A new ICI Viewpoint entitled, "FTT Would Shut Financial Institutions in Participating Countries Out of Repo Market" tells us, "The European Commission has proposed imposing a 0.1 percent (10 basis points) levy on financial transactions. As ICI has detailed, this financial transaction tax (FTT) would have a host of negative consequences, including harm to investors and extraterritoriality. Here's another strike against the proposal: its impact on the market for repurchase agreements (repo). Proponents claim that the proposed tax -- 0.1 percent of the value of repo transactions involving financial institutions from the 11 countries that have signed on in support of the proposed tax -- would hardly affect market participants. But the opposite is true. For example, the FTT would be felt acutely by investors (including U.S. money market funds) conducting repo transactions in which financial institutions from those 11 countries were counterparties. Thus, the tax likely would work to eliminate repo as a source of funding to affected financial institutions, particularly French and German banks.... Repos are a form of short-term funding used largely by financial institutions such as banks. The financial institution sells the securities to investors, such as a money market fund, usually on an overnight basis, and agrees to buy them back at a higher price reflecting the cost of funding.... The FTT would create a substantial drag on repo yields for investors conducting repo transactions with affected financial institutions. In fact, it would produce negative net yields on repo -- both in the current low interest rate environment and at more normal interest rate levels for shorter duration repo."

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