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### I. Introduction — administrative focus
- Purpose: assess administrative feasibility of levying a financial transactions tax (FTT) on a broad range of financial instruments, focusing solely on whether and how a broad-based FTT could be administered.
- Definition and scope:
  - An FTT is a tax on transactions in financial instruments, intended to apply to purchases and sales and other financial transactions with similar effect (e.g., various types of derivatives).
  - Can be levied on one, a few, or a broad range of instruments—including stocks, fixed income securities, derivatives, and foreign exchange.
- Historical and policy context (selected):
  - Keynes (1936) and Tobin (1978, 1996) proposals cited.
  - January 2009 G-20 Summit request for IMF report spurred renewed interest.
  - IMF recommended alternatives: a Financial Stability Contribution (FSC) and a Financial Activities Tax (FAT).
    - FSC: initially levied at a flat rate (varying though by type of financial institution); refined to reflect institutions’ riskiness; applied to a broad balance sheet base on liabilities side (excluding capital and possibly including off-balance sheet items); could be accumulated in a fund or paid into general revenue.
    - FAT: levied on the sum of the profits and remuneration of financial institutions, paid to general revenue.
- Main administrative concerns from literature:
  - FTTs can reduce value of securities, increase cost of capital, lower liquidity.
  - No convincing evidence FTTs lower short-term price volatility.
  - The real burden may fall on final consumers rather than earnings in the financial sector.
- Three instrument categories examined for administration:
  1. exchange-traded instruments;
  2. over-the-counter (OTC) instruments;
  3. foreign exchange (FX) instruments.

### II. Exchange-traded instruments — ease, enablers, and challenges
- Main conclusion: easier to administer an FTT on exchange-traded instruments than on other instruments.
- Enabling institutional features:
  - Centralized exchanges and registered broker-dealers.
  - Listing processes and regulatory supervision.
  - Centralized clearance and settlement systems: clearinghouses (CCPs), central securities depositories/custodians, settlement banks.
  - High automation and a relatively small number of clearinghouses/depositories/settlement banks in a country.
  - Strong recordkeeping capacity in the financial sector.
- Administrative design features (verbatim list preserved):
  - Can be applied to initial issuance, subsequent transactions, or both.
  - Assessed on the basis of the amount of money that changes hands, the notional value, or other valuation methods.
  - Can exempt certain transactions or persons.
  - Single or multiple rates; ad valorem (percentage) or specific (flat amount).
  - Levied on buyer, seller, or both.
  - Collected by exchanges, clearinghouses, or market participants.
- Conceptual and operational challenges:
  - Defining territorial scope, taxable event, tax base, taxable persons.
  - High mobility and product innovation enabling migration to nontaxing jurisdictions or to nontaxed instruments.
  - Exemptions increase underreporting risk.

### III. Clearinghouse operations (Box 1) — stylized five steps and implications
- Five basic steps (preserved structure):
  - Step 1 (T, trade date): investor places order; broker-dealer sends order to exchange/market; exchange sends info to clearinghouse; most trades transmitted as “locked-in”.
  - Step 2 (T+1): clearinghouse transmits trade details to counterparties for confirmation; firms legally bound.
  - Step 3 (Between T+1 and T+2): clearinghouse becomes CCP and interposes between counterparties.
  - Step 4 (T+2): clearinghouse issues trade summary indicating net money and securities owed; reports to central securities depository.
  - Step 5 (T+3, settlement day for trades that began on T): securities delivered versus payment (DVP); depository and settlement banks effect transfers.
- Administrative implications:
  - Exchange trade reporting systems provide an audit trail for timing.
  - Small number of broker-dealers and clearinghouses offers mechanism for tax collection.
  - Broker-dealers have incentives to report accurately.
  - Tight regulatory regimes facilitate tax compliance.
- Centralized clearance scale examples and statistics:
  - DTCC and subsidiaries in 2008 settled US$1.88 quadrillion in transactions across multiple asset classes.
  - CLS settled a record one-day volume of 1.7 million sides with total value of US$ 6.2 trillion on February 16, 2010.

### IV. Administrative options for collection on exchange-traded instruments
- Two broad approaches observed:
  1. Collect through the exchange or clearinghouse (example: UK).
  2. Collect through broker-dealers / financial intermediaries (example: Belgium).
- Advantages of collection via exchanges/clearinghouses:
  - Lowers compliance costs for taxpayers.
  - Lowers administrative costs for tax agency (one or few reporting entities).
  - Reduces scope for evasion if third-party compliance is high.
- Core administrative functions required:
  1. Establish territorial scope.
  2. Define taxable event.
  3. Determine tax base.
  4. Identify taxable persons.
  5. Assess and collect the tax.
- Timing rules for taxable event (three alternatives preserved):
  - Cash rule: liability at settlement (payment). Advantage: charges on actual amount. Disadvantage: possible postponement.
  - Accrual rule: liability when counterparties enter transaction. Advantage: reduces postponement; disadvantage: problematic when amount unknown.
  - Hybrid rule: accrual where price agreed at entry; cash where price determined later.

### V. Measuring tax base and identifying taxable persons (exchange-traded)
- Appropriate tax base: amount of consideration exchanged (money or other payment).
- Exchange-based measures (preserved):
  - Spot trades: tax base = spot price.
  - Options contracts: tax base = premium when issued; strike price if exercised (no tax other than premium for unexercised options).
  - Futures contracts: tax base = strike price for physically settled contracts.
- Identifying taxable persons:
  - Legal liability can be assigned to buyer, seller, or shared.
  - Administrative advantage to splitting tax between counterparties to allow cross-checks.

### VI. Empirical/administrative examples and statistics
- UK Stamp Duty / SDRT:
  - Standard charge: 0.5 percent (i.e., 50 basis points), paid by purchaser, calculated by reference to the consideration.
  - 2008 revenue (combined SDRT and stamp duty): ￡3.6 billion.
  - 2009 revenue: ￡2.9 billion.
  - Equivalent shares of HMRC collections: 0.8 percent (2008) and 0.7 percent (2009).
  - Equivalent shares of GDP: 0.3 percent (2008) and 0.2 percent (2009).
  - Reported administrative cost: about 0.1 percent of revenue collected.
  - Compliance costs to taxpayers estimated at £50 million in 2008.
  - CREST collects and remits tax transaction-by-transaction for most stock transactions.
- Belgium financial transactions tax:
  - Stock transactions tax rate: 0.17 percent (17 basis points).
  - Some OTC instruments taxed at 0.07 percent (7 basis points).
  - Maximum tax per transaction: €500.
  - 2008 revenue: €236.3 million.
  - 2009 revenue: €140.8 million.
  - Equivalent shares of federal government receipts: 0.27 percent (2008) and 0.17 percent (2009).
  - Equivalent shares of GDP: 0.07 percent (2008) and 0.04 percent (2009).
  - Administrative design: intermediaries maintain records, declare transactions monthly, self-assess and pay; exchanges/clearinghouses not required to report for verification.
- Sweden securities tax (historical outcomes):
  - Securities transactions taxed at 0.5 percent, resulting in a 1 percent tax per round-trip; round-trip transactions in stock options taxed at 2 percent.
  - Rates doubled in 1986.
  - 1989 levy extended to fixed-income securities taxed at maximum 0.15 percent of underlying notional or cash amount.
  - Tax accounted for 0.96 percent of government revenue in 1986 and rose to 1.17 percent in 1988 after rate doubling and coverage broadening.
  - A 100 percent increase in rate produced only a 22 percent increase in the tax’s share of revenue.
  - Resulted in massive migration of trading volume from Stockholm; taxes on fixed-income abolished in 1990 and other instruments in 1991.
- Switzerland (Swiss Stamp Transfer Tax):
  - Rates: 0.15 percent (15 basis points) for domestic securities and 0.30 percent (30 basis points) for foreign securities.
  - Filing/payment: quarterly remittance within 30 days after quarter end; annual filing permitted if liabilities < CHF 5,000.
  - 2010: tax accounted for 4.7 percent of central government revenue and equivalent to 0.4 percent of GDP.
  - 2010 footnote figures: stamp tax revenue CHF 2,96.2 million; total central government revenue CHF 46, 347 million; GDP CHF 546,245 million (figures preserved as presented).
  - Registered dealers: about 400; tax officers to administer: about 10.

### VII. Underreporting, migration, and substitution risks — evidence and mitigation
- Three main compliance risks:
  1. underreporting of taxable transactions;
  2. migration of transactions to non-taxing jurisdictions;
  3. substitution of nontaxed for taxed assets.
- Underreporting mitigations:
  - Collect via exchange or clearinghouse where possible (automatic withholding by third party).
  - Minimize number of exemptions; require documentation for exemptions.
  - Require clearinghouses to report exemptions claimed by broker-dealers for reconciliation.
  - Dedicated audit program and sanctions regime proportionate to culpability.
  - Incentives: e.g., UK rule conditioning legal recognition of title change on stamp tax payment.
- Cross-border migration evidence:
  - Sweden in the 1980s: foreign investors avoided tax by trading Swedish shares in London or New York; domestic investors used offshore accounts and foreign brokers.
  - Belgium/EU issue: EU rules permitting firms to provide services across borders allowed some foreign brokerages to trade on Belgian market without charging/remitting Belgian tax.
- Asset-substitution risks and loopholes:
  - Substitutes include CFDs and other derivatives; initial UK CFDs were exempt from stamp duty until legislation recognized them as chargeable.
  - Mitigation: expand tax base to include close substitutes; include anti-avoidance re-characterization powers; accept that not every loophole can be closed.

