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Europaudvalget 2000-01
EUU Alm.del Bilag 870
Offentligt

FINAL

FINAL REPORT

THE COMMITTEE OF WISE MEN

THE REGULATION OF EUROPEAN SECURITIES MARKETS

Brussels, 15 February 2001

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THE COMMITTEE OF WISE MEN

Chairman : Alexandre LAMFALUSSY

Cornelius HERKSTRÖTER

Luis Angel ROJO

Bengt RYDEN

Luigi SPAVENTA

Norbert WALTER

Nigel WICKS

Rapporteur : David WRIGHT

Secretariat : Pierre DELSAUX

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TABLE OF CONTENTS

Page

Preamble

Summary

Introduction

Chapter I

Chapter II

The reasons for change

Regulatory reform – the

Committee’s recommendations

The Committee of Wise Men’s

recommendations

Annex 1

ECOFIN/European Council Conclusions

Annex 2

Recommended timetable 2000-2004

Annex 3

Analysis of the comments on the initial report of

the Committee of Wise Men on the Regulation of

European Securities Markets

Annex 4

Two illustrative examples of the new regulatory

approach

Annex 5

The Committee’s initial report published on 7

November 2000

Abbreviations

115

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PREAMBLE

This document constitutes the Committee of Wise Men’s final report

on the Regulation of European Securities Markets in accordance with

the Committee’s terms of reference which were defined by the

European Union’s Economic and Finance Ministers (ECOFIN

∗

) on 17

July 2000.

It is presented in the context of the ECOFIN’s Conclusions of 26/27

November 2000 (see Annex 1) which requested that the Committee’s

final report be ready by the middle of February 2001. ECOFIN

Ministers particularly emphasized that the final report should refine

the regulatory proposals in the Committee’s initial report, taking fully

into account the institutional balance in the Treaty and the role of

national regulators. Operational recommendations were requested.

These Conclusions also stated that the ECOFIN Council would

examine the Committee’s final recommendations at the beginning of

March, in order for measures to be taken at the Stockholm European

Council of Heads of State and Government on 23/24 March 2001.

The ECOFIN Council also requested that discussions should

advance with the European Parliament.

The Nice European Council in December 2000 (see Annex 1) also

gave its broad agreement to the findings in the Committee’s initial

report and confirmed the invitation to the Council of Ministers and the

European Commission to report back at the Stockholm European

Council on the basis of the Committee’s final report.

The Chairman of the Committee of Wise Men, Alexandre Lamfalussy,

and members of the Committee would like to thank once again the

French and Swedish Presidencies of the European Union; the

President of the European Commission, Romano Prodi; European

Commissioners Frits Bolkestein and Mario Monti; the Chairperson of

the European Parliament’s Economic and Monetary Affairs

Committee, Christa Randzio-Plath, and the members of this

Committee; the Director General of the European Commission’s

Internal Market Directorate General, John Mogg; the Director General

of the Commission’s Legal Service, Jean-Louis Dewost; the

Jurisconsulte of the Council, Jean-Claude Piris; the Chairman of

FESCO (the Forum of European Securities Commissions), Georg

Wittich; Members of FESCO, and the Secretary General of FESCO,

Fabrice Demarigny, for their invaluable assistance and cooperation.

The Committee again thanks all those who have taken part in its

∗

The Committee’s

final report based

on ECOFIN

mandate

ECOFIN

(26/27November

2000) requested

the Committee to

refine regulatory

proposals and

produce

operational

recommendations

for Stockholm

European Council

23/24 March 2001

Broad agreement

on Committee’s

initial findings at

Nice European

Council

Acknowledgements

A list of abbreviations can be found in Annex.

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hearings and those organizations and individuals who responded to

its original questionnaire and more recently to the initial report. The

scale of interest in the Committee’s work has enriched its reflections.

Finally, the Committee would like to thank the Rapporteur, David

Wright, and the Secretary of the Committee, Pierre Delsaux, and their

staffs, for their constructive and efficient contribution to their work.

They displayed professionalism, imagination and loyalty to the

Committee’s gradually evolving consensus view, whilst sparing no

effort to respect the very tight timetable.

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SUMMARY OF THE COMMITTEE OF WISE MEN’S RECOMMENDATIONS

Subject

CHAPTER I -

“The reasons for change”

Recommendation

(The precise wording of all the

recommendations are in the text)

Carry out research work and publish quantitative

estimates as soon as possible (new

“Cecchini”

study) and continuously benchmark progress

towards an integrated European Financial Market.

(see p. 9)

Ensure appropriate environment is developed in

the EU (see p. 10)

Action

Economic benefits of

integrated markets

European Commission,

also with Member

States and markets

Supply of equity and risk

capital for SME’s

Differences in legal

systems and taxation;

political, external trade

and cultural barriers

Priorities of the Financial

Services Action Plan

European regulatory and

supervisory structures

Clearing and settlement

Must not be ignored if full benefits of integrated

European financial methods are to be assured.

Furthermore, establish comprehensive list of

external trade barriers to be removed in the next

Trade Round (see p. 11)

Adopt by end 2003

•

Single prospectus for issuers

•

Modernize admission to listing

•

Home country control for all wholesale

members and definition of professional investor

•

Modernize investment rules for UCITS and

pension funds

•

Adopt International Accounting Standards

•

Single passport for recognized stock

markets(see p. 13)

Encourage convergence to ensure European

Securities Regulators Committee works efficiently

(see p. 15/16)

Further restructuring necessary; pursue work in

ISD review and Giovannini Group; consider

whether regulatory framework needed; examine

general systemic issues, in the context of

monetary policy and smooth functioning of

payment systems; on competition issues – careful

examination is required by the European

Commission (see p. 16/17)

Strengthen cooperation between financial market

regulators, institutions in charge of micro and

macro supervision and cross-sectoral regulators

(see p. 17)

European Commission,

European Parliament,

Council of Ministers,

Member States

European Commission,

European Parliament,

Council of Ministers,

Member States,

markets

European Commission,

European Parliament,

Council of Ministers,

Member States

Member States,

European regulators,

European Commission

European Commission,

Council of Ministers,

European Parliament,

Member States,

European Central Bank,

markets

Managing prudential

implications of integrated

markets

Resources

Improve the allocation of resources devoted to the

task of building an integrated European

securities/financial market (see p. 17/18)

Improve the deployment of best regulation and

common understanding throughout the European

Union (see p. 18)

Economic and Finance

Committee, European

Central Bank and

national central banks,

European Commission,

European Parliament,

Member States and

European regulators

European Commission,

European Parliament,

regulators

Private sector, markets,

European Commission,

regulators

Training

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CHAPTER II –

“Regulatory reform : the Committee’s recommendations”

Subject

Regulatory reform

Recommendation

Establish new 4 level regulatory approach at

European Council in Stockholm and ensure it

functions by end 2001 (see p. 20)

Future securities market legislation to be based,

case by case, on framework principles (Level 1)

and implementing principles in Level 2, within a

broad conceptual framework (see p. 22-24)

Establish new open, transparent consultation

mechanisms with:

- Strengthened and open dialogue with market

participants and end users

- Results of consultation published

- Deadlines for each stage

- Consult Member States/regulators early on

Level 1 proposals

- Inform European Parliament on an informal

basis and seek, wherever possible, early non-

binding understandings on scope of

implementing powers in Level 2 (see p. 25)

Action

European Commission,

European Parliament,

Council of Ministers,

regulators

European Commission,

Council, of Ministers

European Parliament,

regulators, markets

European Commission

with European

Parliament, regulators,

market participants

Level 1 – Framework

principles

Level 1 consultation and

transparency mechanisms

Level 2 implementing

details

Level 2 consultation

procedures and

transparency

Institutional balance

•

Set up 2 new committees (i)

European

Securities Committee

(ESC), (ii)

European

Securities Regulators Committee

(ESRC) and

ensure functioning by end 2001

•

Agree on working methods and mandates (see

p. 28-32)

Strengthened consultation process (see page

32/33)

Ensure periodic reporting and full transparency to

European Parliament at all times.

European Commission to take

“utmost account”

European Parliament Resolutions…(see p. 33-35)

ESRC responsibility

Objectives:

- Consistent guidelines for administrative

regulations

- Joint interpretative recommendations, common

standards

- Compare and review regulatory practices

- Carry out peer reviews (see p. 37/38)

Strengthened enforcement of Community rules

(see p. 40)

Council of Ministers,

European Commission,

European Parliament,

regulators

Regulators, European

Commission

European Commission,

European Parliament,

Council of Ministers

Regulators, Member

States, European

Commission

Level 3

Strengthened cooperation

Level 4

Enforcement

European Commission

with contributions from

Council of Ministers,

European Parliament

and market participants

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OTHER GENERAL REGULATORY RECOMMENDATIONS

Subject

Regulations and fast track

procedures

Regulatory convergence

Recommendation

Use whenever possible to speed up

interinstitutional agreements (see p. 26)

Short term:

ESRC members acting in Level 3

must be able to deliver undertakings made

Longer term:

more fundamental convergence will

be necessary (see p. 38)

Continuous process to monitor half-yearly the

effectiveness of the 4 level regulatory procedure

(see p. 40/41)

Action

European Commission,

European Parliament,

Council of Ministers

Member States,

regulators, European

Commission

Monitoring the regulatory

system

Full review 2004

Full and open review (cf. IGC in 2004) (see p. 41)

New monitoring

committee composed of

two external nominees

from Council of

Ministers, European

Commission and

European Parliament

European Commission,

European Parliament,

Council of Ministers

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THE FOUR-LEVEL APPROACH RECOMMENDED BY THE COMMITTEE

LEVEL 1

Commission

adopts formal proposal for Directive/Regulation after a full consultation process

European Parliament

Council

Reach agreement on framework principles and definition of implementing powers in Directive/Regulation

LEVEL 2

Commission,

after consulting the

European Securities Committee,

requests advice

from the European Securities Regulators Committee on technical implementing

measures

European Securities Regulators Committee

prepares advice in consultation with market

participants, end-users and consumers, and

submits it to

Commission

European

Parliament

kept fully

informed and

can adopt a

Resolution if

measures

exceed

implementing

powers

Commission

examines the advice and makes a

proposal to

European Securities Committee

votes on

proposal within a maximum of 3 months

Commission

adopts measure

LEVEL 3

European Securities Regulators Committee

works on joint interpretation

recommendations, consistent guidelines and common standards (in areas not covered

by EU legislation), peer review, and compares regulatory practice to ensure consistent

implementation and application

LEVEL 4

Commission

checks Member State compliance with EU legislation

Commission

may take legal action against Member State suspected of breach of Community

Law

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INTRODUCTION

The Committee of Wise Men has been very encouraged by the

response to its initial report. In general, there has been widespread

support for the main thrust of its initial ideas. This was confirmed by

ECOFIN Ministers and the European Council at Nice.

There is broad agreement with the Committee’s initial diagnosis of

European financial markets and of the significant benefits that the

European Union could gain from constructing an integrated financial

market in the near future. As a result of the consultation process, the

Committee believes that there is a strong consensus on the need to

deliver the European Commission’s Financial Services Action Plan as

soon as possible, including accelerating work on some priority issues.

Chapter I of this final report sums up the key findings of the first 3

chapters of the Committee’s initial report.

The Committee notes that an almost consensual view has emerged

that the European Union’s current regulatory framework is too slow,

too rigid, complex and ill-adapted to the pace of global financial

market change. Moreover, almost everyone agrees that existing

rules and regulations are implemented differently and that therefore

inconsistencies occur in the treatment of the same type of business,

which threatens to violate the pre-requisite of the competitive

neutrality of supervision.

