Jefferies Considers Proposed Trading Tax in Eurozone (NYX) (NDAQ) (ICE) (CME)

August 17, 2011 2:02 PM EDT
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Next month, leaders from France and Germany are scheduled to propose a tax on financial transactions to European Union members.

An analyst at Jefferies discussed the implications: "The proposal is a strong headwind for exchanges that derive significant revenues from within member countries as it would negatively impact trading volumes."

Exact details have not yet been released, but it seems the tax would be applied to the transaction based on the home country of the seller and not the trading jurisdiction. Items such as bonds, equities, options, futures, and derivatives will all be subject to the tax while currency trading will most likely not be.

Jefferies highlights that NYSE Euronext (NYSE: NYX) has the most revenue exposure to Europe with roughly 50 percent of its total sales coming from there. CBOE currently has none. Other U.S. based exchanges with revenue exposure include IntercontinentalExchange (NYSE: ICE) with 35-45 percent, Nasdaq (Nasdaq: NDAQ) with 15-20 percent, and CME (NYSE: CME) with 5-10 percent exposure.

It has not yet been specified if the tax will apply across all Eurozone member nations or the larger European Union. Jefferies notes if the U.K. is not included, ICE’s revenue exposure would fall to less than 15 percent. If Sweden and Denmark were not included, then Nasdaq's revenue exposure would be less than 10 percent.

Jefferies sees a severe 20 percent decrease in 2012 Eurozone-originated volumes for the NYSE Euronext, ICE, Nasdaq and CME. Assuming Jefferies' model of Eurozone volume declines, the impact on ICE, Nasdaq, and CME is around 1-2 percent each, well below the 6-8 percent decline estimated for the NYSE Euronext. If the tax falls over the entire European Union, the impact on ICE and Nasdaq's 2012 earnings would be slightly larger at 3-5 percent and 2-4 percent, respectively.

Jefferies points out that a tax like this has been proposed in the past but did not earn much respect as times were not as bad as they currently are. Jefferies feels the outcome may be different this time around. In the past, the U.K. has objected to such a tax, saying it prefers more global coordination versus unilateral action.

Jefferies believes "a European Union wide tax would have to be ratified by all 27 member states, including the UK. If adopted, the proposed tax would place the member countries at a competitive disadvantage versus the rest of the world. A similar tax was proposed in the US earlier this year but was quickly dropped before it could gain any momentum. We estimate the likelihood of a tax being introduced in the US as limited given the strong opposition when first announced."

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