Guillaume Prache, 11 November 2012
What is by far the biggest financial market in the world and also one of the most opaque, least regulated, least taxed, and extremely expensive for end users? You guessed it, the Currency Market.
By far the biggest
One quadrillion dollars (one followed by 15 zeros) in transactions per year: this is the worldwide currency market.
The much better known world equity market is a dwarf in comparison weighing only 63 trillion dollars in transactions per year, some 6 % of the currency market!
The gigantic size of the currency market has no relationship whatsoever with the real economy’s foreign currency needs: the bulk of currency transactions is purely financial and executed by and for financial institutions[1].
One of the most opaque and least regulated
Whereas any citizen can quite easily check the quoted price of a given equity on the internet, and be confident that this is the actual price of the most recent trades, it is almost impossible to get this information for a currency price. For example, on the Euro/Japanese Yen price, three different internet sources give three different prices for the same day. This does not happen with equities, where everybody discloses the same prices.
The fee or commission charged by the intermediary for a currency trade (buy or sell) is also most often not disclosed either upfront or ex post to the individual client. For example, a Belgian bank will just disclose the currency rate at which it has sold foreign currencies to its client, not its commissions and not the actual market rate. The client is supposed to research the actual market price on that same day and try to compute the commission paid to the bank. By contrast any equity trade confirmation will clearly disclose the fees charged and the actual market price.
Notwithstanding that the currency market dwarfs any other financial market, regulators do not focus on it, and one can even wonder if there is any European Authority who is really checking and supervising the biggest financial market of all. For example, there was not one single mentioning of currency market in the 2012 Work Programme of the European Securities & Markets Authority (ESMA)[2].
Least taxed: is the Financial Transactions Tax mislabeled?
According to the EU, “the financial sector should contribute more fairly given the costs of dealing with the crisis and the current under-taxation of the sector”[3]. But the hot and widespread debate on the “Financial Transactions Tax” has left the largest financial transactions largely untouched[4] ! Indeed neither the EU nor the national governments have proposed to tax currency transactions, despite their predominance, and despite the fact they are mostly generated by the financial sector with little obvious value to the real economy.
By contrast, both the EU and some Members States have been keen to charge the heaviest FTT on smaller and “physical”[5] equity transactions, actually primarily hurting the wrong target: the non financial and smaller real economy investors !
Very costly for real economy users
The vast majority of citizens cannot get foreign currency other than from retail intermediaries. Unlike equities it is very difficult for an individual to buy or sell currencies using an online broker. Moreover, unlike for equities, there is no transparency of actual market prices, and of fees and commissions.
In the above-mentioned Belgian bank example, the client computed that the bank had actually charged a 2,86 % commission (the difference between the disclosed exchange rate by the bank and the actual market rate). And this was for a rather large transaction (above € 1000). It would probably have been even more costly for a smaller - more typical – retail transaction.
By contrast, any citizen can open an online brokerage account and trade equities with commissions as low as 0,10%, i.e. 29 times cheaper.
Wake-up time for politicians and regulators
The money market (LIBOR) scandal demonstrates what happens when a financial “market” is left unchecked by regulators. And the interbank money market is small change compared to currencies.
There is no time to lose to impose to currencies the transparency rules enforced on equities. Also regulators should ensure much more competition so that the sky-high cost of buying or selling currencies for individuals collapses.
And it is also about time to align the scope of the so-called” financial transactions” tax with reality, and this time actually targeting primarily transactions made by the financial sector, instead of the ones made by real economy users.
But – as for the LIBOR “market” – no one seems in charge at European level for supervising the biggest financial market of all: when I asked ESMA, they told me they did not know!
Guillaume Prache is Managing Director of the Brussels-based European Federation of Financial Services Users (EuroFinUse); he is also chairing the European Securities & Markets Authority’s (ESMA) Stakeholder Group and vice chairing the European Commission’s Financial Services User Group (FSUG).
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[1] Non financial customers account for only 13 % of the currency markets (Bank of international Settlements , 2010)
[2] http://www.esma.europa.eu/system/files/2012-275.pdf
[3] http://ec.europa.eu/taxation_customs/resources/documents/taxation/other_taxes/financial_sector/com%282011%29594_en.pdf
[4] At least the « spot » currency markets
[5] A much (ten times) lower FTT rate is being proposed on transactions on derivatives