Almost all respondents stated that they were in favour of the

Committee’s regulatory proposals, with none objecting to the four

level structure outlined on pages 23-26 of its initial report. Whilst

Member States, the European Commission, the European Central

Bank, European regulators and market participants seem broadly

supportive, the European Parliament, in particular, has sought

assurance about the institutional implications of the 4 level regulatory

structure put forward. Chapter II of this report therefore develops in

greater detail the Committee’s regulatory proposals, and how they

would work in practice. It refines the Committee’s initial ideas –

including a number of new proposals and safeguards to ensure that

there is a proper and fair inter-institutional balance, anchored to

respect for the democratic processes at both national and European

Union levels. The importance of full transparency, flanked by an

open consultation process for both market participants and

consumers is given substantially more prominence in the light of

comments received.

Committee

encouraged by

response to initial

report

Broad agreement

on:

•

Diagnosis of the

problem and

benefits to be

gained

•

Need to

accelerate

FSAP priorities

Common view

that EU’s

regulatory

framework does

not work – hence

need for reform

Committee’s initial

regulatory

recommendations

strongly

supported

European

Parliament has

sought assurance

on institutional

balance

An analysis of all the comments received on the initial report is

Analysis of

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included in Annex 3.

Change in the legislative process is of central importance. Not just to

ensure the prompt delivery of the Financial Services Action Plan but

so that in the future Europeans will be able to rely on a more

accountable and efficient regulatory structure that will be able to

match the best in the world.

Indeed, that is where the real strategic and competitive challe nge lies.

The European Union has no divine right to the benefits of an

integrated financial market. It has to capture those benefits by

building an integrated European market - in many areas starting from

a very low level.

If it does not succeed, economic growth,

employment and prosperity will be lower, and competitive advantage

will be lost to those outside the European Union. And the opportunity

to complement and strengthen the role of the euro and to deepen

European integration will be lost.

Progress will require leadership and a spirit of cooperation and

partnership to work for the wider, deeper and strategic long-term

interest of the European Union and its peoples. All actors: the

Council of Ministers, the European Parliament, the European

Commission, regulators, market participants and consumers will need

to adapt their positions in order to move forward. However it is a

positive-sum game.

comments on

initial report in

Annex 3

Regulatory reform

needed now to

ensure future

competitiveness

of EU

EU has no “divine

right” to benefits

of an integrated

market – it has to

build one.

Failure means

lower growth,

lower

employment….

Leadership,

partnership and

cooperation

required from all

actors to move

forward

There is no serious alternative available. The status quo would

entrench the continuation of European financial market

fragmentation. This means lost benefits. Lost opportunities. And a

There is no

weaker European economic performance - with European savings

serious alternative

diverted to foreign market places. The Committee strongly believes

available

that the approach recommended in this report is the only way

forward. Other options are in the present circumstances impractical,

including a single European regulatory authority for the reasons

stated in the initial report.

The Committee urges European leaders to seize this opportunity to

move forward at the European Council in Stockholm on March 23/24

by adopting a resolution based on the Committee’s

recommendations, including an agreement with the European

Parliament.

Committee urges

European leaders

to seize the

opportunity to

move forward at

Stockholm

European Council

on March 23/24

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CHAPTER I

THE REASONS FOR CHANGE

ECONOMIC BENEFITS

The Committee reaffirms its view that there are significant gains from

building an integrated financial market in the European Union. These

findings, confirmed by reactions to Chapter I of the initial report, are

supported by recent academic work.

An integrated European financial market will enable, subject to proper

prudential safeguards and investor protection, capital and financial

services to flow freely throughout the European Union. The barriers –

unnecessary bureaucracy, lack of trust, and sometimes downright

protectionism - will become things of the past. European businesses,

large and small, will be able to tap deep, liquid, innovative European

capital pools centred around the euro for the financing they require to

develop their business activities. Competition and choice will drive

down the cost of capital. In short, the supply of European capital

from European savings will be efficiently matched with the demand

for capital from European businesses. Consumers will be better able

to purchase financial services and securities from the best European

suppliers of investment, insurance or pension funds, with net yields

increasing as investment choice widens. Cross-border clearing and

settlement should become cheaper. These are some of the obvious

microeconomic benefits.

In macroeconomic terms, the productivity of capital and labour wi ll

increase, enhancing the potential for stronger GDP growth and job

creation.

These tangible benefits must be measured as

accurately as possible, and publicized as soon as possible by

the European Commission because they will galvanize the

political, economic and social case for reform and progress.

∗

essence what is required is a financial market Cecchini report.

∗∗

The

Commission should also construct a comprehensive series of

macro and micro indicators to continuously benchmark

progress towards an integrated European Financial market.

Significant gains

to be expected

from an integrated

European capital

market

Micro benefits:

more rational

allocation of

capital; greater

liquidity will

benefit all

companies,

especially SME’s;

cost of capital will

be lower; net

yields higher for

consumers;

cheaper cross

border clearing/

settlement

Macro benefits:

increased

productivity of

capital and

labour; stronger

growth and

employment; but

need to quantify

benefits

Furthermore, the Committee believes that, provided European

All Member

financial markets are open, competitive and innovative, the benefits

States will benefit

∗

∗∗

The capitalization of European insurance, investment (UCITS) and pension funds alone is equivalent to

10 trillion Euros – or the size of European GDP – one indicator of the importance of this sector.

The original Cecchini report calculated the cost of the non integration of Europe in the field of goods and

services.

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of integration will spread to all Member States.

The Committee

urges governments and the European institutions to pay

particular attention to ensuring that there is an appropriate

environment for the development of the supply of risk capital for

growing small and medium sized companies, given the crucial

importance of this sector for job creation.

The Committee also

believes that if its recommendations are followed – and effectively

implemented – the primary beneficiaries will be those small and

medium sized European companies.

EUROPEAN FINANCIAL MARKET TRENDS

The Committee observes that, in some segments of financial activity,

there has been satisfactory progress towards a single market – for

instance in the non-guaranteed inter-bank market. The Euro bond

market is now also substantial, with the Euro government bond

market already 40% larger than the US Treasury market.

But the

euro corporate bond market remains well behind its dollar equivalent.

Development of

risk capital for

SME’s must be

ensured

recommendations

acted on, SME’s

should be primary

beneficiaries

Mixed signals on

development of

EU financial

markets

On the positive side, turnover on European stock exchanges reached

EU markets still

a record level in 2000: further evidence of an emerging European

roughly �½ US size

equity culture. However, the capitalization of European stock

exchanges remains significantly behind those of the US equivalents.

As a rough rule of thumb, taken together, European securities

markets are still only about half of the size of those in the US.

The development of European securities markets is being held up by

a plethora of interconnected factors and barriers such as:

the absence of clear Europe-wide regulation on a large number of

issues (e.g. prospectuses, cross border collateral, market abuse,

investment service provision) which prevents the implementation of

the mutual recognition system;

an inefficient regulatory system;

inconsistent implementation, in part due to lack of an agreed

interpretation of the rules that do exist;

a large number of transaction and clearing and settlement systems

that fragment liquidity and increase costs, especially for cross-border

clearing and settlement;

the inadequate development of funded pension schemes in most

Member States.

OTHER FACTORS SLOWING MARKET INTEGRATION

The Committee considers that a number of other factors are playing a

But there are

significant role in slowing market integration. These are not directly,

other factors

EU financial

market

development

being hindered by

a plethora of

barriers, e.g.….

Absence of clear

EU regulation, an

effective decision

making system, or

common

interpretations of

rules

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nor always susceptible to be dealt with by regulatory rules and

practices. Among the most important are:

differences in legal systems (e.g. bankruptcy proceedings, effective

judicial procedures etc);

differences in taxation (e.g. withholding taxes, the imposition of stamp

duty or different taxation rates applied to equities versus government

bonds etc);

political barriers (e.g. miscellaneous and creative techniques to

protect national markets or products that favour local suppliers);

external trade barriers (e.g. EU trading screens are not authorized in

the US);

slowing down

market

integration….

Main ones are

differences in

legal systems and

taxation…

Political and

external trade

barriers and….

cultural barriers of which there are two types. Firstly, those that can

Cultural barriers…

be dealt with by public policy – for example the different approaches

to corporate governance; different emphases on the strength of the

role of competition policy; different approaches to market

consultation; different disclosure standards. Secondly, others which

hopefully will converge as markets integrate – such as different

entrepreneurial cultures which in many cases are slowing the supply

of new fast growing firms for the equity markets, due in part to

European venture capital still being only one third of the size of the

parallel US market.

These barriers

must be also

addressed

While putting forward proposals for the removal of these barriers is

not within the remit of the Committee’s work, the Committee

considers that it will be necessary to deal with them if the full potential

of an integrated European financial and securities market is to be

captured. It is particularly important that the European Commission,

working with the Member States, should establish a comprehensive

list of external trade barriers.

In the next Trade Round, as a matter

of priority, the EU must try to remove the most pernicious trade

barriers hampering the global expansion of the EU's securities

industry.

THE NECESSARY EUROPEAN RULES ARE MISSING

The shortcomings and lack of European regulation are responsible in

a major way for preventing progress towards the cross-border

integration of financial markets in a large number of areas. This was

recognized, and indeed is at the heart of the reason for the European

Commission’s Financial Services Action Plan which was designed to

fill the lacunae (the Lisbon European Council agreed it should be

delivered by 2005 at the latest). Among the most important gaps are:

The external trade

barriers should be

removed in next

Trade Round

Lack of basic

European rules is

a major handicap

FSAP designed to

fill the gaps

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lack of commonly agreed guiding principles covering all financial

services legislation;

failure to make the mutual recognition principle work for the

wholesale market business in the context of the Investment Services

Directive (ISD); for regulated markets themselves; for the retail

sector; or for a single passport prospectus working for cross-border

capital raising;

outdated rules on listing requirements, no distinction between

admission to listing and to trading, and lack of a definition of a public

offer;

ambiguity over the scope and application of conduct of business rules

(Article 11 of the ISD) as well as on the definition of who is a

professional investor;

no appropriate rules to deal with alternative trading systems;

potential inconsistencies between the E-commerce Directive and

financial services directives;

no comprehensive market abuse regime;

no cross-border collateral arrangements;

no set of common European-wide accepted international accounting

standards;

outdated investment rules for UCITS and pension funds;

unresolved public policy issues for clearing and settlement activities;

no agreed takeover rules;

no high and equivalent levels of consumer protection and no efficient

methods for resolving cross border consumer disputes.

The list of missing

European

legislation is long

and significant

Some of the main

ones are listed

here….

But this list is not

complete

And there are more.

Many of these gaps and deficiencies are being tackled by new

legislation. But results will take far too long at the present rate of

progress. The result is that the development of efficient securities

markets in the EU is being badly hampered. Market infrastructure

(exchanges and clearing and settlement systems) is not as efficient

as it might be and the chances of delivering the FSAP on time are

close to zero.

The Committee believes that remedying this

unsatisfactory situation should be among the Union’s top priorities.

DETERMINING THE PRIORITIES – ONE WAY TO SPEED UP

PROGRESS

The Committee believes that European policy makers must make a

European

much stronger effort to determine, in the context of the Financial

Governments

must be bolder

Services Action Plan, which are the near-term priorities. Politicians

Result?

