Alterations to the German Investment Tax Act (InvTA), adopted by parliament this year, have been the main factor behind falling fees for beneficial owners loaning out German stocks.

The revisions have had a “devastating effect” on German lending programmes, according to panelists at the fifth Global Investor/ISF securities finance summit in Frankfurt, with earnings slumping in the second quarter of 2016 compared to the same period last year. 

Last year, Germany beat France and the UK with total lending revenues of $632m, DataLend figures show, although experts at the firm believe it is unlikely that the country will generate equivalent revenues by the end of this year. Only $225m worth of fees had been generated between January and the end of July.

“We’ve significantly reduced lending of German stocks held by our German clients,” said Holger Genuneit, director agency securities lending, Deutsche Bank at the event. “We don’t want clients to run into a fiscal disadvantage due to the tax changes.” 

Under the new law, mutual/retail funds face a corporate tax rate of 15% on Germany-sourced income, including dividends, income from securities lending and repos. 

There are also no tax benefits for dividends unless investors meet certain requirements under the so-called 45-day rule. In practice, it means shares must be held for 45 days before and after the dividend ex-date. During that period, the beneficial owner of the shares must bear at least 70% of the economic risk for these shares. 

“Germany has taken a big hit,” added Mark Tidy, managing director, JPMorgan Agent Lending. “However, our portfolios are typically global in nature and other markets and transactions have compensated. Lending revenues in Korea, Japan and the UK, for example, are bright spots.”

John Arnesen, global head of agency lending and BNP Paribas Securities Services, admitted conditions had been difficult in Germany, adding that there is now a greater focus on exactly how trades will be structured going forward. 

“We’re concentrating on developing alternative and innovative ways of generating revenue for our German clients, particularly around corporate action optimisation,” he said. “Collateral also matters more than ever before, which means accepting different types of collateral and understanding the associated risks is crucial to revenue generation.”

SFTR concern

In contrast to the reduced lending activity, Rudolf Siebel, managing director at BVI, the German Investment Fund Association, told conference delegates that many German funds are seeing record inflows. 

“The low interest environment has forced traditional savers to become investors by creating a need to move out on the risk . As a result, more money has gone into our members’ products. In that sense, we cannot complain.”

Siebel claimed that the buyside business model had not been substantially altered by regulation. However, he added that the EU’s Securities Financing Transactions Regulation (SFTR) is causing concern among some members of the investment industry. 

SFTR is part of European regulators’ clampdown on potential risks in the shadow banking system. It is, in effect, a replication of EMIR, which forced financial institutions to report details about their over-the-counter (OTC) and exchange-traded (ETD) derivative transactions to trade repositories. SFTR forces firms to report details of their securities financing transactions (SFTs), including securities lending and borrowing as well as repos. 

“Essentially SFTR is about documentation and reporting,” Siebel said. “There are overlaps with EMIR. However, under that piece of legislation we know that reporting can go wrong. It is crucial, therefore, that various technical amendments are made to SFTR to ensure effective implementation.”

In its response to ESMA’s most recent SFTR consultation paper, BVI suggested data standards should be carefully calibrated and not be rushed. The German fund group added that the introduction of an EMIR reporting obligation should not be used as a model for SFTR as the implementation of that was very complex and burdensome due to time constraints and a lack of legal and operational certainty. 

In addition, BVI noted that it might not be possible to report all relevant details, especially settlement information, on time as collateral might settle later – meaning firms won’t have all settlement details available on T+1.