### VIII. Over-the-counter (OTC) instruments — special administrative issues
- OTC market characteristics:
  - Decentralized dealer networks, less transparency, wider product heterogeneity, many bilateral cross-border trades.
  - OTC instruments include some equities, most bonds, most money market instruments, many derivatives (including swaps).
- Measuring tax base for OTC:
  - Appropriate base: amount of consideration exchanged (money or other payment).
  - Netted OTC transactions: net payments may not reflect transaction value; law should specify whether gross or net amounts taxed.
  - Dodd-Frank Act enumeration approach offered as guidance to define contract classes.
- Identifying taxable persons:
  - Larger set of potential taxpayers than exchange-traded markets.
  - Possible legislative design: restrict taxable persons to broker-dealers and other major market participants; each registered counterparty could be liable for half the tax when trading with each other; exempt small end-users from registration while ensuring broker-dealers charge them half the rate.
  - Safeguard: mandatory registration for transactions above a threshold.
- Three collection variants for OTC:
  1. OTC cleared through clearinghouse: clearinghouse charges two counterparties (half-half) and remits.
  2. OTC not cleared where counterparties are broker-dealers/major participants: two counterparties charged half-half; allows cross-checking.
  3. OTC not cleared where one counterparty is dealer/major participant and other is exempt end-user: dealer/major participant pays half and charges other half to exempt counterparty.
- Compliance and enforcement:
  - OTCs require more administrative resources: register more taxpayers; process returns/payments; audit more entities.
  - Underreporting risks higher due to lack of mandatory reporting and bilateral settlement.
  - Mitigations: taxpayer services, strong enforcement, linking legal enforceability of OTC contracts to FTT payment.

### IX. Foreign exchange (FX) instruments — settlement methods, options, and challenges
- Settlement methods (Box 4 preserved):
  - Continuous Linked Settlement Bank (CLS Bank);
  - Traditional correspondent banking via LVPS;
  - Bilateral netting;
  - On-us settlement within a single institution.
- CLS Bank features and scale:
  - Specialized FX settlement institution created in 2002.
  - Settles more than 50 percent of FX transactions worldwide (share may have risen to as much as 70 percent since 2007 BIS survey).
  - On February 16, 2010: record one-day volume 1.7 million sides, total value US$ 6.2 trillion.
  - CLS operational mechanism: simultaneous debit/credit; pays bought currency only if sold currency is received.
- Options for apportioning FTT revenue via CLS:
  - Charge transaction-by-transaction and remit to countries where counterparties are located.
  - Allocate revenue to country whose currency used in transaction (jurisdictional issues noted).
  - Apply differentiated rates by instrument type (CLS can distinguish types).
- Using LVPS and SWIFT:
  - LVPS could assess tax if payments identified; SWIFT messaging (e.g., MT300) connects >9,000 financial institutions in 209 countries (as of September 2010) and could be leveraged for confirmations.
- Advantages of collection through settlement institutions:
  - Limits scope for noncompliance (higher compliance when withholding by third party).
  - Reduces record-keeping for banks if tax considered final.
- Disadvantages/implementation challenges:
  - Significant technical enhancements to settlement institutions’ systems; many LVPS cannot distinguish FX payments from other payments.
  - Risk of diverting settlement institutions from payment system objectives.
  - Incentive to migrate to nontaxed settlement systems if only some settlement institutions collect tax.
  - Incomplete coverage may leave residual reporting burdens for banks.
- Cost–benefit illustrative figures (sterling example preserved):
  - A 0.005 percent FTT on sterling transactions would cost traders about US$1 billion per year.
  - Estimated benefits of using CLS to clear sterling transactions: US$ 18 billion, comprising US$12.5 billion (efficiency gains), US$5.4 billion (reductions in net funding requirements), and $0.1 billion (reductions in operating cost gains).
  - Additional fixed costs foregone if a member left CLS: about US$ 5 million per member.
- Brazil IOF operational example (FX and broader scope):
  - IOF scope: (1) foreign exchange; (2) securities; (3) lending operations.
  - IOF on FX charged to capital inflows and outflows; spot basic rate 0.38 percent (38 basis points) with higher rates depending on subsequent use.
  - 2010 fiscal significance (all IOF instruments): IOF collected R$ 26,601 million; total federal government revenue R$ 1,378,609 million; GDP R$ 3,674,964 million.
  - IOF collections accounted for 1.9 percent of federal government revenue and were equivalent to 0.7 percent of GDP.
  - Sample higher IOF rates: investors taxed at 6 and 2 percent when converting foreign currency for investing in Brazilian stocks and bonds, respectively; investors taxed at 6 percent when converting for margin payments on derivatives; companies administering international credit cards taxable at 6.38 percent when purchasing foreign currency.
  - Administration: self-assessed at settlement; collected by financial institutions authorized by Central Bank; remit revenue on third business day following end of each 10-day cycle and file monthly DCTF; targeted audit program maintained.
- FX design recommendations and mitigations:
  - Territorial coverage: for exchange-based FX, charge in state where exchange located; for OTC FX consider splitting rate half-half between registered taxpayers and their nonresident counterparties in non-FTT states.
  - Timing: accrual, cash, or hybrid rules depending on instrument characteristics (accrual prevents postponement; cash appropriate where amounts unknown at entry).
  - Tax base: amount of money exchanged in domestic currency terms; special conceptual issues for NDFs and net vs. gross payments.
  - Collection: leverage CLS and LVPS when possible; for non-centrally cleared trades rely on registered counterparties with split liability.
  - Compliance: simple calculation methods; leverage settlement institutions to collect/report; targeted audits; duplicate records at dealing sites; require recognition of FX transactions at dealing sites for FTT purposes.
  - Mitigate migration and substitution by keeping rates low, pursuing coordination among major financial centers, taxing near-substitutes, and providing tax agencies sufficient enforcement resources.

### X. Implementation tasks, timeline, and organizational recommendations
- Implementation tasks:
  - Enact legislation and regulations.
  - Create administrative processes and computer systems (largest initial investment likely information systems).
  - Recruit and train tax officers.
  - Register and educate taxpayers; consult stakeholders.
- Cost structure:
  - Initial investment costs (information systems largest) and ongoing operational costs (mainly staff salaries).
  - Administrative burden lower for exchange-traded instruments because clearinghouses can be leveraged; OTCs require collecting directly from many market participants.
- Compliance program design:
  - Comprehensive audit program and penalty regime.
  - Link legal standing of transaction to FTT payment where feasible.
  - Require exchanges/clearinghouses to report transactions to tax agencies even if not used for collection.
- Timeline and organization:
  - IMF experience suggests a minimum of 18 months would be needed to introduce an FTT.
  - Recommendation to establish a dedicated team within tax agency for design and implementation and a special department to administer the FTT during initial implementation before merging into mainstream operations.
  - Ensure sufficient budgetary, staff, and technical assistance resources for ongoing administration.

*Source: IMF Working Paper content in content unit _wp11185*

### 1. Common Exchange-Traded Instruments............................................................................... 7

### 1. Common Exchange-Traded Instruments

### I. Introduction — administrative focus of the paper
- Purpose: assess the administrative feasibility of levying a financial transactions tax (FTT) on a broad range of financial instruments, focusing solely on administrative practicability (whether and how a broad-based FTT could be administered).
- Definition: an FTT is a tax on transactions in financial instruments, intended to apply to purchases and sales and other financial transactions that have a similar effect (e.g., various types of derivatives).
- Scope: an FTT can be levied on one, a few, or a broad range of instruments—including stocks, fixed income securities, derivatives, and foreign exchange.
- Current practice: some countries levy an FTT, usually on a small number of instruments—most commonly stocks and bonds.
- Historical context and renewed interest:
  - Keynes (1936) proposed a substantial transfer tax on securities transactions to reduce speculation.
  - Tobin (1978, 1996) proposed a tax on currency trades to reduce currency market volatility.
  - January 2009 G-20 Summit in Pittsburgh requested an IMF report (by June 2010) on options for the financial sector to contribute to costs of government interventions; this spurred renewed interest in FTTs.
  - Leading Group on Innovative Financing for Development recommended adoption of a global currency transactions tax (2010).
  - European Commission indicated it would prepare an impact assessment on financial sector taxation, including assessing the implications of introducing an FTT (by summer 2011), and issued a consultation paper in February 2011.
  - European Parliament adopted a resolution urging the EU to introduce an FTT (March 2011).
- Policy literature referenced (administrative vs. policy arguments):
  - IMF (2010a) and Matheson (2011) argue alternative tax instruments are better suited to revenue-raising and mitigating financial market failures.
  - The IMF report recommended a “backward-looking” charge on financial institutions, a Financial Stability Contribution (FSC), and a Financial Activities Tax (FAT) as alternatives to an FTT.
    - FSC: initially levied at a flat rate (varying though by type of financial institution), refined later to reflect institutions’ riskiness and contributions to systemic risk; applied to a broad balance sheet base on the liabilities side (excluding capital and possibly including off-balance sheet items); could be accumulated in a fund or paid into general revenue.
    - FAT: levied on the sum of the profits and remuneration of financial institutions, paid to general revenue.
- Policy concerns about FTTs noted in literature:
  - FTTs can be inefficient for raising revenue: they reduce the value of securities, increase the cost of capital, and lower liquidity.
  - No convincing evidence that FTTs lower short-term price volatility.
  - Asset bubbles are more often caused by excessive leverage than excessive numbers of transactions.
  - The real burden of an FTT may fall largely on final consumers rather than earnings in the financial sector.
- Administrative focus of this paper:
  - Examines facilitation and complication factors for administering a broad-based FTT.
  - Considers three partially overlapping categories of instruments:
    1. exchange-traded instruments;
    2. over-the-counter instruments;
    3. foreign exchange instruments (treated separately because of market size, global nature, and focus in discussions).
  - For each category, examines: factors that facilitate/complicate administration, options for assessing and collecting the tax, likely compliance risks, and mitigation measures.

