EFTA Document EFTA01449213

30 July 2013 Exchange Rate Perspectives: FX and the Financial Transaction Tax transaction. For example, where a dealer provides liquidity to a financial entity and simultaneously hedges the same transaction with a third counterparty, all three entities are likely to be caught. The FX industry would be impacted by this cascade effect. FX is an intermediated market, with several potential stages between the client and ultimate liquidity provider. These stages have evolved in response to demand for tighter pricing and a more efficient market. For example, in the case of an NDF transaction, a dealer is able to provide a better price for a client by being able to hedge that transaction through an offsetting one with a third counterparty. By discouraging this kind of intermediation, the FTT may result in dealers providing wider prices for clients. By definition many FX transactions also contain multiple legs, each of may be subject to the FTT. For example, an FX swap is composed of two forward transactions, meaning that the FTT could be charged twice. FX transactions can also involve very large notionals, which would increase gross costs. As illustrated by the diagram below, a headline rate of 1bp translates into a much higher effective rate once the multiple steps of a typical FX transaction is taken into account. In this case, the final cost for a USD/INR NDF potentially increases up to 8bp, meaning the absolute cost for a USD 10,000,000 notional becomes USD 8,000. Figure 1: The FIT 'Cascade Effect' Based on USD/INR 1 month NDF, notional USD 10,000,000. Schematic based on European Commission proposal and is illustrative only. Subject to FTT May be subject to FTT Not subject to FTT Total Final Cost Financial Institutions Old World Bank -> Broker --> Bank -> Prime Broker --> Client Max: USD 8,000 Min: USD 4,000 New World Bank -> Multi-Dealer Platform --> Bank -> Clearing House -> Clearing Broker --> Client Max: USD 8,000 Min: USD 4,000 Non-financial Institutions Corporates Can Choose Bank -> Broker --> Bank -> --> Client Max: USD 5,000 Min: USD 3,000 Bank -> Multi-Dealer Platform --> Bank -> Clearing House -> Clearing Broker --> Client Max: USD 7,000 Min: USD 3,000 Interbank Market Bank-Client Market Source: Deutsche Bank Deutsche Bank Securities, Inc. Page 9 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0104522 CONFIDENTIAL SDNY_GM_00250706 EFTA01449213