Cross border

consolidation of

markets and

exchanges being

hampered.

Delivery of FSAP

in question

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should highlight and drive forward those likely to have the biggest

impact in the shortest time towards achieving the objective of an

integrated European financial market. They should set an ambitious

deadline for their agreement and ensure these deadlines are met.

and determine the

priorities - i.e.

drive forward

those which will

have the biggest

impact in the

shortest time

European Council

should agree on a

short list of

priorities at

Stockholm

European Council

for delivery in

2003

This is not an easy exercise. The Committee urges the European

Council to give its full political agreement at Stockholm in March to a

list of priorities so that these priorities are effectively operational from

2003 at the latest. The Committee’s suggested priorities are as

follows:

THE COMMITTEE OF WISE MEN’S PRIORITIES TO BE ADOPTED

AND BROUGHT INTO EFFECT AT THE LATEST BY THE END OF

2003

A single prospectus for issuers, with a mandatory shelf registration

system.

Modernization of admission to listing requirements and introduction of

priorities

a clear distinction between admission to listing and trading.

Generalization of the home country principle (mutual recognition) for

wholesale markets, including a clear definition of the professional

investor.

Modernization and expansion of investment rules for investment

funds and pension funds.

Adoption of International Accounting Standards.

A single passport for recognized stock markets (on the basis of the

home country control principle).

The Committee’s

THE MAJOR PROBLEM: THE CURRENT REGULATORY SYSTEM

IS NOT WORKING

Whilst part of the problem concerns the incomplete regulatory

coverage at European level, the greater part of the responsibility lies

in the way in which European Union legislation has been decided (or

left undecided) and “implemented” (or not “implemented”). The

problem is the system itself.

The major part of

the problem – the

EU legislative

process does not

work

The current system requires the European Commission to make a

Current

proposal to the Council of Ministers and the European Parliament,

procedures

who decide, by a co-decision procedure specified in Article 251 of the

Treaty. The average time taken for a co-decision procedure from the

Commission’s proposal to final agreement in co-decision across all

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domains is over two years – and in the financial services area, the

average time is longer.

∗

The Commission, in the preparation of its proposals, has improved its

efforts to consult the regulators and markets on forthcoming

proposals, but to date there is no agreed procedure, nor obligation,

nor deadlines imposed for the consultation mechanism.

Moreover, under

“subsidiarity”

pressure from the Member States, the

Commission has generally put forward Directives rather than

Regulations. This leaves more latitude for Member States to

implement Community Law but too often leads to uneven

transposition and different interpretations. Furthermore it puts further

pressure on the Commission to check and enforce proper

implementation. Directives also require at least 18 months for

transposition.

Blockages can occur in the system at four levels:

(i)

in the

Commission

itself – over-stretched, sometimes slow off the

mark;

most notably in the

Council of Ministers

where there is far too often

The multiple

a tendency to add unnecessary levels of complexity to straightforward

possibilities of

blockage

Commission proposals (often in an attempt to try to fit 15 sets of

national legislation into one Community framework);

Insufficient

consultation and

transparency

noticeable

Plus uneven

transposition and

erratic

implementation by

Member States of

agreed

Community rules

(ii)

(iii) in the

European Parliament,

although much less than in the past;

(iv)

and finally in the

Member States

where transposition and

implementation are often late and frequently incomplete.

Therefore, taken together, the current system has a number of major

The current

regulatory system

shortcomings:

is:

it is too slow

(e.g. the Takeovers Directive proposal (12 years so far

too slow….

and not yet adopted); the European Company Statute (more than 30

years); Basel I (over 4 years);

it is too rigid

and cannot react speedily enough to changing market

too rigid….

Between 1 May 1999 and 31 October 2000,

in all legislative domains,

19% of dossiers were agreed at

first reading, 53% in second reading, 28% required conciliation. First readings took an average of 8

months, second readings more than 2 years, conciliation an additional 2-3 months.

∗

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conditions. Every change, however small or technical, requires a full

blown Commission proposal to be negotiated by co-decision;

it produces too much ambiguity

(e.g. Article 11 of the Investment

producing too

Services Directive concerning conduct of business rules; public

much

ambiguity….

versus private offers in the 1980 Directive). Worse still, Directives are

often ambiguously implemented – partly due to the texts themselves,

but also due to the lack of coordination by an effective network of

European regulators;

it fails to distinguish between core, enduring, essential

framework principles and practical, day to day, implementing

rules.

The result is that Directives are too detailed and are unable to

be adjusted expeditiously.

YET THE PACE OF MARKET CHANGE IS ACCELERATING

The pace of change in financial markets, global and Europe-wide, is

accelerating – another reason why the European regulatory system

must be able to keep pace.

Globalization, instantaneous,

interconnected electronic markets, deregulation and information

technology developments are all increasing the rate of market

change.

The euro itself is making markets more transparent, liquid and

interconnected and is an additional stimulus, indeed another reason

why the European Union must aspire to faster and more flexible

regulatory procedures to remain competitive in the global financial

market.

(i)

THREE FURTHER IMPORTANT PARAMETERS

Convergence of regulatory and supervisory structures

Today, there are about 40 public bodies in the European Union

(i) EU regulatory

dealing with securities markets regulation and supervision.

convergence is

required

Competences are mixed. Responsibilities are different. The result at

European level is fragmentation and often confusion.

But market

change is

accelerating –

and European

regulation is not

up to speed….

and failing to

distinguish

between core

principles and

detail….

Damaging

competitiveness

of EU financial

markets

3 other

parameters need

attention

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More convergent regulatory and supervisory structures are vital to

ensure that the future European Securities Regulators Committee, a

key part of the Committee’s regulatory proposal, can function

effectively. This is further explained in the second part of this report.

(ii)

Clearing and settlement

The Committee is convinced that further restructuring of clearing and

settlement is necessary in the European Union.

The process of

consolidation should largely be in the hands of the private

sector.

Market forces should mainly determine the contours of

European clearing and settlement such as the extent of linkages

between post-trading bodies, (clearing, settlement, CSD’s etc), and

the possible emergence of a single European central counterparty.

This does not mean that there are no public policy issues at

stake.

In particular, public policy should focus on competition issues

and removing the kinds of obstacles and impediments that make

consolidation difficult. Among the most important public policy issues

are the excessive costs of cross-border clearing and settlement in the

EU compared to the US, due to fragmentation; competition issues

such as open and non-discriminatory access, exclusivity agreements

etc; the soundness of the technical linkages between CSD’s; the

prudential implications of one central counterparty; and whether

clearing and settlement organizations should be authorized and

supervised according to common European standards (e.g.

conditions for access to payment systems, information sharing and

cooperation). There may also be a need, perhaps, to separate

clearing system issues from settlement (an efficient clearing system

being a public good).

The Committee is of the opinion that if in due course it emerged

that the private sector was unable to deliver an efficient pan-

European clearing and settlement system for the European

Union, a clear public policy orientation would be needed to

move forward.

In the light of the consultations underway in the context of the

updating of the Investment Services Directive

(due in the second

half of 2001) and

the forthcoming work of the Giovannini Group,

∗

the Committee urges that serious consideration be given as to

whether the EU needs to establish a regulatory framework for

clearing and settlement activities.

(ii) Clearing and

settlement

Restructuring

required – led by

the private sector

to remove

obstacles to

consolidation

Key issues:

Excessive

European costs of

cross border

clearing and

settlement

compared to US;

competition

matters;

prudential

implications

If private sector

fails to deliver an

efficient c/s

system, public

policy lead will be

needed

Is a c/s regulatory

framework

needed at EU

level?

∗

The Giovannini Group is a group of market participants that advises the Commission

on economic and financial matters. It has recently begun to work on clearing and

settlement issues.

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Such a framework would have to take into account the vital

importance of ensuring the smooth functioning of European clearing

and settlement mechanisms as a prerequisite for the efficient

functioning of securities markets. In addition they would also have to

take into account the general systemic issues raised and the way in

which such systems are vital for the infrastructure for monetary policy

operations and the smooth functioning of payment systems.

Consideration might also need to be given to the European Central

Bank being involved in this work.

The ECOFIN Council could ask

the Economic and Finance Committee to launch discussions on

the above areas.

Finally, on competition questions,

the Committee suggests that the

European Commission’s Directorate General for Competition

should examine the situation in order to ensure that the

Community’s competition policy is being properly respected in

this crucial sector.

(iii) Managing the prudential implications

While the Committee strongly believes that large, deep, liquid and

innovative financial markets will result in substantial efficiency gains

and will therefore bring individual benefits to European citizens, it also

believes that greater efficiency does not necessarily go hand in hand

with enhanced stability.

Increased integration of securities markets entails more

interconnection between financial intermediaries on a cross-border

basis, increasing their exposure to common shocks. It is not within

the remit of this Committee to evaluate such risks, and even less to

make recommendations on how to deal with them. However, given

the growing interlinkages between all segments of the securities

markets and the full range of financial intermediaries,

the Committee

believes that there is an urgent need to strengthen cooperation

at the European level between financial market regulators and

the institutions in charge of micro and macro prudential

supervision. The ECOFIN Council should ask the Economic and

Finance Committee to report on the development of this

cooperation.

RESOURCES AND TRAINING

Building an integrated European financial market, in the tight

timeframe that the European Union’s Heads of State and

Government have defined,

requires a proper allocation of

resources to the task.

This applies in particular to the European

Smooth

functioning of c/s

essential for

efficient securities

markets and for

the infrastructure

for monetary

policy

EFC could launch

work

Competition

issues:

DG Competition

should carefully

examine the

situation

Whilst benefits of

integration are

clear – enhanced

stability not

necessarily the

result….

Committee

believes urgent

need to

strengthen

cooperation at EU

level notably from

regulators and

institutions

responsible for

micro/macro

supervision

Resources must

be properly

allocated to the

task of building an

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Commission, the European Parliament and to national regulators as

EU integrated

well. In general there are too few experts around with the detailed

financial market

knowledge necessary to undertake this difficult work.

In general, there

are too few

The Committee is firmly of the view that insufficient staff are

being allocated to tackle the complex task of building an

integrated European financial market.

Barely a handful, for

example, in the European Commission are working on infringement

work, which is time consuming, often exceedingly complex but

nevertheless essential work. The shift from conceptualization to the

hard negotiation of the many legislative proposals in the Financial

Services Action Plan also requires further staff.

In summary the

Commission has very few staff working on financial services –

which is not logical given its economic importance for the

European Union.

Commission is

very understaffed

in this key

economic area….

The European Parliament’s Secretariat dealing with these

The EP as well

matters is also too lightly staffed and ought to be reinforced.

Finally the Committee recommends

that the private sector along

New private led

with European regulators should lead a new training drive

training system

necessary

improve the deployment of best practice and common understanding

among regulators and market participants throughout the European

Union.

To summarize,

the challenges facing the creation of an integrated

securities market in Europe are that the basic legislation is not in

place; that there is still insufficient prioritization; and that the present

system cannot produce quickly or flexibly enough the type of

legislation that modern financial markets require; and that

inconsistent implementation is severely handicapping the emergence

of a pan-European market.

Summary:

Basic legislation

is not in place;

there is

insufficient

prioritization; the

current regulatory

system does not

work;

implementation is

erratic

The Committee of Wise Men is therefore convinced that regulatory

reform is required if the European Union’s objectives are to be

Therefore

fulfilled, and if the Financial Services Action Plan is to be delivered on

regulatory reform

time. Sufficient resources must be available. Part Two contains

is required

recommendations on how these challenges could be met.