### II. Exchange-traded instruments — relative administrative ease and context
- Main conclusion: It is easier to administer an FTT on exchange-traded financial instruments than on other instruments.
- Rationale:
  - In both high and low income countries, most equities (in terms of trading volume), some bonds, and some derivatives are bought and sold on organized exchanges.
  - Centralized trading, reliance on clearinghouses for settlement, and high degree of market regulation facilitate administration.
  - Where countries have levied an FTT, it is most commonly applied to exchange-traded instruments (examples cited: China, India, Korea, the United States (US), and the United Kingdom (UK) apply an FTT or similar levy on these types of instruments).
- Key administrative enablers for exchange-traded instruments:
  - Centralized exchanges bringing together purchasers and sellers executed by registered broker-dealers.
  - Listing process: issuers typically register securities with a regulatory body and satisfy exchange listing rules.
  - Extensive regulation of exchanges (statutes, regulations, self-regulatory arrangements) governing instruments traded, persons who can buy and sell for the public, and trading practices—creating a conducive environment for tax administration.
  - Centralized clearance and settlement systems:
    - Clearinghouse functions: confirms terms of trade, informs counterparties of settlement obligations, and guarantees completion of a trade.
    - Central securities depository or custodian: holds securities (often as electronic book entries) and registers transfers of ownership.
    - Settlement banks: handle payment/receipt of funds associated with a trade.
    - These operations have become highly automated, centralized, and integrated in many countries; typically each country has one or a few clearinghouses and securities depositories, and a small number of settlement banks.
  - Strong recordkeeping capacity of the financial sector and relatively small number of entities subject to an FTT reduce administrative workload.

### A. Market organization, instruments, and regulatory environment
- Exchanges:
  - Provide a marketplace for buyers and sellers; trades executed by registered broker-dealers for clients or themselves.
  - Not all securities must be exchange-traded; in many countries securities (including listed securities) can also be traded OTC, but such transactions usually must be reported to a regulatory or self-regulatory organization.
- Clearing and settlement (definitions and roles preserved):
  - Clearing a security transaction: confirming terms and mutual obligations between counterparties.
  - Settling the transaction: transfer of the security from seller to buyer and transfer of funds from buyer to seller.
  - Clearinghouse (central counterparty, CCP): authorizes broker-dealers to clear and settle transactions for themselves and others; clearing members maintain settlement accounts with designated banks; the clearinghouse interposes itself between counterparties and becomes buyer to every seller and seller to every buyer; reduces settlement risk by requiring collateral and imposing penalties for failure to complete a trade.
  - Depending on the country, the three functions (clearinghouse, securities depository/custodian, settlement banks) may be centralized in a single entity or split across multiple entities.
- Administrative challenges for an FTT (summarized):
  - Conceptual issues: defining territorial scope, taxable event, tax base, and taxable persons.
  - Operational challenges: high mobility and constant innovation in financial instruments creating opportunities for tax avoidance by migrating transactions to nontaxing jurisdictions and nontaxed instruments.
  - Complicating market developments: creation of new and complex instruments, ever-growing transaction volumes, increasing globalization of financial markets.
  - Facilitating market developments: expanding role of clearinghouses; proliferation of automated trading platforms; conversion of paper securities into electronic book entries; strengthening regulation of OTC derivatives in a number of countries.

### B. Administrative design features for an FTT (verbatim list from source)
- Key administrative features of the tax are that it can be:
  - Applied to the initial issuance of a financial instrument, subsequent transactions in the instrument, or both.
  - Assessed on the basis of the amount of money that changes hands in the transaction, the notional value of the transaction, or a variety of other valuation methods.
  - Designed to exempt certain types of transactions or categories of persons.
  - Taxed at a single tax rate or multiple rates, either on an ad valorem (percentage) or specific (flat amount) basis.
  - Levied on the buyer, the seller, or both.
  - Collected by exchanges, clearinghouses, or market participants.

### Table 1. Common exchange-traded instruments — definitions (preserved wording)
- Equities
  - Equities (i.e., stocks) are financial securities that give the holder an ownership claim to a company. A company may have different types of equities (preferred, common), each with distinctive ownership rules, privileges, or share values. Equities can be private or public: public equities are regulated by government securities regulators and are traded on exchanges; private shares do not require approval by a regulatory body and are traded over-the-counter.
- Futures
  - A future is a contract that obligates the purchaser to buy or sell an underlying asset at a specified price and time. The underlying asset is commonly a single stock or a stock index, a bond, a currency, or a commodity. Futures are traded on an exchange in standardized forms in terms of their contract size and maturity date.
- Options
  - An option is a contract that provides the purchaser (the “holder”) with the right (but not the obligation) to buy (a call) or sell (a put) an underlying asset at a specified price (“strike price”) over a specified period of time in exchange for the payment of a premium to the seller (i.e., the “writer”). The underlying asset is commonly a stock, bond, commodity, or currency. Most options are traded on exchanges in standardized forms in terms of their contract size and maturity date. Some options are negotiated over-the-counter, which allows the contract to be customized to meet the needs of the counter-parties.

*Source: _wp11185 - 1. Common Exchange-Traded Instruments*

### Box 1 provides a stylized description of a clearinghouse’s operations.

### Box. 1 The Operations of a Clearinghouse

### Clearinghouse operations — five basic steps
- Step 1 (T, trade date): Investor places buy or sell order with a broker-dealer. Broker-dealer sends order to an exchange or another market for execution, which sends information to the clearinghouse. Most trades are transmitted as “locked-in” (matched by the exchange) so the clearinghouse does not perform a trade comparison. For trades not locked-in, market participants report buy and sell data to the clearinghouse and the clearinghouse compares and matches the data.
- Step 2 (T+1): Clearinghouse transmits trade details to counterparties for confirmation; firms become legally bound to complete the transaction.
- Step 3 (Between T+1 and T+2): Clearinghouse becomes the central counterparty (CCP) by interposing itself between counterparties (buyer to seller and seller to buyer) and assumes responsibility to make the trade whole if either party cannot fulfill its obligation.
- Step 4 (T+2): Clearinghouse issues a trade summary indicating net money and net securities owed. Clearinghouse sends a report to the central securities depository (if different) describing securities changing hands, amounts due, and brokerage accounts to update.
- Step 5 (T+3, settlement day for trades that began on T): Securities are delivered versus payment (DVP). Central securities depository transfers securities electronically from selling firm’s securities account to clearinghouse’s account and then to buying firm’s account. Buying firm instructs its settlement bank to send funds to the clearinghouse’s settlement bank, which pays funds to the selling firm’s settlement bank.

- Membership note: Buying and selling firms may be members of the clearinghouse (entailing membership fees) or may access the clearinghouse through other members (clearing members).

### Implications for Financial Transaction Tax (FTT) administration
- Exchange and clearinghouse features that facilitate FTT administration:
  - Exchange trade reporting systems provide an audit trail for transaction timing.
  - Relatively small number of broker-dealers and clearinghouses offers a mechanism for tax collection.
  - Broker-dealers have commercial incentives to accurately report trades to clearinghouses.
  - Tight regulatory regimes governing exchanges create environments conducive to tax compliance.
- A tax agency can leverage these features to administer an FTT (example: UK shown below).

### Examples and key statistics on centralized clearing and FTT collection
- US example: Depository Trust & Clearing Corporation (DTCC) and subsidiaries in 2008 settled US$1.88 quadrillion in transactions of corporate and municipal bonds, US Treasury issues, stocks, exchange traded funds, and mutual funds.
- European settlement: Substantial amounts of European government securities are settled in Belgium or Luxembourg through Euroclear and Clearstream.
- Centralized clearance for complex instruments: Partnership between DTCC’s Deriv/SERV and the CLS Bank provides centralized trade processing and settlement for credit default swaps.
- UK Stamp Duty / SDRT:
  - Standard charge: 0.5 percent (i.e., 50 basis points), paid by purchaser, calculated by reference to the consideration.
  - 2008 revenue (combined SDRT and stamp duty): ￡3.6 billion.
  - 2009 revenue: ￡2.9 billion.
  - Equivalent shares of HMRC collections: 0.8 percent (2008) and 0.7 percent (2009).
  - Equivalent shares of GDP: 0.3 percent (2008) and 0.2 percent (2009).
  - Reported administrative cost: about 0.1 percent of revenue collected.
  - Compliance costs to taxpayers estimated at £50 million in 2008.
  - CREST collects and remits tax on a transaction-by-transaction basis for most stock transactions.
- Belgium financial transactions tax:
  - Stock transactions tax rate: 0.17 percent (17 basis points) of amount received or paid on most exchange-traded securities and derivatives.
  - Some OTC instruments (e.g., corporate bonds) taxed at 0.07 percent (7 basis points).
  - Transactions between financial institutions (trading and investment accounts) exempt; transactions between natural or legal persons (non-financial intermediaries) exempt; transactions with nonresidents exempt.
  - Both sides of a transaction are charged; tax is split evenly between the two parties.
  - Maximum amount of tax per transaction: €500.
  - 2008 revenue: €236.3 million.
  - 2009 revenue: €140.8 million.
  - Equivalent shares of federal government receipts: 0.27 percent (2008) and 0.17 percent (2009).
  - Equivalent shares of GDP: 0.07 percent (2008) and 0.04 percent (2009).
  - Administrative design: financial intermediaries maintain records, declare transactions in a monthly tax return, and self-assess and pay the tax when filing; exchanges/clearinghouses are not required to report to the tax agency for verification.

### Administrative options and feasibility considerations for an FTT on exchange-traded instruments
- Two broad collection approaches observed:
  1. Collect through the exchange or its clearinghouse (example: UK).
  2. Collect through broker-dealers / financial intermediaries (example: Belgium).

