Graham Cox – International Capital Markets Services Association (ICMSA) letter

Graham Cox, letter

Dear Mr. Buckley and Ms. Mueller,

Comments on the Foreign Account Tax Compliance Act of 2009 (H.R. 3933, S. 1934)

On behalf of the members of the International Capital Markets Services Association
(‘‘ICMSA’’), we thank you for the opportunity to comment on the proposed Foreign
Account Tax Compliance Act of 2009 (‘‘the Bill’’).

ICMSA (1) is a London-based self regulatory organization representing international
financial and non-financial institutions active in the provision of services to the
International Capital Markets. Our membership includes universal banks, registrars,
stock exchanges, law firms, International Central Securities Depositories
(‘‘ICSD’’s) and other service providers specialised in specific product segments such
as the processing of tax reclaims. The primary purpose of the association is to foster
the highest standards in the practice and management of international capital market
services, thereby facilitating the efficient functioning of the market. In its dayto-day
activities, the ICMSA is predominantly focusing on the operation of the International
Securities Market,(2) which has outstanding issuance levels exceeding U.S.

Dollar (USD) 13 trillions, i.e. about half of the overall international debt securities
outstanding volumes reported by the Bank for International settlements.(3)
We wish first to confirm our full support to the overall objective of the Bill which
we understand is intended to prevent the avoidance of tax by U.S. persons. We however
would like to express our serious concerns regarding Section 102 of the proposed
Bill (Repeal of Certain Foreign Exceptions to Registered Bond Requirements)
which, we fear, could result in a severe disruption of the international capital markets’
current economic fundamentals and operating practices at a time when global
access to cost-efficient funding is pivotal to achieve economic recovery. Please note
that many of our members have also expressed serious concerns over other aspects
of the Bill (for example the new ‘‘foreign financial institution’’ regime in Section 101,
which will affect the financial community worldwide and may deter foreign investment
from U.S. securities). These concerns have been and will be addressed by
members either individually or through other industry groups.

The International Securities Market has overwhelmingly adopted the bearer legal
form as the preferred form for security issuance, moving from definitive bearer instruments
at its inception to a custody structure where global bearer notes are now
immobilized with the ICSDs and settle through a book-entry system. Approximately
80% of the securities in the International Securities Market have been issued in
global immobilised bearer form under the TEFRA (4) D rule, regardless of the nationality
of the issuer (U.S. or non-U.S.), effectively becoming the norm in the market
and representing therefore a very important and efficient funding vehicle for all
issuers, U.S. or non-U.S..

An elimination of the foreign-targeted bearer bond exemptions, as we understand
the current draft of the bill is proposing, on which the market is based would inevitably
lead to wide-spread market disruption and would impose substantial costs and
additional complexities (different legal documentation, restricted placement opportunities
due to a more limited investor base, additional registration services, additional
certification and tax processing procedures, etc) to those actors, across the entire
chain from issuers to investors, forced or willing to comply with the new requirements.
This would ultimately translate into a higher cost of borrowing for
those issuers forced to adopt the registered format for their international securities
issuances and thus expose them to sub-optimal funding conditions. This could therefore
put U.S. issuers seeking foreign funding at a disadvantage compared to their
non-U.S. peers, who chose to continue issuing in the global bearer format.(5)
U.S.-incorporated issuers represent today a significant portion of the International
Securities Market. These entities mostly tap this market to raise funds in Euros and
British Pounds (i.e. alternative funding to USD) with European- and Asian-based
investors, thereby diversifying their funding base, and they do so very efficiently
and effectively through the issuance of global bearer notes immobilized with the
ICSDs. Because these transactions are foreign-targeted and that the mechanisms in
place under the TEFRA rules already provide appropriate safeguards against offering
to U.S. persons, we believe that the measures proposed in Section 102 will
produce marginal benefits in terms of reducing U.S. tax evasion compared to the
disruption they will provoke.

Moreover, we note that, in some markets, it is simply not feasible to issue obligations
in registered form, which would leave some foreign issuers with no choice but
to be exposed (at least in principle) to a very significant excise tax.
In light of these elements, we urge the U.S. House of Representatives and the
U.S. Senate to re-consider the possibility to maintain the existing exceptions for foreign-targeted
bearer bond until such time as the potential impact has been thoroughly
investigated. Over time these exemptions have served issuers, intermediaries
and investors worldwide very well and that have helped maintain a level-playing
field access to the international capital markets. In our view, the repeal of these
exceptions needs to be carefully planned and considered to avoid a major disruption
in a multi-trillion dollar market which would affect U.S. issuers, non-U.S. issuers,
many market intermediaries including the major U.S. banks, and, ultimately, the
investors. To this effect, the ICMSA supports the recommendation made by other
industry groups that Congress requests a report regarding the potential consequences
of the repeal of the foreign-targeted bearer bond exceptions.

We thank you again for the opportunity to present our understanding of the proposed
legislation and of its likely consequences should the current draft be adopted.
We hope the arguments and recommendations we have put forward in this letter
will be considered and will provide useful guidance in the elaboration of any proposed

Yours Sincerely,

Graham Cox


(1)More information on the association can be found on
(2) i.e. securities primarily issued and deposited with the ICSDs, Clearstream Banking and Euroclear Bank.
(3) BIS Quarterly Review, September 2009
(4)Tax Equity and Fiscal Responsibility Act, which requirements and procedures are designed to ensure that the concerned securities are not offered to or acquired by U.S. persons.
(5)Whether or not these non-U.S. issuers would then be exposed to U.S. sanctions such as the Excise Tax is linked to the question of U.S. tax laws extra-territoriality.