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CHAPTER II

REGULATORY REFORM

THE COMMITTEE’S RECOMMENDATIONS

INTRODUCTION

The Committee’s proposal in its initial report centred around a four

level approach.

Level 1:

Framework principles to be decided by normal EU legislative

procedures (i.e. proposal by the Commission to the Council of

Ministers/European Parliament for co-decision).

Level 2:

Establishment of two new committees – an EU Securities

The Committee’s

Committee and an EU Securities Regulators Committee (in a format

four level initial

similar to that of FESCO) to assist the European Commission in

proposal

determining how to implement the details of the Level 1 framework.

Level 3:

Enhanced cooperation and networking among EU securities

regulators to ensure consistent and equivalent transposition of Level

1 and 2 legislation (common implementing standards).

Level 4:

Strengthened enforcement, notably with more vigorous

action by the European Commission to enforce Community law,

underpinned by enhanced cooperation between the Member States,

their regulators, and the private sector.

This approach recognized two layers in the legislation related to

financial markets :

basic political choices

that can be translated into

broad but sufficiently precise framework norms (Level 1); and the

more detailed technical measures,

in full conformity with this

framework, needed to implement the objectives pursued by the

legislation (Level 2).

Level 1

principles

Level 2

= detailed

technical

measures

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The two layers should be efficient, in the sense of achieving the

stated objectives with the lowest cost in terms of regulatory burden;

they should aim at establishing a level playing field, by removing any

opportunity to erect regulatory barriers to competition; they should

help speedy implementation and be flexible, so that they can be

quickly adapted to the rapid pace of technical changes and product

innovation in the financial markets. As experience shows, and as the

Committee documented in Chapter III of its initial report, there is a

trade-off between these requirements and the extent to which basic

legislation (Directives and Regulations) is specific and covers the

details of technical implementation.

∗

In the case of financial markets, the distinction between framework

legislation on the one hand, and implementing measures to be

adopted on a faster track on the other, helps to remove that trade-off,

at least in part.

The Committee believes that this distinction

should be adopted at the EU level, subject to the following

constraints: the process must be transparent; it must respect

the institutional balance; and be in conformity with the structure

of the Treaties.

This Chapter sets out in detail how the Committee believes each of

the four levels of the regulatory approach should work in practice. It

defines the key roles and requirements of the different institutions and

actors. Diagrams illustrate the decision-making process. Lastly it

responds to certain comments made about its possible workings.

Importance of

principles of

efficiency, lowest

regulatory cost,

flexibility and

competition

It is necessary

adopt at EU level

a distinction

between Level 1

and Level 2

subject to proper

institutional

balance and

transparency

This chapter sets

out details of the

Committee’s

regulatory

proposal….

∗

To give one example, even the limited possibility of mutual recognition allowed by directive 80/390EEC

for share prospectuses cannot be used for the issues of covered warrants or similar financial instruments.

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THE MAIN ISSUES BROUGHT TO THE ATTENTION OF THE

COMMITTEE OVER ITS 4 LEVEL REGULATORY APPROACH

Members of the European Parliament have raised concerns that the 4

level approach would represent a dilution of its right of co-decision

under the Treaties. They have also suggested more use of

Regulations rather than Directives, the use of fast track procedures

and far more transparency.

∗

Market participants and some regulators commented that they would

like also to see greatly reinforced transparency, openness, and

accountability at all levels. Early and institutionalized involvement of

market practitioners and consumers in the legislative process is

strongly recommended. Deadlines at every stage of the procedures

are widely supported.

Respondents wanted a clearer definition concerning the

“substance”

of Level 1 framework principles and of Level 2 implementing

measures.

Respondents felt that the links between the various levels should be

made clearer. In particular, the role of the Securities Regulators

Committee needed attention. How would it be established? Who

would participate in it? How would it link with the Commission?

Under what conditions?

Questions were raised about the differences between the

competences and powers of the national regulators.

These

differences could harm the effectiveness of the European Securities

Regulators Committee and cooperation in Level 3.

Some

respondents called for more convergence in the national regulatory

structures.

Some have called for overarching principles for all European financial

services legislation.

Main issues

raised on the

Committee’s 4

level regulatory

approach, derived

from the

responses to the

initial report

∗

Fast Track procedure involves early adoption of an act after first reading in the European Parliament – by

ensuring prior consultation and agreement with the Council of Ministers and the Commission.

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A CONCEPTUAL FRAMEWORK FOR EUROPEAN SECURITIES

LEGISLATION

The Committee believes that all European financial services and

securities legislation should be based around a conceptual framework

of overarching principles. These principles should be consistently

applied, and in the future could be either enacted in a framework

Regulation jointly agreed by the Council of Ministers and the

European Parliament or possibly in a future amendment to the Treaty

at the next Intergovernmental Conference.

Among the most

important could be:

to maintain confidence in European securities markets;

to maintain high levels of prudential supervision;

to contribute to the efforts of macro and micro prudential supervisors

believes there is a

to ensure systemic stability;

need for all

financial services

to ensure appropriate levels of consumer protection proportionate to

and securities

the different degrees of risk involved;

legislation to be

to respect the subsidiarity and proportionality principles of the Treaty;

to promote competition and ensure that the Community’s competition

rules are fully respected;

to ensure that regulation is efficient as well as encouraging, not

discouraging, innovation;

to take account of the European, as well as the wider international

dimension of, securities markets.

THE DETAILS OF THE COMMITTEE’S PROPOSAL

LEVEL 1 – FRAMEWORK PRINCIPLES

The Committee considers that, without amending the Treaty, new

types of Directives or Regulations should be developed in the

securities field. They should contain framework principles, with

implementing powers being delegated to a second level.

based around a

conceptual

framework of

overarching

principles

The Committee

What are Level 1 framework principles?

The framework principles are the core political principles, the

What are Level 1

essential elements of each proposal. They reflect the key political

framework

principles?

choices to be taken by the European Parliament and the Council of

Ministers on the basis of a proposal by the European Commission.

They determine the political direction and orientation, the

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fundamentals of each decision.

Directive or Regulation.

They should be specific to each

Level 1 principles should clearly specify the nature and the extent of

the technical implementing measures that should be taken at the

second level and the limits within which the resulting provisions can

be adapted and updated at that level without requiring a change of

framework legislation. This is in order for the Council of Ministers and

the European Parliament to be fully and precisely informed on the

nature of the delegations they are being requested to grant. The

European Commission, whenever possible, should indicate the type

of implementing details that could be covered in Level 2.

Consider two examples:

•

the forthcoming Prospectus Directive. The Level 1 framework

principles would include all the relevant Articles concerning the type

of single passport (e.g. compulsory shelf registration, with a securities

note and a summary prospectus, definition of a public offer, the role

and powers of the competent authorities; the language regime etc).

However, all the technical details and definitions of what constitutes

the detailed implementing contents of the prospectus (such as the

contents of a prospectus for each specific type of financial

instrument) would be delegated to the Level 2 procedure.

Need for precision

of what are key

principles

(Level

and

implementing

measures

(Level

so EU institutions

know exactly

where they

are…..

Some

examples….

the forthcoming

Prospectus

Directive….

•

conduct of business rules under Article 11 of the ISD. A new text

would include the basic elements of these rules (due diligence, acting

Or Article 11 of

honestly, adequate disclosure, home country conduct, the necessity

the ISD

to differentiate between professionals and retail investors). The

implementing measures would contain the detailed rules that

investment firms should apply in their relations with clients (specific

type of information to ask from the client, what should be disclosed to

the client etc).

Two specific examples of a prototype Community Directive in the new

structural format are attached to understand the form of the

Committee’s ideas (see Annex 4….).

The substantive content of what should be delegated to the Level 2

procedure would

in every case

be agreed by the Council of Ministers

and the European Parliament on the basis of the European

Commission’s Level 1 proposal.

This is a crucial point and a key

democratic safeguard.

Delegated powers

to Level 2 would

be determined

always on a case

by case basis…

Are there legal guidelines or rules for determining what should

be included as Level 1 framework principles?

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The EC Treaty (Article 202), the jurisprudence of the European Court

Legal context –

of Justice and some recent interinstitutional agreements give some

Article 202 of the

Treaty

broad guidance. Article 202 of the EC Treaty refers only to

“…powers for the implementation of the rules…”

as being able to be

delegated from the normal Level 1 co-decision procedure (Article 251

of the EC Treaty).

In a number of judgements,

∗

the European Court of Justice has

ECJ case law

referred to the requirement for all

“essential elements”

to be included

in the basic legislation. This would mean them being included in the

Commission’s co-decision Level 1 proposal.

What does essential (or by implication, non-essential) mean? This

has never been defined, but the recent June 1999 Interinstitutional

Agreement

comitology

agreed

the

European

Parliament/Council/Commission has stated that the use of the

comitology process refers to

“…applying the essential provisions of

basic instruments…. as well as measures designed to adapt or

update certain non-essential provisions of a basic instrument…”.

Level 1

“Essential

elements”;

Level 2

Applying the

essential

elements of basic

instruments…

The Committee considers that technical implementing powers for

securities legislation should be delegated to the Level 2 procedure

through a Level 1 framework Directive/Regulation. The extent of the

technical implementing powers should be decided on a case by case

basis for each Directive/Regulation by co-decision on the basis of a

Commission proposal.

(i)

What are the advantages of the new approach?

Committee

believes technical

implementing

powers should be

delegated to a

new Level 2

procedure

Advantages of

new approach

The legislative

process would speed up

– because the key Level 1

political co-decision negotiations between the Commission, the

Speeding up,

Council of Ministers and the European Parliament would focus solely

legislation

on the essential issues and not on technical implementing details. As

the section on Level 2 shows, the process of updating technical

details would also be speeded up.

The process would be democratic and flexible

– with the range

and scope of implementing powers being defined by the Council of

Ministers and the European Parliament by co-decision on a case by

case basis for each Level 1 proposal.

Maintaining

democratic and

institutional

balance

(ii)

(iii)

The EU institutions

would be able to benefit from the technical and

∗

For example see

ECJ, 17 December 1970, Köster, 25/70, ECR 1161, paragraph 6.

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regulatory expertise of European regulators, with the European

Ability to benefit

from expertise of

Commission fully retaining its right of initiative.

EU regulators

Level 1 Consultation and Transparency mechanisms

The European Commission alone has the right of initiative under the

Treaty. However the Committee recommends that in the future,

before the Commission draws up a proposal in these areas, it should

take the following steps:

∗

Consult, beforehand, in an open, transparent and systematic way

with market participants and end-users (issuers and consumers).

Deadlines should be set and made clear. Where necessary, open

hearings should be held. There should be a strengthened and open

dialogue with market participants and end-users so as to advise the

Commission on a continuous basis on Level 1 work. Use of the

Internet should be used to encourage more participation. A summary

of the consultation process undertaken should be made available

when the final proposal is made. The Committee recognizes that this

will take a little time to set up and that there are resource implications

for the Commission services.

Continue to consult Member States and their regulators on an

informal basis as early as possible on any impending Level 1

proposals.

Inform the European Parliament on an informal basis of forthcoming

proposals (including more systematic use of the

“2005”

group)

∗∗

and

seek, wherever possible, early, non-binding, understandings on the

scope of any implementing powers that might be delegated to Level

2. This will help guide the European Commission, the Regulators

and Securities Committees on the scope of the work that they should

undertake, preparing them, where possible, in advance of any formal

co-decision agreement in order to gain time.