- Advantages of collection via exchanges/clearinghouses:
  - Lowers compliance costs for taxpayers (no need for registration, record-keeping, charging and remitting by many market participants).
  - Lowers administrative costs for tax agency (process information from one or few entities).
  - Reduces scope for evasion if third-party (exchange/clearinghouse) compliance is higher than market participants.

- Core administrative functions a tax agency must perform for technical feasibility:
  1. Establish the territorial scope of the tax.
  2. Define the taxable event.
  3. Determine the tax base.
  4. Identify the taxable persons.
  5. Assess and collect the tax.

- Establishing territorial coverage:
  - Primary determination by reference to the location of a transaction.
  - For exchange transactions, levy by the country whose exchange the transaction is executed on; if universally applied, would eliminate double taxation or untaxed transactions.

- Defining the taxable event:
  - Broad-based FTT could include purchase or sale of a financial instrument, an agreement establishing a right/obligation to purchase or sell a financial instrument, or an exchange of payments based on a financial instrument, rate, index, or event.
  - Applies to transfers in ownership and to transactions not involving ownership transfer but with similar economic effect (e.g., unexercised options, cash-settled futures, non-deliverable forwards, swaps).

- Timing of the taxable event — three alternative rules:
  - Cash rule: tax liability arises at settlement (payment). Advantage: charges tax on actual amount changing hands. Disadvantage: taxpayers could delay payment to postpone tax liability. Less problematic for exchange-traded instruments settled through clearinghouses with strict payment timing.
  - Accrual rule: tax liability arises when counterparties enter into a taxable transaction. Advantage: reduces postponement risk and allows charging tax once for multi-payment transactions (e.g., swaps). Disadvantage: problematic for transactions where actual amount is unknown at contract entry (e.g., options, cash-settled futures); would require charging tax on notional prices (e.g., strike price) that may never be realized.
  - Hybrid rule: apply accrual where transaction price is agreed at contract entry and cash where transaction price is not known until later; this avoids postponement and arbitrary liabilities.

- Measuring the tax base:
  - Appropriate measure: amount of consideration exchanged (money or other payment).
  - For exchange-based instruments:
    - Spot trades: tax base = spot price.
    - Options contracts: tax base = premium paid when contract is issued and strike price if option is exercised (no tax other than premium for unexercised options).
    - Futures contracts: tax base = strike price for physically settled contracts.
  - Conceptual challenge: cash-settled contracts where net cash payment may be the appropriate tax base versus using strike price.

- Identifying taxable persons:
  - Legal liability can be assigned to buyer, seller, or shared; economic incidence depends on demand and supply elasticities.
  - Administrative advantage to splitting tax between counterparties to allow cross-checks and reduce revenue vulnerability; advantage less important where a third party (exchange/clearinghouse) charges and remits.

- Assessing and collecting the tax:
  - Strong reasons to assess and collect FTT on exchange-traded instruments through exchange or clearinghouse rather than counterparties:
    - Reduces compliance costs for broker-dealers and market participants.
    - Reduces collection costs for tax agency by limiting reporting to one or few entities.
    - Reduces scope for evasion if third party compliance is higher than market participants.

*Source: Box 1 and accompanying text in content unit _wp11185 - Box 1 provides a stylized description of a clearinghouse’s operations.*

### introduction of such a tax would involve a number of implementation tasks. Legislation and

### _wp11185 - introduction of such a tax would involve a number of implementation tasks. Legislation and

### Implementation tasks and cost structure
- Legislation and regulations would need to be enacted, administrative processes and computer systems created, tax officers recruited and trained, and taxpayers educated on their obligations.  
- The costs associated with these activities would comprise both initial investment costs (the largest of which is likely to involve information systems) and ongoing operational costs (mainly staff salaries). 33
- Administrative burden is likely lower for exchange-traded instruments than for OTC instruments because:
  - Clearinghouses can be leveraged to administer the FTT for exchange-traded transactions.
  - For OTC transactions that are not centrally cleared, the tax would need to be collected directly from market participants, implying a substantially larger workload for the tax agency.

### Administrative feasibility and enforcement
- Workable rules and procedures can be designed to determine how a FTT would be charged and collected on exchange-based transactions; administrative feasibility also requires that the tax agency can ensure compliance and prevent easy avoidance.
- Broker-dealers would be required to register for off-exchange transactions as described in Section III. 31

### Compliance risks (three main types)
- An FTT faces three main compliance risks:
  - (1) underreporting of taxable transactions;
  - (2) migration of transactions to non-taxing jurisdictions;
  - (3) substitution of nontaxed for taxed assets.

### Underreporting risks and mitigation
- Underreporting can be reduced when an exchange or clearinghouse collects the tax (as with the UK stamp duty) because the tax is automatically withheld by a third party rather than relying on self-assessment by market participants.
- It is easier for the tax agency to monitor one or a few exchanges and clearinghouses than to control the much larger number of broker-dealers and other market participants.
- Exemptions exacerbate underreporting risks by creating opportunities to claim reliefs not entitled to. The best solution is to minimize the number of exemptions in the FTT legislation.
- Where exemptions are necessary, legislation should require taxpayers to maintain documentation and accounting records substantiating relief claims.
- Where the FTT is collected by a clearinghouse, the clearinghouse should be required to record and report to the tax authorities the exemptions claimed by broker-dealers so auditors can reconcile claims with broker-dealer accounts.
- Off-exchange transactions present additional underreporting opportunities:
  - Listed securities may also be traded off-exchange or settled outside the exchange’s clearing agency. 34
  - Example: securities registered in the name of a nominee (e.g., a broker-dealer) where the beneficial interest is sold using the same nominee so the legal title remains unchanged and the trade can be completed off-exchange without central clearing. 35
- To mitigate off-exchange underreporting, legislation should require broker-dealers to charge and remit the tax for off-exchange transactions or report these transactions to some other entity responsible for collecting the tax or reporting to the tax agency. 36
- Controlling underreporting requires:
  - A dedicated audit program.
  - An appropriate sanctions regime linked to culpability (lower penalties for negligence, higher for gross negligence, very high for fraud or deliberate evasion).
- Incentives for compliance can reduce underreporting. Example:
  - The UK’s stamp tax establishes that title change of share ownership will not be legally recognized (except as evidence in a criminal case) unless the stamp tax has been paid, creating strong incentive for purchasers to ensure tax payment.

### Cross-border migration risks and examples
- Market participants may shift investments from instruments traded on taxable domestic exchanges to nontaxable overseas exchanges to avoid tax.
- Sweden’s 1980s experience provides a documented case study of such avoidance; the Swedish tax was levied at high rates on a range of financial instruments and resulted in widespread avoidance and poor revenue performance compared to the high rates. 38
- Examples of avoidance behaviors observed in Sweden:
  - Some foreign investors avoided the tax on stocks by eliminating the use of Swedish brokerage firms when trading in Sweden or by trading Swedish shares in London or New York.
  - Some domestic investors established off-shore accounts and used foreign brokers to purchase Swedish shares in Sweden.
- Belgium (and possibly other EU countries) face an avoidance problem arising from EU rules permitting EU-domiciled firms to provide services throughout the EU without a physical presence or fiscal agent in the countries where services are provided:
  - Some foreign brokerages registered with Belgian financial authorities but with no seat or office in Belgium conduct transactions on the Belgian market yet are not required to charge or remit the stock exchange transactions tax to the Belgian tax agency.
  - Some Belgian nationals may evade the tax by executing transactions through these foreign institutions.
  - Belgian tax authorities lack legal power and administrative capacity to redress this noncompliance, and there are no conventions or EU-directives on mutual assistance and recovery of FTTs for tax authorities to draw on.

*https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11185.pdf*

### 0.5 percent, resulting in a 1 percent tax per round-trip. Round-trip transactions in stock options were taxed at

### _wp11185 - 0.5 percent, resulting in a 1 percent tax per round-trip. Round-trip transactions in stock options were taxed at

### Swedish securities tax: design, evolution, and outcomes
- Tax structure and rates:
  - Securities transactions were taxed at 0.5 percent, resulting in a 1 percent tax per round-trip.
  - Round-trip transactions in stock options were taxed at 2 percent.
  - The exercise of an option was treated as a transaction in the underlying stock and was subject to an additional 1 percent round-trip charge.
  - These rates were doubled in 1986.
  - In 1989, the levy was extended to fixed-income securities (including on government debt and corresponding derivatives) which were taxed at a maximum rate of 0.15 percent of the underlying notional or cash amount.
- Coverage and collection:
  - Taxes were applied directly on registered Swedish brokerages for transactions between domestic residents as well as those between domestic and foreign residents.
  - Trades between two foreign principals were taxed only if they involved a security registered in Sweden.
- Revenue and market effects:
  - Revenue performance was disappointing relative to the high tax rates, partly due to tax avoidance.
  - The tax generated little revenue—even after the rates were doubled—but led to a massive migration of stock trading volume from Stockholm to other financial centers.
  - The tax resulted in a sharp drop in trading volume for Swedish government bills and bonds as investors shifted to nontaxed domestic substitutes.
  - Taxes on fixed-income instruments were abolished in 1990 and on other instruments in 1991.
- Quantitative revenue detail:
  - The tax accounted for 0.96 percent of government revenue in 1986 and rose to only 1.17 percent of collections in 1988 after the rates had been doubled in July 1986 and the coverage broadened in 1987.
  - Thus, a 100 percent increase in the tax rate resulted in only a 22 percent increase in the tax’s share of revenue.

