Aysha Suzuki
FMCR is a leading firm of financial markets professionals with deep sectoral experience and technical knowledge in a wide range of trading floor activities. FMCR is currently undertaking a multi-faceted investigation into widely publicised potentially irregular activities in the field of “Cum-Ex Trading” in several European markets. In this article, Aysha Suzuki discusses the issues and the potential parties who may be involved in civil and criminal claims related to Cum-Ex Trading.

Cum-Ex Trading - Is your firm affected?

First charges have been brought by Cologne prosecutors who are leading criminal investigations into Cum-Ex. Two London traders face criminal charges in court proceedings that began on 4th September in Germany’s elaborate tax case (Cum-Ex German Tax Fraud Case Puts Finance Industry on Trial - Bloomberg 2nd September 2019).

What is Cum-Ex trading?
Before recent changes in the law, both existing shareholders and buyers in Germany and many other European countries who bought shares around the dividend record date could be entitled to the dividend. This meant that multiple tax reclaims on a dividend that had only been paid once were possible if the seller was a short seller. (In contrast in the UK, only shareholders who already hold shares in their custody account on record date are entitled to receive the dividend.

The impact of the alleged tax trading scheme has been estimated at €55bn and is said to extend to Germany, Denmark, Austria, Belgium, France, Spain, Italy, the Netherlands, Finland, Norway and Switzerland (Call to crack down on multibillion-euro tax tricks as scandal bites –Financial Times 3rd December 2018). The case is only just beginning and the list of parties involved continues to grow.

Which parties/counteparties were involved?
The transactions in question have involved a large number of trading counterparties as well as legal and accounting advisers. The table below provides an overview of these and of the roles played by them.

Data table

Investment Banks
Delta One Trading desks typically handled dividend arbitrage transactions and some acted as counterparties to Cum-Ex transactions, sometimes as a Short Seller (a Short Seller sells shares they do not own, as opposed to selling shares already in their account). Cum-Ex trades require a Short Seller to create duplicate, sometimes multiple tax reclaims on a dividend tax only paid once.

In order to deliver shares, a Short Seller may engage Securities Lending desks predominantly sitting in large investment banks who facilitate settlement by borrowing and lending shares.

Hedge Funds, Institutional & Retails Clients
Investors or buyers making withholding tax reclaims came in many forms. Investment funds acted as investors as well as investment managers or arrangers and frequently utilised Prime Brokerage desks to access banking services and the market. Prime Brokers offered securities lending, creating leveraged trading positions through financing, serving as intermediaries between other counterparties and offering capital introductions.

Clearing Banks & Custodian Banks
Cum-Ex transactions tended to use both shares and futures. Clearing Banks provided clearing services on exchange traded products to clients and acted as an intermediary to facilitate the trading and/or settlement of securities.

Both sellers and buyers in Cum-Ex transactions would have an appointed Custodian Bank providing safeguarding of shares in custody accounts. Custodians could facilitate settlement, collect information on dividend size/timing or the annual general meeting, administer corporate actions and sometimes assist in tax reclaim applications.

Law Firms & Accounting Firms
Many counterparties utilised advice from major law firms and accounting firms on local tax law, structure and process for Cum-Ex transactions. From 2009, a withholding tax reclaim application in Germany required an independent statement from an Auditor or Tax Specialist Firm attesting there was no collusion between the buyer and the seller of the shares. This rule was put in place with the intention of ending duplicated withholding tax reclaims.

Interdealer Broker
In order to meet tax authority requirements, an Interdealer Broker would act as an intermediary to sit between the buyer or the buyer’s Prime Broker and the Short Seller. As time passes, the number of firms implicated in participating in the Cum-Ex party continues to grow (see for example Geld, Gier, Gerechtigkeit – Investmentbank Macquarie im Visier der Ermittler – Handelsblatt 14th July 2019). It is still not clear how far the indictment will reach and what liability will be placed upon the different firms and individuals involved.


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