The Commission

must put in place

a more rigorous

consultation and

transparency

mechanism for

Level 1 work

Strengthened and

open dialogue

with market

participants and

end-users is

essential

Ex-ante

consultation with

Member States

and regulators.

Commission

should seek early

informal

understandings

with European

Parliament, if

possible, on

scope of Level 2

implementing

powers

∗

∗∗

See, inter alia, paragraph 9 of the Protocol on the application of the principles of subsidiarity and

proportionality annexed to the Treaty of Amsterdam (O.J C340, 10/11/1997 p. 0105).

The

“2005 Group”

is an informal high level group composed of the chairperson of European and

Monetary Affairs Committee of the European Parliament, the Presidency of the Council of Ministers, the

incoming Presidency and the European Commission.

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More use of Regulations and fast track procedures

The Committee proposed in its initial report that in order to help

speed up the legislative process, more use should be made of

Regulations, rather than Directives. Regulations can speed up the

implementation process because they are directly applicable in the

Member States. The Committee considers that Regulations should be

used whenever possible, along with fast track procedures, although

these techniques will not be able to resolve all the problems.

The Committee believes that the choice of the approach (Regulation

versus Directive) should be made by considering the pros and cons

of each measure on a case by case basis. The guiding principles

should be those set out on pages 20 and 22-24.

Committee

supports use of

Regulations and

fast track

procedures

whenever

possible….

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LEVEL 1 – FRAMEWORK PRINCIPLES

Pre-proposal consultation process

Commission decides that legislation needed

Commission consults

with interested parties

Interested parties feed in views

to Commission

Commission formal proposal

Commission makes formal proposal

European

Parliament

Council of

Ministers

Co-decision

Agreement reached on framework

principles and definition of

implementing powers to Level 2 in

a Directive/Regulation

Level 2

(see page 28)

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LEVEL 2 – IMPLEMENTING THE DETAILS

Level 2 is composed of an actively functioning network of national

securities regulators, the European Commission and a new European

Securities Committee to define, propose and decide on the

implementing details of framework Directives and Regulations,

determined by the co-decision procedure in Level 1.

It is therefore proposed that two new Committees are formally

established – an EU Securities Committee (ESC) which will have a

primarily regulatory function and an EU Securities Regulators

Committee (ESRC) with advisory functions. The roles of these

Committees are described below. They should be established and

be functioning before the end of 2001.

The Committee emphasizes the crucial importance it attaches to

building solid triangular relations of trust and efficiency between the

European Commission and the Securities and Regulators

Committees, based on a clear understanding of their respective roles.

The European Parliament must be fully informed throughout the

process.

Level 2 working methods

The main tasks of the European Commission and the Securities and

Regulators Committees can be summed up in the following way:

Level 2 = a

functioning

network of

regulators,

European

Commission, and

a Securities

Committee to

determine Level 2

implementing

details

Two new

Committees

needed ESC +

ESRC

Trust must be

built up…

And the European

Parliament fully

informed

Level 2 working

methods

Without prejudice to the Commission’s right of initiative, after

Commission asks

consultation with the Securities Committee (ESC) and in the light of

ESRC to work on

a subject…..

the results of the Level 1 co-decision process, the Commission would

ask the European Securities Regulators Committee (ESRC) to begin

work on the technical details of the subject and agree a timeframe for

the work to be carried out.

The ESRC, having thoroughly and openly consulted the markets and

ESRC consults

end users, according to a prescribed process, with fixed deadlines

openly and

widely…..

(see below) would forward its technical advice to the Commission in

due time.

The Commission, without prejudice to its right of initiative under the

Treaty, would then consider this technical advice.

The Commission would then forward a proposal to the Securities

Committee, taking into account the work of the ESRC. The

Commission would also ensure that the European Parliament is fully

informed of all emerging proposals – the agenda/documents etc both

ex-ante and ex-post, in line with the Interinstitutional Agreement. The

ESRC forwards

its work to the

Commission

forwards a

proposal to the

Securities

Committee

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Securities Committee would then vote on the Commission’s proposal

according to the decision making rules for such committees. If the

Securities Committee agreed by qualified majority voting with the

Commission’s proposal the Commission could decide to enact the

legislation. (For further details see voting procedure below.)

THE SECURITIES COMMITTEE (ESC)

Role

The ESC will be a Committee of major importance, with 3 main roles.

Firstly,

its central role would be to act as a Regulatory Committee

under Article 202 of the Treaty – in which the Commission’s proposal

would be voted on with a fixed deadline (usually 3 months).

Secondly,

it could also act in an advisory capacity to the Commission

in particular, but not only for, Level 1 legislation (in this guise, it will

replace the existing High Level Securities Supervisors Committee).

Thirdly,

it could also advise the Commission on Level 2 mandates for

the ESRC.

Voting procedure

The voting procedure in the Securities Committee (in accordance

with the 1999 decision laying down the procedures for the exercise of

implementing powers conferred on the Commission) would be as

follows :

•

The Commission submits the draft measures to the Securities

Committee.

The Securities Committee votes on the draft measures according to a

fixed timetable.

∗

If approved by the Securities Committee, the draft measures are

then adopted by the Commission and become binding in Community

law.

In case the Securities Committee votes against or if no opinion is

delivered, the draft measures are submitted to the Council of

Ministers as the Commission’s proposal.

The Council votes within a determined period

∗∗

to adopt or oppose

The Committee shall deliver its opinion on the draft within a time-limit which the chairman (the

representative of the Commission) may lay down according to the urgency of the matter. The Committee

votes by qualified majority in the case of decisions which the Council is required to adopt on a proposal

from the Commission. The votes of the representatives of the Member States within the Committee shall

be weighted in the manner set out in the Treaty for the votes in Council. The chairman shall not vote.

ESC has 3 roles

Key one is acting

as a Regulatory

Committee

•

∗

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the proposal.

•

In case of opposition by the Council, the Commission shall re-

examine the proposal.

The Commission may then choose between three options : (1) submit

an amended proposal of implementing measures to the Council, (2)

Voting procedures

re-submit its initial proposal or (3) abandon the draft implementing

in the ESC

(continued)

measures and present a legislative proposal based on the EC Treaty

by use of its initiative powers. In that case, the draft implementing

measures are replaced by a draft legislative act, e.g. a Regulation or

a Directive.

If the Council neither approves the draft measures proposed by the

Commission nor indicates any opposition to them, the Commission

shall adopt the proposed implementing act.

Role of the European Parliament

Key supervisory

role of European

Parliament.

EP must be fully

informed at all

times of what is

going on….

If European

Parliament

considers

Commission’s

proposal exceeds

implementing

powers –

Commission shall

re-examine its

proposal and take

utmost account of

European

Parliament’s

position

•

The European Parliament must be kept informed of the Securities

Committee’s work and receive all related documents (agendas, draft

measures, results of the votes, minutes of the meeting, list of those

present).

If the European Parliament considers that draft measures submitted

by the Commission exceed the implementing powers provided for in

the basic instrument, the Commission would have to re-examine its

proposal. Taking the utmost account of the Parliament’s Resolution,

the Commission might then submit new draft measures to the

Committee, continue with the procedure, or submit a proposal under

co-decision procedure.

Membership of the Securities Committee

The Member States will nominate members to the ESC, which the

Commission will chair. For this reason, the ESC is not a body of the

Council of Ministers. Member State nominees should be of a high

level (e.g. at the rank of State Secretary), in which case no doubt the

European Commissioner responsible for securities matters issues

would chair.

It is essential that attendance should not be

downgraded. The Committee of Wise Men considers it particularly

important that the Securities Committee, having such a key role, must

work in a collegiate way – with members nominated for sufficiently

long periods to ensure continuity and the building of a real

“…esprit

de corps…”.

Members of the ESC should, whenever possible, be

∗∗

Committee wants

membership of

ESC to be at high

level (State

Secretary)

Collegiality and

esprit de corps

are very important

This period is laid down in the basic legislative instrument from which the Committee originates. It cannot

exceed three months from the date of referral to the Council.

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present when votes are taken. The ESC must also work in a

transparent and open way – and should be ready to report to the EP

on a regular basis.

Setting up the Securities Committee (transitional arrangements)

The Securities Committee will be legally established when the first

Modalities of

implementing powers are granted to it. However, in order to permit

setting up the

ESC quickly

the ESC to begin work as soon as possible – pending any formal

conferment of implementing powers – the Commission could formally

set it up as an Advisory Committee by a Commission Decision. The

Committee recommends this course of action.

The ESC acting as a Regulatory Committee:

The Committee considers the optimal approach is to delegate, case

by case, the relevant implementing powers as each Level 1 proposal

is agreed by co-decision of the Council and European Parliament.

This would allow all the three Institutions to precisely determine the

scope of implementing powers for each piece of legislation.

EU SECURITIES REGULATORS COMMITTEE (ESRC)

The ESRC should be a Committee with two hats.

In Level 2

it would

act as an advisory committee to the European Commission.

In Level

(see page 37) it would act alone as a fully independent committee

of national regulators to ensure more consistent implementation of

Community Law.

Composition

In Level 2 the ESRC should be established as an independent

advisory group to the Commission. The members of the ESRC

should be the heads of the competent authorities for securities

regulation/supervision designated by each Member State – building

on the structure already successfully established by FESCO. The

Chairman should be elected by the members of the ESRC from one

of their number. What is crucial however, is that those attending the

ESRC, at all times, are competent to advise the Commission on any

agreed subject.

It is therefore important that the secretarial

arrangements should reflect the need to keep close operational links

with the Commission for Level 2 work

ESRC to be

composed of

national

regulators and

should be an

independent

advisory

committee to the

Commission.

Close operational

links will be

necessary with

the Commission

in the

organization of

Level 2 work.

Commission

The ESRC to

have 2 roles –

one in Level 2,

the other in Level

Case by case

delegation of

scope of

implementing

powers

Furthermore the Commission would obviously play a key role in the

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Committee, informing the members of the political priorities,

would have key

role in the ESRC

discussing emerging ideas etc.

The Committee considers the European Parliament should be able to

request the ESRC to report to it periodically. The Chairman of the

ESRC should also be an observer in the Securities Committee. The

ESRC should also produce an annual report on its work and forward

this to all the European Union’s institutions.

Voting procedures in the ESRC

The Committee does not think that unanimity is an appropriate voting

procedure for the ESRC in Level 2, for several reasons:

(i)

(ii)

It could lead to lower common denominator agreements.

If the voting procedures of the ESRC were inconsistent with those of

the Securities Committee, there would be the potential for

incongruous, or at worst, perverse decision making in Level 2.

It is therefore recommended that the Regulators Committee should

vote in its Level 2 role by Qualified Majority Voting. Minority opinions

should be recorded and made public in the final advice sent to the

European Commission.

Setting up the ESRC

The ESRC should be politically endorsed at the Stockholm European

Council and be legally established as an independent advisory group

to the Commission (outside the comitology process).

ESRC should

be politically

endorsed

at the Stockholm

European Council

and then as an

independent

advisory group to

the Commission

Voting in the

ESRC should be

by qualified

majority

The European

Parliament should

be able to request

the ESRC to

report to it

periodically

Consultation procedures and transparency

The Committee considers that the ESRC must consult market

participants, consumers and end-users according to a fixed,

preferably mandatory set of procedural rules that should be set out in

its statutes and rules of procedure. The following principles should

apply to the consultation process:

ESRC must also

set up an open

and transparent

consultation

process

market practitioners must be involved…

at every level…

in a continuous process…

Principles of

consultation

process

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with particular weight given to those with knowledge and expertise on

the subject in question…

in an open process, using,

inter alia,

the Internet…

with end-users views being considered at the same time.