### Legislative provisions to limit offshore migration (UK practices)
- Key features cited:
  - The UK stamp tax is a global tax that is chargeable on a transaction that is carried out either in the UK or overseas.
  - Recognizing practical difficulties of collecting the tax on overseas transactions, the UK imposes a higher rate (1.5 percent) when shares enter a depositary receipt issuer arrangement or a clearance service system.
  - The 1.5 percent charge or “season ticket” ensures some revenue is collected from subsequent stamp-free transactions overseas when shares are onward traded between members of the clearance service/depositary receipt issuer but legal title to the shares remains in the name of the clearance service/depositary receipt issuer.
- Definition note:
  - Depositary receipts: an intermediary (usually a bank) purchases the ordinary shares in the overseas market and then issues the depositary receipts, against the shares, to investors in the domestic market. The holder receives the same dividends as an ordinary shareholder and can also trade the shares on overseas exchanges.

### Summary assessment: exchange-traded instruments and FTT administration
- Advantages of taxing exchange-traded instruments:
  - High degree of market regulation and requirement that transactions take place through registered intermediaries (broker-dealers).
  - Ease of establishing the timing of a taxable event and calculating the tax base.
  - Possibility of collecting the tax through clearinghouses.
- Administrative needs and compliance measures:
  - A comprehensive audit program—backed by a penalty regime—is needed to control noncompliance.
  - Noncompliance could be further reduced through a supportive policy regime that:
    - (a) conditions the legal standing of a transaction on the payment of an FTT;
    - (b) imposes a higher tax rate when financial instruments exit the domestic market;
    - (c) applies the FTT at a low tax rate; and,
    - (d) ensures that near-substitutes for exchange-traded instruments are also subject to the tax.
  - Governments will need to invest resources in developing their tax agencies’ capacity to collect the new tax.

### Asset-substitution risks and derivative loopholes
- Substitution behavior:
  - Shareholders may avoid taxes by trading in derivatives instead of the underlying share (e.g., contracts for differences (CFDs)).
  - CFDs allow market participants to speculate on price movements without taking ownership of the underlying shares.
- Example and mitigation:
  - CFDs were first developed in London during the 1990s and initially had the advantage of being exempt from stamp duty because the legislation did not recognize them as “chargeable securities.”
  - The UK Financial Services Authority (FSA) regulations exclude derivatives from the classes of assets admissible for the solvency test for life insurance companies and pension funds, thereby raising the cost of investing in derivatives.
  - Policy option: countries could consider expanding the tax base of the FTT to include close substitutes (such as CFDs) so that the closest substitutes to taxable instruments are also subject to the tax, recognizing that it will never be possible to close every loophole.

### Over-the-counter (OTC) instruments: market features and taxation challenges
- OTC market characteristics:
  - OTC markets are decentralized networks of trading relationships centered on one or more dealers rather than formal exchanges.
  - OTC instruments include some equities, most bonds, most money market instruments, and many types of derivatives (including swaps).
  - OTC markets are generally less transparent, operate with fewer rules, and involve a larger variety of products with varied characteristics.
- Taxing implications:
  - Challenges include greater variety of instruments and persons who can execute OTC trades, the decentralized nature of trading, and absence of centralized clearinghouses for some instruments.
  - OTC derivatives (options, forwards, swaps) are dealer-intermediated and often traded bilaterally across borders, complicating the definition of taxable events, tax base calculation, and timing of transactions.
- Bond market features that facilitate taxation:
  - Bonds tend to be closely regulated and must be registered before issuance.
  - Trading often occurs through licensed broker-dealers, automated telephone and electronic trading platforms, and, in some countries, individual trades must be reported to a regulatory body.
  - Bonds often involve a single payment at the outset and are frequently settled in a centralized manner (treasury, settlement banks, or clearinghouse), aiding identification of taxable persons and collection.

### Administrative options for taxing OTC instruments and the Swiss model
- Collection approaches:
  - Where an OTC transaction is cleared and settled through a clearinghouse, the tax could be collected (withheld) by the clearinghouse.
  - For OTC instruments not centrally cleared, traders themselves would need to assess and pay the tax.
- Swiss Stamp Transfer Tax (example of leveraging large traders):
  - Scope and rates:
    - Applies to transactions in certain domestic and foreign securities, including: stocks, corporate and government bonds, investment fund units, and some derivatives (e.g., exercised options, forwards, and equity swaps).
    - Levied at a rate of 0.15 percent (15 basis points) for domestic securities and 0.30 percent (30 basis points) for foreign securities.
    - Both residents and nonresidents are subject to tax, but there are a broad range of exemptions.
  - Collection mechanism:
    - Tax is collected through securities dealers.
    - Dealers are broadly defined to include traditional broker-dealers and banks, Swiss companies with more than CHF 10 million in taxable securities on their balance sheet, and foreign members of a Swiss stock exchange.
    - These persons are required to charge and collect the stamp tax from their counterparties—on both OTC and exchange-based transactions—and remit the revenue to the government.
  - Liability timing:
    - Liability arises when the transfer of ownership of a security has been completed, provided that one of the parties or intermediaries is a Swiss securities dealer.
    - For conditional transactions (e.g., options), liability is incurred when the condition is met: for options, the tax is charged on the strike price when the option has been exercised.
  - Exemptions and rationale:
    - Dealers are exempt from paying the tax when buying and selling securities for/from their trading portfolio or when acting as a broker for two other counterparties.
    - Swiss investment funds, foreign banks and brokers, foreign social security institutions, foreign pension institutions, foreign life insurers, and foreign companies whose shares are listed on a recognized stock exchange are also exempt.
    - Exemptions aim to add liquidity and enhance the attractiveness of the Swiss capital market and to avoid disadvantaging Swiss banks relative to foreign competitors.

*Source: _wp11185 - 0.5 percent, resulting in a 1 percent tax per round-trip. Round-trip transactions in stock options were taxed at*

### Box 3. Assessment Methods for the Swiss Stamp Transfer Tax

### Box 3. Assessment Methods for the Swiss Stamp Transfer Tax

### Dealer roles, liabilities, and charging rules
- Dealers must consider: whether counterparties identify as registered securities dealers or as tax-exempt investors, whether the dealer is contracting party or broker, whether the dealer is purchasing or selling for its own trading portfolio, the domicile of the dealer’s counterparty, and the instrument being traded.
- When a securities dealer is a contractual party to a transaction:
  - The dealer will be liable either for paying one-half of the tax itself (if the transaction is for its own investment portfolio) or no tax (if the transaction is for its own trading portfolio).
  - The dealer is required to charge one-half of the tax to its Swiss client (for both Swiss and foreign securities) or a foreign client (for Swiss securities, foreign investment fund units, and foreign shares, but not foreign bonds), as the case may be.
- When a dealer acts as a broker between two counterparties:
  - The dealer itself is not required to pay the tax but may be required to charge it to the counterparties depending on who the two counterparties are:
    - Where one counterparty is another securities dealer and the other counterparty is either a Swiss or foreign client, no tax is charged to the other dealer and one-half the tax is charged to a Swiss client (for both Swiss and foreign securities) or a foreign client (for Swiss securities, foreign investment fund units, and foreign shares, but not foreign bonds).
    - Where one counterparty is a foreign bank or foreign broker and the other counterparty is either a Swiss or foreign client, no tax is charged to the bank or broker and one-half the tax is charged to a Swiss client (for both Swiss sand foreign securities) or a foreign client (for Swiss securities, foreign investment fund units, and foreign shares, but not foreign bonds).
    - Where one counterparty is a Swiss client and the other counterparty is a Swiss or foreign client, one half of the tax is charged to the Swiss client and one-half is charged to the other Swiss client (for both Swiss sand foreign securities) or a foreign client (for Swiss securities, foreign investment fund units, and foreign shares, but not foreign bonds).
    - Where the two counterparties are foreign clients, one-half the tax is charged to one foreign client (for Swiss securities, foreign investment fund units and foreign shares, but not for foreign bonds) and one-half to the other foreign client.

### Filing, payment, and compliance relief
- Filing and payment are performed on a self-assessment basis.
- The dealer must file the tax return and remit the revenue within 30 days after the end of each quarter.
- To reduce compliance costs, the Swiss tax may be paid and tax return filed on an annual basis for those taxpayers whose stamp transfer tax liabilities are less than CHF 5,000 (about US$4,700).

### Administrative arrangements and safeguards
- Using dealers to collect the tax eliminates the need for individual end-users to register for the tax, maintain records, and file tax returns.
- All securities dealers must register with the tax agency irrespective of whether they are a licensed bank or licensed by another regulatory agency.
  - At registration, dealers are issued an identification number and card which they must present to other dealers in order to claim an exemption for purchases intended for their trading portfolio.
- Dealers are required to maintain a transactions register recording the name, domicile, and securities dealer number (if any) of purchaser and seller as well as the type, number, and value of the securities traded.
- These arrangements facilitate the dealer’s task of assessing the tax and the tax agency’s task of verifying the assessment.

### Cooperation with market participants and administrative trade-offs
- The Swiss tax authorities consulted the Swiss banking association when preparing guidance circulars setting out practical administration details.
  - Result: administrative procedures were built around banks’ internal systems and procedures; the tax agency reduced taxpayers’ errors and created a trusting relationship with taxpayers.
- Complexities that complicate administration:
  - The web of exemptions and differential treatments increases compliance effort for taxpayers and enforcement work for tax agencies.
  - Collecting the tax through dealers instead of clearinghouse(s) raises compliance costs for market participants and administrative costs for the government.
- Legal avoidance channels acknowledged by Swiss Federal Tax Administration:
  - (1) Swiss nationals (individuals) can conduct tax-free transactions directly with foreign banks instead of using a Swiss dealer.
  - (2) Two Swiss end-users (individuals or businesses) can trade securities between themselves tax-free, provided they own less than CHF 10 million in such securities (otherwise, they would be required to register and charge the tax).
  - The authorities believe associated revenue loss is very small, arguing traders are unlikely to incur inconvenience and additional costs to avoid a small tax.

