Investment
Services:
Constructive Open Hearing on Revision of Directive
MEMO/02/80
Brussels, 24th April 2002
There was a constructive discussion amongst over 200 participants
representing financial intermediaries, exchange operators and supervisory
authorities who attended the second open hearing on revision of
the Investment Services Directive (ISD), hosted by the European
Commission in Brussels on 22 April. The revised Directive will bring
EU regulation up to date with the reality of modern investment markets,
where orders from buyers and sellers of stock are increasingly being
executed outside "traditional" regulated exchanges, in
particular by Alternative Trading Systems (ATS) and in-house by
banks. Debate at the hearing focused on creating a level playing
field so that exchanges, ATSs and banks can compete transparently
without fragmenting the market, compromising efficiency and weakening
investor protection. The open hearing was the latest demonstration
of the Commission's commitment to systematic consultation of the
financial services industry and the public, in line with the approach
to reforming securities markets agreed with the European Parliament
and the Council on the basis of proposals by the committee of wise
men chaired by Alexandre Lamfalussy (see IP/02/195). Discussions
at the hearing were based on the Commission's latest consultation
document on ISD revision, published on 25 March 2002 (see IP/02/464)
and available on the Europa website at: http://europa.eu.int/comm/internal_market/en/finances/mobil/isd/index.htm.
The deadline for responses to the consultation is 31 May 2002.
The hearing began with a discussion by a high-level panel comprising
Christa Randzio-Plath, Chair of the European Parliament's Economic
and Monetary Affairs Committee, Miguel Mora Hidalgo, Special Advisor
to the Director General of the Spanish Treasury and Eddy Wymeersch,
President of the Dutch Banking and Finance Commission.
Some participants in the hearing advocated limited regulation
to clarify the conditions that must be respected before client/investor
orders can be executed "off-exchange". However, others
supported more robust intervention aimed at ensuring that orders
from buyers and sellers can only be matched away from exchanges
if alternative ways of trading are subject to broadly equivalent
regulatory conditions.
Despite these differences of view, participants' constructive
and open approach allowed the hearing to identify elements which
could provide the basis for a balanced solution, in particular:
· clarifying conditions under which market participants can be
expected to have access to ATS or internalizing systems which display
limit orders better than competing trading venues;
· strengthening obligations on providers of investment services
to ensure that orders are executed in the way most beneficial to
the customer ("best execution" obligation). This would
be a means of bringing about effective linkage between different
types of market and of ensuring that orders are only fulfilled internally
within banks where this delivers demonstrable benefits for clients;
· clarifying the obligations of banks or investment firms when
they receive orders from clients. Should banks be required to display
such orders to the wider market if the order represents an improvement
on best prevailing bids or offers in the marketplace?
Some participants were skeptical about the value of pre-trade
transparency obligations as a means of fostering market efficiency,
claiming that the benefits have been over-stated and that over-concentration
on this issue risked becoming a stumbling-block to revision of the
Investment Services Directive.
Others took the view that, where trading arrangements support
the display of and reaction to limit orders, the information on
potential trading opportunities inherent in these orders should
be made widely available as an aid to overall market efficiency.
From this perspective, limit order-books should be subject to comparable
regulatory disciplines irrespective of the particular legal capacity
in which they had been licensed.
Fabrice Demarigny, Secretary General of the Committee of European
Securities Regulators (CESR, see IP/02/195) noted that the recently
constituted CESR Transparency Working Group may help to shed light
on the role of pre-trade transparency as a support for overall market
efficiency. An issue which warrants particular attention in this
regard is whether in-house internalization can be equated with a
limit order book to which pre-trade transparency obligations can
be effectively applied.
There was broad support for the extension of ISD to include investment
advice and commodity derivatives, but some participants noted that
these businesses currently operate outside ISD and are subject to
tailor-made national regulatory regimes which are sensitive to their
particular risk-profile. They felt the revised ISD should replicate
this sensitivity.
Representatives of small and specialized investment firms (for
example investment advisors and individual asset managers) emphasized
the dangers of expanding the scope of ISD to such firms if this
would trigger the application of disproportionate capital adequacy
requirements.
Concluding the hearing, the Commission reminded participants
of the need to arrive at a consensus on a single template for the
regulation of market structure. ISD revision must - at all costs
- avoid an 'à la carte' approach to infrastructures for trading.
Allowing optional approaches on such fundamental issues would fatally
undermine the capacity of the revised ISD to underpin an efficient,
liquid and integrated EU financial market. |