The Committee considered the merit of

“practitioner forums”

Committee looked

European level, but given the complexity of deciding who should be

at practitioner

forum idea….

members, bearing in mind that there are 15 Member States (and

soon more) as well as a wide range of interests to be covered, the

Committee prefers the alternative outlined below.

Once advice on implementing measures has been requested from

the European Commission, and with a specified timeframe agreed for

the work, the ESRC would set up the consultation process.

Four basic procedures could be envisaged:

but prefers the

following ESRC

consultation

process….

In the case of complex issues, the ESRC should consult first on the

basis of a

“concept release”

– outlining the problem and the options

and asking for public input on what, if any, regulatory approach would

be appropriate. The time for such a consultation should not exceed 3

months.

Once a regulatory approach had been decided, a draft proposal

would be released by the ESRC for consultation with markets and

end users (3 months maximum).

Four basic

procedures must

be followed for an

ESRC

consultation…

Where necessary the ESRC could use hearings, or roundtables, as

With hearings,

this Committee has done. Use of the Internet should be compulsory

roundtables….

for the consultation process.

A summary of the public comments should be appended to each of

Public comments

should be

the ESRC’s final recommendations.

disclosed…..

The Committee recommends the Commission to maintain a similar

level of transparency and openness as these proposals move to the

Securities Committee.

Maintaining institutional balance and involvement of the

European Parliament

The Committee is acutely aware of the importance of maintaining

Importance of

institutional balance between the European Commission, European

institutional

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Parliament and the Council of Ministers.

It was put to the Committee that the procedure suggested should be

accompanied by a call-back mechanism for the European Parliament:

in particular a new interinstitutional agreement should give European

Parliament (and Council of Ministers) the possibility to oppose, within

a given period, a Commission proposal for the implementing

measures. The Committee considered this possibility with interest,

but it was convinced by the argument that the introduction of a

“Parliamentary override”

is not envisaged in the Treaty.

Nevertheless the Committee believes that there are ways to ensure

that the European Parliament will maintain a significant degree of

control and have a significant impact on the implementing legislation

enacted at Level 2 and in particular on the work of the Securities

Committee.

First,

having agreed on the scope of implementing powers in Level 1,

the European Parliament (along with other interested parties) will be

fully informed at all times of the content of the ESRC’s emerging

advice and subsequently about the Commission proposals. The

Commission and the two Committees will keep in close contact with

the European Parliament, sending all the necessary documentation

and agendas in good time (these requirements are specified,

inter

alia,

in Articles 1 and 2 of the Interinstitutional Agreement). Further

assurance could be given to the Parliament if, as suggested, the

Commission published, whenever possible, at least in an indicative

form, drafts of the more important implementing measures when it

puts forward level one legislation.

Second,

before the Commission makes a proposal to the Securities

Committee and after the Securities Committee has voted on it, the

European Parliament will have sufficient time available to check that

the proposal and the decision conform with the scope of the

implementing powers defined by co-decision in Level 1.

Third,

if the European Parliament were to consider that the European

Commission’s proposal on the intended decision does not conform

with the scope of implementing powers, it would pass a resolution.

Were it to do so, the Commission would be required to re-examine its

proposal and should take the utmost account of the European

Parliament’s position. Given the importance of institutional balance, it

would be inconceivable if the Commission did not. The Commission,

on the other hand, would have already undertaken to take the utmost

account of the position of the European Parliament in its proposals.

balance

“Call-back

mechanism” for

European

Parliament

considered…

but not envisaged

in the Treaty

But can meet

European

Parliament’s

concerns in other

ways:

(i) By keeping the

European

Parliament fully

informed….

(ii) By giving the

European

Parliament time to

check the

proposal (before

ESC votes)

(iii) By ensuring

that Commission

takes utmost

account of any

European

Parliament

resolution against

proposal

Furthermore,

it is in everybody’s interest that the European

In everybody’s

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Parliament be given an adequate role in the procedure, within the

limits of the Treaty. Were Parliament not to be satisfied, the

consequences would be felt the next time co-decision legislation

(Level 1) conferring implementing powers on the Securities

Committee is proposed. This point would no doubt not be lost on the

Commission or on the Securities Committee.

The Committee therefore concluded that these considerations

properly safeguard parliamentary oversight.

To the extent that any political problems remained, they should be

dealt with by the three Institutions working together (the Commission,

the European Parliament and the Council of Ministers) as soon as

possible – in any case before the European Council in Stockholm or

in the full review in 2004 recommended later in this report (which also

coincides with the next Intergovernmental Conference).

interest to give an

adequate role to

the European

Parliament

So European

Parliament’s

interests will be

safeguarded

The EU

institutions should

work together to

sort out any

residual problems

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LEVEL 2 DECISION MAKING

Commission,

after consulting the

European

Securities Committee,

requests advice from

the

European Securities Regulators

Committee (ESRC)

on technical

implementing measures

ESRC

consults with market

participants, consumers and end-

users

European

Parliament

ESRC

forwards advice to the

Commission

- kept fully

informed in

conformity with

Interinstitutional

Agreement;

- adopts a

resolution if it feels

the draft measures

exceed the scope

of the

implementing

powers

Commission draws up its proposal,

within the framework of its implementing

powers

Commission

forwards a proposal to the

Securities Committee

(ESC) votes on

proposal

European Parliament

examines the final draft

measures and has

one month

to consider whether

they would exceed the implementing powers defined

in Level 1

If the

Parliament

passes a resolution stating that

these measures are not in conformity, the

Commission shall re-examine

its proposal, taking

the utmost account of the Parliament’s position

Commission

adopts proposal

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LEVEL 3 – STRENGTHENED COOPERATION

REGULATORS TO IMPROVE IMPLEMENTATION

BETWEEN

The initial report stated that Level 3 should encompass a

“…framework of enhanced and strengthened cooperation and

networking between (national) regulators with a view to ensuring

consistent and equivalent transposition of Level 1 and Level 2

legislation…”.

National regulators were also encouraged to agree

joint protocols for improving implementation and a peer review

process to ensure consistent enforcement practice in the ESRC. The

Committee confirms this approach.

The essence of Level 3, therefore, is to greatly improve the

consistency of the day to day transposition and implementation of

Levels 1 and 2 legislation. It is the national regulators who have the

prime responsibility for this work – acting in a cooperative network. It

is the other main part of their responsibility.

Membership and voting

Acting in its Level 3 role, the ESRC should be composed of a

representative for each Member State designated by the national

supervisory authority, or authorities. Given the crucial importance of

common implementing rules and interpretations, the ESRC should

decide by consensus in Level 3. The Commission could attend as an

observer.

Definition of Level 3 ESRC work

The key objective is to greatly improve the common and uniform

implementation of Community rules. The ESRC therefore should:

•

produce consistent guidelines for the administrative regulations to be

adopted at the national level;

Level 3 is

strengthened

cooperation

among regulators

to improve

implementation

Objective is to

improve day to

day transposition

and

implementation

In Level 3, ESRC

is more

“independent”.

Voting by

unanimity is

necessary for

implementation

issue joint interpretative recommendations and set common

standards regarding matters not covered by EU legislation – where

The role of the

ESRC in Level 3

necessary, these could be adopted into Community Law through a

Level 2 procedure;

compare and review regulatory practices to ensure effective

enforcement throughout the Union and define best practice;

periodically conduct peer reviews of administrative regulation and

regulatory practices in Member States, reporting their results to the

Commission and to the ESC.

•

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The outcome of this work would be non-binding although clearly it

would carry considerable authority.

Currently FESCO is carrying out only some of those tasks. So a

political resolution will be needed to mandate regulators to carry out

all of this essential work. Market participants should be prepared to

submit examples of uneven implementation practice to the regulators,

Commission and the Member States.

The importance of supervisory and regulatory convergence

An important, immediate condition for the ESRC to achieve

successfully the objectives stated above is that those mandated by

the national regulatory authorities should have both the knowledge to

carry out their work and the ability to deliver from the very outset the

undertakings on which they have agreed. In the longer term, far

more fundamental convergence is necessary among European

regulatory structures in a number of areas. The main ones are to

converge

“horizontal”

structures; the degree of autonomy of

regulators; and not least the involvement of market participants in the

regulatory process. The Committee urges governments to coordinate

their efforts in this regard given the various initiatives underway.

The Committee

believes

regulatory

convergence is

necessary

ESRC members

must be able to

deliver the

undertakings they

make

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LEVEL 3

LEVEL 1 / 2 ACTS

EU Securities Regulators Committee

Translation of Level 1 / 2 Acts and other EU securities legislation into

effective and even enforcement of Community rules, using,

inter alia:

•

Day to day administrative guidelines;

Joint interpretation recommendations;

Common (but not binding) standards in areas not covered by EU

legislation;

Comparison of regulatory practice to improve enforcement;

Peer Reviews

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LEVEL 4 – ENFORCEMENT

The fourth level of the Committee’s proposal concerns strengthening

Level 4 = greatly

the enforcement of Community rules. All actors have a role to play

strengthened

enforcement

here, but the major responsibility falls on the European Commission,

which has the legal duty to act as guardian of the European Treaties.

The Committee however also underlines the role that Member States,

regulators and the private sector have in improving enforcement of

agreed Community law. The Commission, for example, needs

complaints, information, and strong, well-researched cases. Yet too

often the private sector is reluctant to come forward for fear of

damaging its market opportunities. Regulators should inform the

Commission immediately if they become aware of any potential

infringements.

The primary

responsibility is

with the European

Commission –but

others must help,

including….

The European Parliament as well should inform the Commission of

the European

any areas where it believes Community Law is being breached. As in

Parliament…..

the other areas, a partnership approach between the public sector

and private sector is necessary for efficiency and success.

The Commission, however, sho uld be bolder in enforcing Community

The Commission

Law and checking the accurate transposition of agreed legislation. In

should be

bolder…..

many cases the mere opening of a case by the European

Commission results in a rapid solution being agreed with the

offending Member States.

MONITORING THE REGULATORY SYSTEM

The Committee underlines the particular importance that it attaches

to an efficient, continuous process to monitor the effectiveness of the

4 level regulatory procedures that it is proposing. In the initial report

the Committee suggested that

“…half yearly reports could be given to

the Council on the progress, or lack of it, being made…”.

There are two questions: precisely what should the monitoring

mechanism look at and who should the monitors be?

Assuming the Committee’s 4 level regulatory structure is endorsed,

there needs to be a strong system to report on the functioning of the

legislative and regulatory process. It should identify the bottlenecks,

and who is responsible. It should also report on whether there is real

progress towards an integrated financial market. The Committee

would expect all the institutions to pay considerable attention to its

Monitoring system

should be blunt:

where are the

bottlenecks and

who is

responsible?

The results must

An efficient half

yearly monitoring

process is

essential

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findings. The monitoring system, however, should not propose

be acted on

remedial measures.

Given the fact that the Council of Ministers, European Commission

and the European Parliament have equivalent stakes in the process,

the Committee suggests that the Monitoring Group should be

composed of two external nominees (i.e. not drawn from the

membership of the Institutions) of the Council, European Parliament,

and the European Commission.

The Monitoring Group should produce half-yearly reports.