### Audit program, compliance costs, and revenue statistics
- The tax agency operates a dedicated audit program for banks and other securities dealers, examining the stamp duty and other bank-specific taxes.
  - The audit program examines each dealer’s stamp tax obligations at least once before the expiration of the five-year statute of limitations.
  - Tax auditors are authorized to review dealers’ books and records and, when discrepancies are found, assess additional tax and apply penalties.
  - The tax office is not permitted to access transactions information from clearinghouses.
- The stamp tax is thought to have low compliance and administrative costs, and high compliance rates, although no precise estimates are available.
  - In 2010, the tax accounted for 4.7 percent of central government revenue and was equivalent to 0.4 percent of GDP.51
  - Footnote figures (as presented): In 2010, stamp tax revenue (for the issuance of new shares and the transfer of existing shares) was CHF 2,96.2 million, total central government revenue was CHF 46, 347 million, and GDP was CHF 546,245 million (Source: Confederation Suisse, 2011).
- Administrative staffing and dealer base:
  - The small number of registered dealers (about 400) requires only a small number of tax officers (about 10) to administer the tax.
  - Compliance costs are said to be low because dealers integrate the calculation of the tax into their internal accounting systems.
  - Swiss tax officials attribute high compliance rates to the focused audit program and banks’ confidence in efficient administration.

### Challenges applying a transactions tax to OTC instruments
- Applying a transactions tax to OTC instruments is more challenging than to exchange-traded instruments due to difficulties in:
  - (1) establishing the territorial coverage of the tax;
  - (2) defining the taxable event;
  - (3) measuring the tax base;
  - (4) identifying the taxable persons; and,
  - (5) assessing and collecting the tax.
- Establishing territorial coverage:
  - OTC transactions are not executed at a single physical location and elements can occur across borders, potentially giving two states jurisdiction.
  - One solution: adopt a common approach defining the taxable person as either the “buyer” or “seller” of a financial transaction — but this faces problems for OTC transactions (e.g., swaps) where counterparties are both buyers and sellers.
  - Another solution: countries imposing an FTT require residents to pay only half the tax rate on transactions with non-residents in countries that also impose an FTT.52
- Defining the taxable event:
  - Broad taxable transaction definition: purchase or sale of a financial instrument, or the right to purchase or sell a financial instrument, or an exchange of payments based on a financial instrument, rate, index, or an event.
  - Conceptual problems for some instruments (example: repurchase agreements):
    - Question whether the two legs constitute separate taxable events or a single taxable event depends on whether the law and accounting treat a repurchase agreement as a sale (arguing for taxing both legs) or as a financing arrangement (arguing for taxing only the first leg).53
- Timing of the taxable event:
  - Liability could arise at the time counterparties enter into a taxable transaction (accrual rule) or at the time of payment (cash rule).
  - The accrual rule generally preferred to prevent postponement of tax liability, but accrual rule encounters problems for some OTC instruments (e.g., swaps) where cash flows during the life of the contract are unknown at inception.
    - Accrual rule would require imposing the FTT on the notional value (or some constructed value), producing an arbitrary tax liability since the notional amount is often not exchanged.
  - Conclusion: each of the two rules—cash and accrual—is better suited for some OTC instruments than others; a hybrid approach would be needed.

*Source: Box 3. Assessment Methods for the Swiss Stamp Transfer Tax*

### Section II.

### _wp11185 - Section II.

### Measuring the tax base for OTC instruments
- The amount of consideration (money or other form of payment) that changes hands between counterparties to an OTC transaction is an appropriate tax base for the FTT because it measures transaction value.
- Net payments in netted OTC transactions do not accurately reflect transaction value; gross payments (though not exchanged) are a more appropriate tax base and must be specified in FTT law and rules.
- Constant innovation in OTC products complicates defining taxable instruments. The US Dodd-Frank Act approach—enumerating specific instruments (e.g., interest rate swap, a credit swap, a weather swap) and describing general features (any contract that provides for a purchase, sale, payment or delivery dependent on occurrence, nonoccurrence, or extent of an event or contingency associated with a potential financial, economic, or commercial consequence)—is offered as guidance.

### Identifying taxable persons for OTC transactions
- OTC markets involve businesses other than registered broker-dealers and some instruments are not centrally cleared, increasing the number and diversity of potential taxable persons.
- To reduce compliance and administrative costs, the FTT law could:
  - Restrict taxable persons to broker-dealers and other major market participants.
  - Make each registered counterparty liable for paying half the tax rate when trading with each other.
  - Relieve small end-users and other nonregistered persons from registering and accounting for the FTT; broker-dealers and major market participants who trade with them would pay half the FTT rate themselves and charge nonregistered persons half the rate.
- Rationale: exempting small end-users is expected to result in minimal revenue loss because they almost always transact with broker-dealers and major market participants who would be within the FTT charge.
- A legislative safeguard: mandatory registration could be required for all transactions that exceed a certain level to prevent revenue loss from large trades between exempt end-users.

### Assessing and collecting the tax on OTC transactions — three collection variants
- Variant 1: OTC transactions settled through a clearinghouse
  - The clearinghouse charges the tax to the two counterparties (half-half) and remits revenue to government.
  - This variant is identical to collection from exchange-traded instruments.
- Variant 2: OTC transactions settled outside a clearinghouse where counterparties are broker-dealers and/or major market participants
  - The two counterparties are charged the FTT half-and-half.
  - Splitting the tax between counterparties allows cross-checking and reduces vulnerability of revenue compared with charging a single counterparty.
  - For some OTC instruments (e.g., swaps) both counterparties may be considered “buyer” and “seller,” making single-party charging less straightforward.
- Variant 3: OTC transactions not settled through a clearinghouse where one counterparty is a broker-dealer or major market participant and the other is an exempt end-user (nonregistered)
  - The broker-dealer or major market participant pays half the FTT themselves and charges the other half to their exempt counterparty, ensuring the full amount is charged while exempting small end-users from registration and accounting burdens.
  - Nonresidents (regardless of size) could also be included under this exempt end-user category; countries could require resident registered taxpayers to pay half the FTT themselves and charge half to nonresidents in non-FTT jurisdictions, while residents trading with non-residents in FTT jurisdictions would pay half the tax themselves but not charge the other half.

### Creating the administrative mechanisms
- Administrative machinery used for exchange-based instruments can be leveraged, but OTCs require more effort because market participants must self-assess for non-cleared transactions.
- Tax agencies must:
  - Register many more taxpayers,
  - Process tax returns and payments,
  - Maintain accounts,
  - Audit tax returns for a larger taxpayer base.
- Result: higher tax agency collection costs and greater taxpayers’ compliance burdens.
- The greater challenge beyond mechanics is ensuring compliance by OTC transactors.

### Compliance risks and mitigation for OTC instruments
- OTC instruments are more vulnerable to compliance risks than exchange-traded instruments and require greater administrative effort.

Underreporting risks
- Reasons for greater underreporting risk:
  - Some OTC instruments lack mandatory reporting to regulatory bodies or trade repositories.
  - Many OTC instruments are settled bilaterally rather than through clearinghouses.
  - Different collection methods across OTC instruments complicate accounting and increase scope for intentional or unintentional underreporting.
- Mitigation requires greater administrative resources:
  - Effective taxpayer services to facilitate voluntary compliance.
  - Strong enforcement programs to discourage noncompliance.
  - These resource requirements are higher for OTCs collected directly from market participants than for exchange-based transactions collected via clearinghouses.
- Incentives for compliance:
  - Linking legal standing and enforceability of OTC contracts to payment of the FTT: legislation could render OTC contracts unenforceable in contract courts if the required FTT has not been paid, creating a powerful inducement to comply.

Cross-border migration risks
- OTC instruments are at least as vulnerable, and possibly more so, to cross-border migration than exchange-traded instruments.
- Examples and features:
  - Historical example: transactions taxes in Germany in the late 1980s reportedly contributed to high proportions of German corporate bond trades occurring in London.
  - Swaps trade in a highly globalized market and are less territorially tied; a swap can be entered into in another country than where the underlying asset was issued.
- Mitigation measures:
  - Restrict legal standing for OTC contracts to those where transaction tax has been paid.
  - Levy FTT on OTC contracts entered into within jurisdiction and on transactions that residents enter into in other jurisdictions.
  - Encourage major financial center countries to introduce similar taxes to enhance effective administration.
  - Note: double taxation could be avoided by exempting residents’ transactions in countries that also impose the FTT or allowing residents to claim a credit for FTT paid abroad.

Asset substitution risks
- OTC instruments pose greater asset substitution risks than exchange-traded instruments due to design flexibility.
- Swedish example:
  - Introduction of a transactions tax had a greater impact on local trading of OTC instruments than on exchange-traded stocks.
  - During the tax’s first week in January 1989, bond trading volume fell by about 85 percent from its average during the summer of 1987.
  - Untaxed domestic substitutes (e.g., Swedish debentures, forward-rate agreements) became active substitutes for taxed instruments.
  - Tax rates on these OTC instruments varied but were considerably lower than those on equities, reaching a maximum of only 15 basis points of the underlying notional or cash amount.
- Mitigation approaches:
  - Apply the FTT to all close substitutes for taxed OTC instruments and craft broad definitions of taxable instruments.
  - Include anti-avoidance provisions allowing the tax agency to re-characterize as taxable those instruments entered into mainly to avoid tax.

### Summary assessment
- Applying an FTT to OTC instruments is practicable but more challenging than for exchange-traded instruments.
- Main challenges:
  - Greater variety of instruments and trading persons,
  - Constant product innovation,
  - Reliance on market participants to assess and collect the tax,
  - Absence of centralized settlement and reporting for many instruments.
- Offsetting measures:
  - Restrict registration and liability to broker-dealers and other large market participants,
  - Harness central clearinghouses and trade reporting bodies where they exist,
  - Leverage trend toward greater regulation of OTC swaps.
- Administrative implications:
  - Expect greater effort and resources from the tax agency.
  - Need for a supportive tax policy regime: low rates, taxation of near-substitutes, linking legal standing to tax payment, and strong enforcement programs.

