-ceiling debate in their regulatory filings, it is not only credit markets that will be affected. Independent government contractors may also get stiffed, not to mention lose future business. (more…)

Canada’s Anti-Bribery Cops Reel One In

By John Mackie

TORONTO, July 22 (Business Law Currents) – Though Canada has had foreign bribery legislation in effect for over a decade, prosecutions have proven very few and very far between. So it remains to be seen whether the recent guilty plea by Calgary’s Niko Resources under Canada’s Corruption of Foreign Public Officials Act marks a scaling-up of Canadian efforts on this front, or just another blip on the radar screen.

Canada’s Corruption of Foreign Public Officials Act (CFPOA) entered into force on February 14, 1999. The Act contemplates prosecutions in respect of three offences: bribing a foreign public official, laundering property and proceeds, and possession of property and proceeds. In addition, the CFPOA enables prosecutions for conspiracy, aiding and abetting, counselling, and the like.

One aspect of the CFPOA that has attracted criticism from the Organisation for Economic Cooperation and Development and Transparency International is that there must be a “real and substantial link” between the offence and Canada. While a bill has been introduced to eliminate this requirement, it has not passed into law, and arguably remains a significant barrier to investigations.

Delay in U.S. consumer bureau authority spares non-bank lenders

By Ted Knutson

WASHINGTON, July 21 (Thomson Reuters Accelus) – A political stalemate over the consumer protection bureau created under the Dodd-Frank financial regulation overhaul is allowing payday loan firms and other non-bank lenders to escape the agency’s authority for now, but industry participants say they have nonetheless boosted lending and disclosure standards.

Institutions including non-bank mortgage companies, student loan providers and payday lenders, and their trade organizations discussed their views with Thomson Reuters before Thursday’s official launch of the Consumer Financial Protection Bureau.

(more…)

U.S. ratings downgrade could make it harder for banks to raise capital, experts say

By Emmanuel Olaoye

NEW YORK, July 20 (Thomson Reuters Accelus) – Any downgrade in the U.S. government’s credit rating stemming from a failure to raise the debt limit would make it harder for American banks to raise capital at a time that they are facing higher capital requirements, banking experts and industry representatives warned. (more…)

Ratings agencies turn tables on global legislators

By Christopher Elias

London, July 20 (Business Law Currents) – Governments around the world may regret the vitriol they cast at rating agencies as these American companies turn the tables on sovereign debt-marred governments and drive the agenda in the U.S. and EU.

Turning the hunted into the hunters, rating agencies have taken aim at political decisions in the U.S. and Europe as they constrain political decisions and break free from the much-promised legislative clampdown to impact euro zone restructurings and U.S. debt ceiling considerations. (more…)

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