Committee

suggests 2

external

nominees per

Institution for the

monitoring group

Half yearly

monitoring reports

are required

FULL REVIEW – 2004

Assuming that the new regulato ry structure is functioning from the

beginning of 2002 onwards, the Committee considers that there is a

strong case for a full and open review of the 4 level process in 2004.

This is in part due to the convergence of a number of significant

political factors – a new Intergovernmental Conference (agreed upon

at Nice), a period when the first wave of enlargement should be

underway, and also a period when the main priorities of the Financial

Services Action Plan should have been successfully negotiated.

Full review should

take place in 2004

– coinciding with

the next IGC

But another benefit of a full review in 2004 would be to dissipate any

“No finality”

misplaced fears of institutional rigidity or permanence.

If in the light of the Monitoring Group’s half-yearly reports, it was

If no progress, full

manifestly clear well before 2004 that progress was not being made

review should

take place earlier

and that there did not appear to be any hope of progress, a full review

would need to take place earlier. As already mentioned in the initial

report, if the full review were to confirm in 2004 (or earlier as the case

may be) that the approach did not have any prospect of success, it

might be appropriate to consider a Treaty change, including the

creation of a single EU regulatory authority for financial services

generally in the Community.

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FINAL COMMENTS

The outcome will hinge on the ability and willingness of the principal actors, the

Commission, Council of Ministers, European Parliament, and national regulators to

play

“a cooperative game”,

since all these actors carry part of the responsibility for the

identified shortcomings in the current regulatory system.

What is the likelihood that the proposed framework could work?

importance that there are:

•

Clear mandates given to the two key Level 2 Committees.

•

Full transparency throughout the system, coupled with deadlines in the decision making

process.

•

Strong monitoring and reporting to Council, Commission and Parliament and to the public

at large.

•

Active, well defined involvement of market participants and consumers.

•

National regulatory structures reformed in a way that brings them closer to one another

over time. Without such convergence there is serious risk that neither the ESRC nor the

ESC, nor indeed their interaction, will yield results.

It will also be important that each institution can identify the benefits, both for itself, but

also for the European Union in its entirety.

What are they?

A more rational use of scarce resources. Faster decision making, more in tune with

the needs of modern financial markets. A concentration of political efforts and energy

on the key political principles. Bringing European regulators with their experts into a

much more important

“formal”

European role: advising the European Commission on

the necessary implementing details of each subject. For the Commission, the pivot of

the whole system, there will be a much better chance to deliver the ambitious FSAP on

time. For the European Parliament, far greater transparency and open consultation, no

finality due to a 2004 review, participation in the monitoring system and the ability to

determine what the scope of implementing powers are (in Level 1). Finally for the

Council of Ministers: streamlined decision making and greater efficiency.

The Committee of Wise Men urges all concerned to give this fair and balanced

approach their full hearted and active support. The benefits of success are simply too

large to be ignored.

The present system, the status quo, simply will not do.

Brussels, 15 February 2000

It is of crucial

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ANNEX 1

ECOFIN COUNCIL MEETING ON 27 NOVEMBER 2000

CONCLUSIONS

The Council welcomes the initial report of the Committee of Wise Men, chaired by

Alexandre Lamfalussy, on the Regulation of European Securities Markets and the

methods the Committee has used to gather the views of interested parties.

ECOFIN shares the diagnosis of the report, namely:

The economic benefits on economic growth, employment, productivity and for

consumers, SMEs, large companies, as well as sovereign borrowers of integrating

the EU’s financial markets are considerable, which confirms the importance of the

Lisbon Economic Reform Agenda. The Financial Services and Risk Capital Action

Plans contains the right measures to be implemented as a response towards

improving the single market in financial services, but these measures require more

prioritisation.

Financial markets are changing at a very fast pace, requiring regulators to keep up

with market developments, a view strongly supported by market participants. In this

context, the present regulatory system is too slow and complex, and is producing

unnecessary levels of ambiguity and uneven implementation. Therefore urgent action

is needed to make the current European regulatory system become more efficient, so

that the goal of an integrated European financial market be delivered in the near

future.

ECOFIN requests the Committee to present a final report in mid-February 2001. This

report should focus on refining the regulatory approach proposed in its initial version,

taking into account the institutional balance resulting of existing Treaty arrangements

and the role of national regulators. This report shall propose operational

recommendations.

ECOFIN shall examine these recommendations at the beginning of March in order to

take appropriate measures at the Stockholm European Council in March. In this

perspective ECOFIN recommends that discussions should be advanced with the

European Parliament……

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EUROPEAN COUNCIL – NICE

7-10 DECEMBER 2000

CONCLUSIONS OF THE PRESIDENCY

Regulation of financial markets

30. The European Council broadly agrees with the initial findings in the interim report by

the Committee chaired by Mr Lamfalussy on the regulation of European securities

markets and the third Commission report on the action plan for financial services. It

invites the Council and the Commission to report back to it on this subject at

Stockholm in March 2001 on the basis of the Committee's final report.

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ANNEX 2

RECOMMENDED TIMETABLE

2000 – 2004

2001

15 February

15 February –

23/24 March

April/May

Publication of Final Report by Wise Men

Consideration of report by Council of Ministers, European Parliament, Commission

Agreement at European Council, Stockholm on regulatory reform and FSAP priorities

(i)

Commission brings forward some first FSAP directives in new format

(ii) Commission decision on setting up European Securities Committee as an

advisory group pending formal delegation of powers via adoption of a Level 1

directive/regulation. )

(iii) Commission decision to set up European Securities Regulators Committee as

an independent advisory group (outside comitology)

(i)

New consultation procedures set up (Commission and ESRC)

(ii) Interinstitutional Monitoring Committee agreed and set up

Giovannini report on clearing/settlement

First interinstitutional monitoring report presented to all Institutions

April –

September

June/July

November

By December

2001

By end

December 2001

By end

December 2001

First provisional results from research on economic benefits of integrated European

financial markets

•

Review of Commission, European Parliament

requirements

•

New private sector training initiative launched

New Level 2 committee structure must be operational

and

regulators

staffing

2002

March

September

Second monitoring report on functioning of regulatory system

Third monitoring report on functioning of regulatory system

2003

March

September

By December

Interinstitutional agreement (and delivery) of key priorities (single prospectus; listing

requirements; home country principle for wholesale markets, including definition of

professional investor; new investment rules for investment and pension funds;

adoption of international accounting standards; a single passport for recognized

stock markets).

Fourth monitoring report

Fifth monitoring report

2004

•

Intergovernmental Conference

•

Full review of

“new”

system

•

FSAP review

Sixth monitoring report

March

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ANNEX 3

ANALYSIS OF THE COMMENTS ON THE INITIAL

REPORT OF THE COMMITTEE OF WISE MEN ON THE

REGULATION OF EUROPEAN SECURITIES MARKETS

SUMMARY

Forty one replies have been received, most of them from the private

41 replies

sector.

All the respondents welcome the general thrust of the Committee’s

Full support for

initial report. They consider it as a valuable contribution to the policy

the Wise Men’s

initial report

debate. They all share the analysis of the current situation contained

in Chapters I, II and III of the initial report. They also share the view

that urgent steps must be adopted in order to remove barriers to the

integration of the European financial market.

Most of the replies focus on the possible approach for European

Replies focus on

regulatory

Regulation described in Chapter IV of the initial report.

approach

There is a general agreement that a more efficient, flexible and faster

Accelerate the

legislative process is needed. Responses nevertheless insist that

legislative

process but

faster legislation should not be at the expense of the quality of the

maintain quality

regulatory system.

Respondents also support the main lines of the proposed institutional

Full support for

and regulatory framework. However the objectives have to be

the four-level

approach

defined. The distinction between primary and secondary technical

legislation needs to be delineated clearly. Political willingness will be

necessary to achieve this objective.

Most of the respondents called for a more detailed analysis of the

regulatory approach with practical examples in the final report.

The main issues raised by the respondents:

Respondents

want more details

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Guiding principles for the new regulatory framework

Most of the respondents consider that the following principles need to

be applied:

Guiding principles

Transparency

of the whole legislative process is seen as

fundamental. This implies early publication of preliminary thinking

Transparent

about policy, open consultation methods, the publication of agendas,

legislative

the publication of minutes and documents of meetings, the

process

establishment of forum/technical groups, organisation of conferences,

roundtables, etc. The European Institutions and the new regulatory

model should therefore adopt these working methods. Respondents

also called for the Securities and Regulators Committees to set out

these principles as a rule.

Openness.

Market practitioners and consumers should be involved

in the legislative process through early and continuous consultation.

Involvement of

market

practitioners

Accountability.

The democratic accountability of the Securities and

Regulators Committees is seen as of vital importance. Respondents

Strong democratic

stated there must be adequate accountability mechanisms to fully

safeguards

inform the European Parliament. Different variants were suggested,

necessary

such as hearings in front of the Parliament, regular reporting and the

granting of observer status to the European Parliament in the

Securities Committee.

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TABLE 1 : COMMENTS ON THE NEW APPROACH SET OUT IN THE INITIAL

REPORT

General opinion on the

initial report

Role of regulation/level of

regulation

Guiding principles

New approach of the

legislative system

Level 1

Level 2

Level 3

Level 4

Regulations/Directives

Role of national regulators

No clear positions expressed

Need for harmonization of competences

General support for increased cooperation

Transparency

Role of market participants

/ consumers

Enforcement

Needs to be set out as a guiding principle

Early and institutionalised involvement in the

legislative process

Need for increased resources for the Commission

Need for a clear distinction between primary and

secondary legislation

Full support of all respondents

Need for a balance; avoid over-regulation

Transparency,

flexibility

openness,

accountability

and

Widespread support for the concept of a four-level

system

Need for a clear definition of basic objectives

Possible four-level approach

A small number of respondents argued that the adoption of a set of

principles and objectives applying to all securities legislation would be

useful for assessing future legislation.

(a)

Level 1

The adoption of Level 1 legislation is considered to be crucial to the

success of the new approach. A clear distinction must therefore be

drawn between primary and secondary legislation (principles in Level

1, implementing details in Level 2). This may vary depending on the

subject. Level 1 should contain “essential elements”: fundamental

principles which are unlikely to require amendment in the short or the

medium term.

On the type of legislation, the suggestion to move from Directives to

Regulations was also mentioned. Nevertheless, respondents did not

set out clear preferences for either.

Distinction

necessary

between primary

and secondary

legislation

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(b)

Level 2

The final report should expand on some of the key points, such as:

Key point - define

Level 2 more

clearly

The role, the objectives and the working procedures of both

Committees

There is a general consensus that a set of objectives should be

drafted to define the competence of both Committees. The need for

transparency and co-operation with market-practitioners should guide

their work and deliberations.

Several respondents expressed

concerns about transposing FESCO’s working methods to the EU

institutional framework. They therefore called for more details on the

working procedures of the Regulators Committee.

Role, objectives

and working

procedures of

both Committees

The composition of the Regulators Committee

As there is not a common template for supervision, the composition

of the Regulators Committee raises major issues, and some

concerns. For example, the Competent Authorities that should

advise the Commission in Level 2 might be current FESCO members.

The missions and competence of national regulators

vary

considerably among the Member States. Prior harmonization of the

national regulatory functions would therefore be desirable.

Composition of

the Regulators

Committee –

need for

convergence

The links between the Securities and the Regulators Committees and

the European Parliament (EMAC)

The respondents called for the role of the European Parliament to be

respected in order to keep the legislative process open, accountable

and democratic. Different models are proposed, such as the full

accountability to Parliament of the Securities Committee, and the

obligation to regularly report the activities of the Committees.