*Source: _wp11185 - Section II.*

### Box 4. Settlement Methods for Foreign Exchange Transactions

### Box 4. Settlement Methods for Foreign Exchange Transactions

### Settlement methods
- The Continuous Linked Settlement Bank (CLS Bank): a specialized settlement institution which ensures that the bought currency is paid out only if the sold currency is received.
- Traditional correspondent banking: each counterparty to a trade transfers to the other counterparty bank deposits in the currency it is selling through its correspondent bank; transfers often take place through countries’ large value payment systems (LVPS).
- Bilateral netting: trades between two counterparties that are due on a certain date are netted and the net amounts then settled by another method (for example, traditional correspondent banking).
- On-us settlement: both legs of a foreign exchange trade are settled across the books of a single institution (for example, when a bank trades with one of its own customers who has accounts in both relevant currencies).

### CLS Bank operations and scale
- CLS is a specialized foreign exchange settlement institution created in 2002 by the largest foreign exchange banks to reduce the risk of settlement default on currency trades.
- Operational mechanism:
  - Each CLS member has a multicurrency account at the bank (nonmembers may access the bank through members).
  - When a foreign exchange transaction is submitted to CLS for settlement, the accounts of the two relevant members are simultaneously debited by the amount of the currency sold and credited by the amount of the currency purchased.
  - CLS pays out the bought currency only if the sold currency is received; CLS acts as a trusted third party in the settlement process.
- Scale and reach:
  - CLS settles more than 50 percent of the foreign exchange transactions worldwide and could be leveraged to collect tax from these transactions.
  - On February 16, 2010, the bank settled a record one-day volume of 1.7 million sides with a total value of US$ 6.2 trillion.
  - It is understood that CLS’s share of settlements may have risen from 50 percent to as much as 70 percent of worldwide foreign exchange transactions since the time of the 2007 BIS survey.

### Options for apportioning FTT revenue via CLS
- Charge the tax on a transaction-by-transaction basis and remit the revenue to the country or countries where the counterparties to the transaction are located.
- Allocate revenue to the country whose currency was used in the transaction (note: this approach could raise major jurisdictional issues, e.g., when banks located in one country trade currencies from other countries).
- Apply differentiated tax rates by instrument type, since CLS can distinguish between different types of foreign exchange transactions (e.g., spot, futures, options).

### Using large value payment systems (LVPS) to collect an FTT
- Each country operates at least one LVPS, which major financial institutions use to carry out large value or urgent payments through their accounts at the central bank.
- Banks often settle foreign exchange transactions by using an LVPS to transfer balances from their account at the central bank to their counterparty’s central bank account (or to the account of their counterparty’s correspondent bank).
- In principle, an LVPS could assess the tax and transfer the revenue to the government’s account.
- Leveraging standardized messaging systems: the SWIFT messaging system has dedicated message form—MT300 and its variants—used specifically to confirm different types of foreign exchange transactions (spot, derivatives, etc.). SWIFT was linked to more than 9,000 financial institutions in 209 countries as of September 2010. Hillman et. al. suggest sending a copy of the confirmation instruction to the relevant LVPS which, in turn, would assess and collect the tax.

### Advantages of collecting an FTT through settlement institutions
- Limits the scope for noncompliance:
  - Taxpayers’ compliance rates tend to be higher when taxes are withheld by third parties (for example, employers withholding personal income tax) than when collected directly from taxpayers.
- Reduces record-keeping requirements for banks:
  - Taxes collected by settlement institutions would be considered final, relieving banks from maintaining extensive reporting systems to account for the tax.

### Disadvantages and implementation challenges
- Technical and operational costs:
  - Settlement institutions’ computer systems may require significant technical enhancements to administer an FTT, entailing additional costs and time to introduce.
  - Many countries’ LVPS do not have the capacity to distinguish foreign exchange payments from other types of payments; creating this capacity could involve a significant effort.
- Potential diversion from core objectives:
  - Saddling settlement institutions with tax collection responsibilities could divert the payment system from its central objective of promoting financial stability by providing smooth and secure payment services.
- Incentive to migrate to nontaxed systems:
  - Applying an FTT through the CLS Bank, if not also applied to other settlement institutions, would create an incentive for users to clear their transactions through nontaxed settlement systems, potentially undermining CLS’s settlement-risk reduction gains.
  - Possible mitigation: apply higher capital charges to banks in proportion to the share of transactions they settle outside of CLS or other settlement institutions that collect the tax.
- Incomplete coverage and residual reporting burdens:
  - Unless settlement institutions can withhold the FTT on all taxable transactions—and there is reason to believe this may not be feasible—banks would still need reporting systems to account for tax on transactions settled outside settlement institutions.
- Trade-off evidence:
  - There is some evidence that, depending on the size of the tax rate, the benefits of using the CLS Bank may exceed the cost of a transactions tax; however, concerns need to be fully and carefully assessed.

*Source: Box 4. Settlement Methods for Foreign Exchange Transactions from the provided IMF content unit.*

### 0.005 percent FTT on sterling transactions would cost traders about US$1 billion per year. In contrast, the benefits of

### _wp11185 - 0.005 percent FTT on sterling transactions would cost traders about US$1 billion per year. In contrast, the benefits of

### Cost–benefit comparison of FTT vs. CLS for sterling transactions
- A 0.005 percent FTT on sterling transactions would cost traders about US$1 billion per year.
- Estimated benefits of using CLS to clear sterling transactions amount to US$ 18 billion, comprising:
  - Efficiency gains: US$12.5 billion
  - Reductions in net funding requirements: US$5.4 billion
  - Reductions in operating cost gains: $0.1 billion
- Additional fixed costs foregone if a member left CLS: about US$ 5 million per member.

### Brazil’s IOF (Impuesto sobre Operacoes Financieiras) as an operational example
- IOF scope: three sets of financial instruments — (1) foreign exchange; (2) securities; and (3) lending operations.
- IOF on foreign exchange:
  - Applies to both spot transactions and derivatives.
  - Charged to both capital inflows (purchases of reais by nonresidents) and capital outflows (purchases of foreign currency by residents).
  - Spot transactions: basic rate of 0.38 percent (38 basis points), with higher rates added depending on subsequent use of local currency.
  - Exemptions include interbank transactions and exports.
- Fiscal significance (2010, all IOF instruments):
  - IOF collected R$ 26,601 million.
  - Total federal government revenue was R$ 1,378,609 million.
  - GDP was R$ 3,674,964 million.
  - IOF collections accounted for 1.9 percent of federal government revenue and were equivalent to 0.7 percent of GDP.
- Sample higher IOF rates and applications:
  - Investors taxed at 6 and 2 percent when converting foreign currency for investing in Brazilian stocks and bonds, respectively.
  - Investors taxed at 6 percent when converting foreign currency for margin payments on derivatives.
  - Foreign bank loans to Brazilian entities with maturities of 720 days or less taxable at 6 percent when converted to reais.
  - Companies administering international credit cards taxable at 6.38 percent when purchasing foreign currency to fulfill overseas obligations.
- Administration and reporting:
  - Tax is self-assessed and arises when the foreign exchange contract is settled (when national currency is received or paid).
  - Collected by financial institutions authorized by the Central Bank of Brazil to trade in foreign currencies.
  - These institutions must maintain records, register transactions with the central bank, charge the tax on each FX transaction, remit revenue on the third business day following the end of each 10-day cycle, and file a monthly tax return (DCTF).
  - Brazil maintains a targeted audit program with tax agency branches in Sao Paolo and Rio de Janeiro administering financial institutions.

### Key design elements for an FTT on foreign exchange (FX)
- Establishing territorial coverage:
  - For exchange-based FX: charge FTT in the state where the exchange is located.
  - For OTC FX: consider splitting the tax rate half-and-half between registered taxpayers and their nonresident counterparties in states that do not impose an FTT; no tax charged to nonresidents in states that also impose an FTT.
- Defining taxable event and timing:
  - Taxable event could arise on entry into an FX transaction (accrual rule) or on settlement (cash rule).
  - Accrual rule prevents delay in tax liability but can produce arbitrary outcomes for instruments where exchanged amounts are unknown at entry (options, futures, forwards, NDFs, swaps).
  - Hybrid approach (use accrual or cash rule depending on instrument) suggested as appropriate.
  - Example illustrating different outcomes: exporter–bank NDF where under the accrual rule the tax base would be US$5 million, while under the cash rule the tax base would be US$66,372.
- Measuring the tax base:
  - Tax base defined as the amount of money (or other consideration), in domestic currency terms, that counterparties exchange.
  - NDFs present conceptual issues: taxing net cash payment yields much lower liability than taxing gross amounts; decision depends on whether net and gross transactions are viewed as equivalent.
- Identifying taxable persons:
  - FTT charged to counterparties; administrative advantages to splitting the tax half-half between counterparties.
  - Registered FX traders obligated to maintain records, charge and remit tax, and file periodic returns.
  - Small or infrequent traders could be relieved from registering, but would still be taxed when transacting with registered persons.

### Assessment and collection mechanisms
- Assessment and collection methods vary by settlement mode:
  - Transactions settled through centralized settlement institutions (e.g., CLS Bank): settlement institution could charge and collect the tax half-and-half from the two counterparties, requiring government agreements with settlement institutions.
  - Non-centrally cleared transactions between registered persons: two registrants each pay half the tax — facilitates cross-checking and avoids double-taxing interbank trades.
  - Non-centrally cleared transactions between a registered person and a nonregistered person: registered person pays half and charges other half to nonregistered person to ensure full collection.
- Administrative requirements:
  - Leverage CLS Bank and large-value payment systems where possible to withhold tax or provide reports on banks’ FX transactions.
  - For non-centrally cleared trades, collecting tax through market participants would require substantial effort because of the enormous FX transaction volume.

### Compliance risks and mitigation
- Underreporting risks:
  - Some taxpayers will underreport FTT; Brazil’s IOF history shows avoidance schemes.
  - Mitigations:
    - Keep calculation methods simple.
    - Leverage settlement institutions to collect tax or provide reports.
    - Targeted audit programs backed by appropriate penalty regimes.
    - Require duplicate records at dealing sites where booking sites are centralized; require recognition of FX transactions at dealing sites for FTT purposes.
- Migration risks:
  - Unilateral FTT introduction may lead to relocation of FX trading to nontaxing jurisdictions; magnitude of migration depends on benefits of relocation vs. costs of relocating.
  - Prospects improved if tax rate is kept low and if major financial center countries jointly introduce the tax.
- Asset substitution risks:
  - Traders may shift to nontaxable instruments (derivatives, swaps, structured loans, back-to-back or parallel loans) to avoid tax.
  - Mitigations:
    - Extend FTT to close substitutes (futures, forwards, short-maturity swaps).
    - Introduce reporting requirements for transactions like back-to-back loans and employ anti-avoidance provisions to re-characterize such transactions as taxable.

### Summary assessment and policy conclusions
- Difficulty and feasibility:
  - Levying an FTT on FX is more difficult than on other instruments due to global nature, migration ease, and light regulation, but problems are not insoluble.
  - Challenges reduced if FX settlement institutions (like CLS Bank) can be harnessed to collect the tax or report transactions.
- Key factors enhancing viability:
  - Cooperation among major financial center countries in jointly introducing the tax in a fairly uniform manner.
  - Assessing the tax at a very low rate to reduce incentives for avoidance and migration.
  - Ensuring near-substitutes for spot transactions are subject to the tax.
  - Providing tax agencies with sufficient resources to enforce compliance.
- Administrative best practices:
  - Coherent legislation specifying territorial scope, taxable event/timing, tax base, and taxable persons.
  - Prefer collecting through exchanges/clearinghouses to reduce compliance costs; where not possible, restrict collection responsibility to broker-dealers and other major traders while taxing small participants through their transactions with major traders.
  - Require exchanges and clearinghouses to report transactions to tax agencies even if not used for collection.
  - Implement targeted enforcement, link legal transfer of ownership to tax payment, and extend tax to close substitutes to reduce avoidance.
  - Implementation tasks: enact legislation and regulations, develop information systems and administrative procedures, recruit and train tax officers, register and educate taxpayers, and consult stakeholders.
  - Implementation timeline: IMF experience suggests a minimum of 18 months would be needed to introduce an FTT.
  - Organizational recommendations: establish a dedicated team within the tax agency for design and implementation and a special department to administer the FTT during initial implementation before merging into mainstream operations.
  - Ensure the tax agency is provided sufficient budgetary, staff, and technical assistance resources to implement and administer an FTT on an ongoing basis.

*IMF Working Paper content as provided.*

### Appendix 1. The UK Stamp Tax: Detailed Collection Procedures

### Appendix 1. The UK Stamp Tax: Detailed Collection Procedures

### CREST ownership, role, and scope
- Euroclear UK & Ireland (EUI) is owner and operator of the CREST system and is authorized to operate a Central Securities Depositary (CSD) called CREST in the UK.
- EUI is recognized as a clearing house subject to regulatory supervision by the Financial Services Authority.
- CREST is a UK-based settlement system permitting shares in UK & Irish companies (not a trading platform) to be settled electronically without paper certificates or stock transfer forms.
- CREST does not act as a central counterparty in the way a clearing house normally would.

### Dematerialization and legal arrangements
- Certificated shares must undergo an initial process called “dematerialization” to be settled in CREST.
- Dematerialization involves CRESTCo Nominees Ltd. as the legal regulatory recipient of shares into the CREST paperless system.
- All legal and beneficial rights to the underlying shares remain with the CREST member who deposited the shares into the system (i.e., nominee arrangement preserves member rights).

### Membership accounts and technical access
- On a successful application for membership, a CREST participant is provided with two accounts in the system:
  - (1) a stock account by which shares acquired are placed (or shares removed upon a sale) and held indefinitely on behalf of the member; and
  - (2) a Cash Memorandum Account (CMA), which the member will use to settle any payment obligations (or receive credits for shares sold) with its settlement bank.
- Members are provided with a secure authenticated computer link to communicate with the CREST system.
- CREST has arrangements with payment banks guaranteeing delivery of shares against payment.

### Trade input, matching, and stamp tax indicators
- After execution (on a trading platform outside CREST), each party creates a settlement instruction and inputs trade details into CREST.
- CREST compares both settlement instructions and, if details correspond (including intended settlement date), the transaction is electronically ‘matched’.
- The purchasing member must indicate whether he is accountable for stamp tax by inputting a stamp indicator authorizing CREST to debit his account with tax, or alternatively input an indicator that an exemption from tax is being claimed.
- On matching, CREST will automatically calculate any stamp tax due by reference to the consideration amount payable for the shares input by the trading member.

### Settlement checks, movements, and tax collection
- On the intended settlement date CREST checks:
  - that the selling member has sufficient shares to move from his account; and
  - that the buying member has sufficient credit to pay for the shares including any stamp duty to be debited.
- If checks are satisfactory, settlement occurs with shares moving electronically from seller to buyer and members' CMAs debited/credited accordingly.
- At the time of actual settlement CREST will typically debit the purchasing member’s account with the stamp tax already calculated as due and, per an agreed arrangement with HMRC, will electronically credit a designated bank account with the tax collected.
- CREST advises each party to the transaction of the actual settlement performed and provides details to the share purchaser of the amount of stamp tax debited from his account.

### Registrar notification and holding names
- CREST arranges for the settled trade to be notified to the relevant company registrar (also linked into CREST) so the company's share register can be updated.
- Traded shares settled in CREST are typically held:
  - directly in the name of the purchasing member who is also the beneficial owner, or
  - in the name of a CREST member (i.e., a broker) acting as nominee for an underlying beneficial owner client.

### Reporting to HMRC and refunds verification
- Under its agreement with EUI, HMRC is provided with a daily data feed of all transactions reported by CREST members and settled within CREST, including details of stamp indicators input, and the amount of tax assessed and collected.
- Any CREST member seeking a subsequent partial or whole refund of SDRT paid on a settled transaction in CREST must provide HMRC Stamp Taxes with the relevant unique CREST transaction reference so HMRC can cross-check actual SDRT paid using the CREST data feed.

### Exemptions and member responsibilities
- When claiming an exemption from SDRT in CREST, a member is required to obtain, before settlement, evidence satisfying him (and HMRC upon enquiry) that the trade was not subject to SDRT.
- The member must populate the relevant CREST data field (before the trade is allowed to settle) with the relevant SDRT exemption indicator.
- Failure to populate the field, or leaving the stamp data field blank, will result in CREST functionality by default seeking to debit the member’s account with SDRT.

### Appendix 2. The CLS Bank — structure and settlement mechanics
- The Continuous Linked Settlement (CLS) system is a specialized foreign exchange settlement institution owned by the foreign exchange community.
- The CLS Bank (CLSB) is chartered by the Federal Reserve and based in New York; processing is contracted out to CLS Services (CLSS), a company based in London.
- Both CLSB and CLSS are wholly owned by a UK holding company (CLS UK International Holdings Ltd.), which is wholly owned by CLS Group Holdings (Switzerland).
- Supervisory and governance arrangements:
  - CLSB is supervised by the Federal Reserve and governed by New York law.
  - CLSS is overseen by the 17 central banks whose currencies are settled in CLS.
- Ownership and participants:
  - Owned by 59 CLS Bank members.
  - Total of 7,070 participants use the bank’s service, including 450 banks, corporations, and nonbank financial institutions, and a further 6,620 investment funds.
- Account structure and daily balances:
  - Each direct participant (“settlement member”) holds an account at CLS Bank divided into subaccounts, one subaccount for each currency CLS settles in.
  - Members start and end each day with zero balances in these accounts and subaccounts.
- Settlement process:
  - Foreign exchange transactions are settled one by one (gross) by simultaneously debiting the subaccount of the currency being sold and crediting the subaccount of the currency being bought.
  - Settlement takes place in “CLSB” money; members accumulate debit balances where they are net sellers and credit balances where they are net buyers.
- Funding and defunding:
  - Members with debit balances must pay in funds to CLS to restore subaccounts to zero by end of day; CLS makes payouts to members with net long positions.
  - Pay-ins and payouts use large-value payment systems to transfer funds to and from accounts CLS Bank holds at the central banks of the currencies concerned.
  - Central bank money is used in the funding and defunding process to satisfy the zero-balance requirement.
- Central bank access and remote participation:
  - For the Canadian dollar and pound sterling, CLS Bank accesses the central bank as a customer of the central bank.
  - In other currencies, CLS Bank is a direct participant in the system used.
  - CLS Bank thereby represents significant remote access for the Australian dollar, euro, yen, and Swiss franc systems.
- Currencies currently eligible for CLS settlement:
  - US Dollar, Euro, UK Pound, Japanese Yen, Swiss Franc, Canadian Dollar, Australian Dollar, Swedish Krona, Danish Krone, Norwegian Krone, Singapore Dollar, Hong Kong Dollar, New Zealand Dollar, Korean Won, South African Rand, Israeli Shekel and Mexican Peso.

*Source: Appendix 1 and Appendix 2, _wp11185 - Appendix 1. The UK Stamp Tax: Detailed Collection Procedures*

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