Strong links with

the European

Parliament

essential

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TABLE 2 : COMMENTS ON THE NEW INSTITUTIONAL FRAMEWORK

Securities Committee

General support for its establishment

It needs to be accessible and transparent

Regulators Committee

Role of European

Parliament

Demand for

composition

details

its

role

and

Its rights should be preserved

Accountability of the Securities Committee to it is

recommended

More details are requested

Criticism on the lack of transparency

General agreement that it would be premature to

create it for the time being

Links between both

Committees

Comments on FESCO

Single European

Supervisor

(c)

Level 3

Most respondents consider that differences in the competences and

powers of national supervisory authorities hinder the consistent

Convergence

application of EU legislation and effective international cooperation. A

between national

great majority of replies indicate that prior harmonization of the

regulators

national regulators competences is seen as necessary, as well as a

thorough revision of the division of responsibilities between

supervisory authorities and exchanges.

(d)

Level 4

The lack of enforcement by the Commission is seen as having been a

More enforcement

serious obstacle to the completion of a single market for financial

resources for the

Commission

services. Proposals for an increase in the enforcement resources and

instruments for the Commission should be considered in the final

report.

Other comments

Respondents have also submitted comments on the other preliminary

conclusions of the initial report.

These are summarized in the following table:

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TABLE 3: OTHER COMMENTS ON THE PRELIMINARY CONCLUSIONS

Economic benefits

Trade issues

Agreement on the proposal to carry out a proper

study of the benefits

Endorsement of the Wise Men’s analysis and

suggestion to address these issues more

prominently in the final report

Suggestions to exclude any

volatility from the final report

assessment

Other comments

Market volatility

The FSAP

General agreement to accelerate the completion

of the FSAP to 2004

The EU needs to ensure that faster legislation

does not mean lower quality legislation

Some additional comments deal

contained in the initial report.

with the main technical issues

These are summarized in the table below:

TABLE 4 : ADDITIONAL COMMENTS

Clearing and Settlement

Suggestions to remove the obstacles necessary

for the completion of a European market. Others

express some doubts concerning the initial

report’s assessment of the savings that could be

generated by an integrated clearing and

settlement system. Some raise competition

questions. Most of the respondents consider that

market forces should drive the consolidation

process.

Some replies insist on the immediate and

widespread implementation of these principles,

notably for wholesale markets

Request for the establishment of a level playing

field between the exchanges

Further regulation of the OTC markets considered

unnecessary and undesirable

Differentiation between investors

considered useful and necessary

generally

Country of origin and

mutual recognition

Alternative trading

systems

OTC market

Categorization of investors

Additional

technical issues

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ANNEX 4

Hypothetical examples of the possible role of the Securities

Committee

These examples aim to describe how Level 1 proposals could be

structured but are without prejudice to future work in the areas by the

Commission and FESCO.

(a)

Harmonization of regular reporting obligations

Note : the changes that could be made to the text in this hypothetical

example are indicated in bold characters in italics.

COUNCIL DIRECTIVE

of 15 February 1982

on information to be published on a regular basis by companies the shares

of which have been admitted to official stock-exchange listing

(82/121/EEC)

THE COUNCIL OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Economic

Community, and in particular Articles 54 (3) (g) and 100 thereof,

Having regard to the proposal from the Commission (1),

Having regard to the opinion of the European Parliament (2),

Having regard to the opinion of the Economic and Social Committee (3),

Whereas Council Directive 80/390/EEC of 17 March 1980 coordinating the

requirements for the drawing up, scrutiny and distribution of the listing

particulars to be published for the admission of securities to official stock-

exchange listing (4) seeks to ensure improved protection of investors and

a greater degree of equivalence in the protection provided, by coordinating

requirements as to the information to be published at the time of

admission;

Whereas, in the case of securities admitted to official stock-exchange

listing, the protection of investors requires that the latter be supplied with

appropriate regular information throughout the entire period during which

the securities are listed; whereas coordination of requirements for this

In implementing the following principles, the competent authorities shall make an appropriate distinction

between the requirements applying to the professional investors and those applying to retail investors

(retail investors are to be understood as investors acting outside their professional activities).

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regular information has similar objectives to those envisaged for the listing

particulars, namely to improve such protection and to make it more

equivalent, to facilitate the listing of these securities on more than one

stock exchange in the Community, and in so doing to contribute towards

the establishment of a genuine Community capital market by permitting a

fuller interpenetration of securities markets;

Whereas, under Council Directive 79/279/EEC of 5 March 1979

coordinating the conditions for the admission of securities to official stock-

exchange listing (5), listed companies must as soon as possible make

available to investors their annual accounts and report giving information

on the company for the whole of the financial year; whereas the fourth

Directive 78/660/EEC (6) has coordinated the laws, regulations and

administrative provisions of the Member States concerning the annual

accounts of certain types of companies;

Whereas companies should also, at least once during each financial year,

make available to investors reports on their activities;

Whereas this Directive can, consequently, be confined to coordinating the

content and distribution of a single report covering the first six months of

the financial year;

Whereas, however, in the case of ordinary debentures, because of the

rights they confer on their holders, the protection of investors by means of

the publication of a report is not essential;

Whereas, by virtue of Directive 79/279/EEC, convertible or exchangeable

debentures and debentures with warrants may be admitted to official listing

only if the related shares are already listed on the same stock exchange or

on another regulated, regularly operating, recognized open market or are

so admitted simultaneously;

Whereas the Member States may derogate from this principle only if their

competent authorities are satisfied that holders have at their disposal all

the information necessary to form an opinion concerning the value of the

shares to which these debentures relate;

Whereas, consequently, regular information needs to be coordinated only

for companies whose shares are admitted to official stock-exchange listing;

Whereas the report must enable investors to make an informed appraisal

of the general development of the company's activities during the period

covered by the report;

Whereas, however, this report need contain only the essential details on

the financial position and general progress of the business of the company

in question;

Whereas, in order to take account of difficulties resulting from the current

state of laws in certain Member States, companies may be allowed a

longer period to implement the provisions of this Directive than that laid

down for the adaptation of national laws;

Whereas, so as to ensure the effective protection of investors and the

proper operation of stock exchanges, the rules relating to regular

information to be published by companies, the shares of which are

admitted to official stock-exchange listing within the Community, should

apply not only to companies from Member States, but also to companies

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from non-member countries

HAS ADOPTED THIS DIRECTIVE:

SECTION I

General provisions and scope

Article 1

1. This Directive shall apply to companies the shares of which are admitted

to official listing on a stock exchange situated or operating in a Member

State, whether the admission is of the shares themselves or of certificates

representing them and whether such admission precedes or follows the

date on which this Directive enters into force.

2. This Directive shall not, however, apply to investment companies other

than those of the closed-end type. For the purposes of this Directive

'investment companies other than those of the closed-end type' shall mean

investment companies:

- the object of which is the collective investment of capital provided by the

public, and which operate on the principle of risk spreading, and

- the shares of which are, at the holders' request, repurchased or

redeemed, directly or indirectly, out of those companies' assets. Action

taken by such companies to ensure that the stock-exchange value of their

shares does not significantly vary from their net asset value shall be

regarded as equivalent to such repurchase or redemption.

3. The Member States may exclude central banks from the scope of this

Directive.

Article 2

The Member States shall ensure that the companies publish a report

on their activities and profits and losses on a regular basis.

The report shall be published within a fixed time limit.

The report shall be sent to the competent authorities of each Member

State in which its shares are admitted to official listing, and shall be

made available to the public.

It shall contain comparative figures as well as an explanatory

statement relating to the company’s activities and profits and losses,

so as to enable investors to assess the current state and the likely

future developments of the company.

The report must be drawn up in the official language or languages or

in one of the official languages or in another language, provided that,

in the Member State concerned, such official language or languages

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or such other language are customary in the sphere of finance and

are accepted by the competent authorities.

Where the accounting information has been audited by the official

auditor of the company's accounts, that auditor's report and any

qualifications he may have shall be reproduced in full.

Article 3

The Member States may subject companies to obligations more stringent

than those provided for by this Directive or to additional obligations,

provided that they apply generally to all companies or to all companies of a

given class.

SECTION

Powers of the competent authorities

Article

1. Member States shall appoint one or more competent authorities and

shall notify the Commission of the appointment of such authorities, giving

details of any division of powers among them. Member States shall also

ensure that this Directive is applied.

2. The Member States shall ensure that the competent authorities have the

necessary powers to carry out their task.

If a company governed by the law of a non-member country publishes a

report in a non-member country, the competent authorities may authorize it

to publish that report instead of the report provided for in this Directive,

provided that the information given is equivalent to that which would result

from the application of this Directive.

This Directive shall not affect the competent authorities' liability, which

shall continue to be governed solely by national law.

SECTION

III

Cooperation between Member States

Article 5

1. The competent authorities shall cooperate whenever necessary for the

purpose of carrying out their duties and shall exchange any information

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required for that purpose.

2. Where a report has to be published in more than one Member State, the

competent authorities of these Member States shall, by way of derogation

from Article 3, use their best endeavours to accept as a single text the text

which meets the requirements of the Member State in which the

company's shares were admitted to official listing for the first time or the

text which most closely approximates to that text.

In cases of

simultaneous admission to official listing on two or more stock exchanges

situated or operating in different Member States, the competent authorities

of the Member States concerned shall use their best endeavours to accept

as a single text the text of the report which meets the requirements of the

Member State in which the company's head office is situated; if the

company's head office is situated in a non-member country, the competent

authorities of the Member States concerned shall use their best

endeavours to accept a single version of the report.

SECTION

Securities

Committee

Article

The Commission shall be assisted by a Committee, composed of

representatives of the Member States and chaired by the

representative of the Commission (The Securities Committee)

2. The regulatory procedure laid down in Article 5 of Decision

1999/468/EC shall apply in compliance with Article 7 and Article 8

thereof.

3. The Securities Committee shall have as its functions :

(a) to set out, for the application of Article 2 of the Directive, the

following elements :

- the period within which the report shall be published;

- the circumstances in which the competent authorities will be

permitted to extend the time limit for publication;

- where a company publishes consolidated accounts, the

circumstances in which Member States may allow the competent

authorities to require the company to publish additional information;

- the modes of publication of the report;

- the date of communication of the report by the company to the

Member States competent authorities;

- the circumstances in which the competent authorities will be

permitted to provide for adaptations to the particular requirements of

this Directive ;

- the conditions under which the competent authorities may authorise

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the omission from the report of certain information provided for in

this Directive.

(b) without prejudice to Articles 169 and 170 of the Treaty to facilitate the

harmonized implementation of this Directive through regular consultations

on any practical problems arising from its application on which exchanges

of views are deemed useful;

stringent or additional obligations which they may impose pursuant to

Article 3 with a view to the ultimate convergence of obligations imposed in

all Member States, in accordance with Article 54 (3) (g) of the Treaty;

(d) to advise the Commission, if necessary, on any additions or

amendments to be made to this Directive; in particular, the Committee

shall consider the possible modification of

Articles 2 and 3

in the light of

progress towards the convergence of obligations referred to in (b) above.

2. Within five years of notification of this Directive, the Commission shall,

after consulting the

Securities

Committee, submit to the Council a report

on the application of

Articles 2 and 3

and on such modifications as it

would be possible to make thereto.

SECTION

Final provisions

Article

1. Member States shall bring into force the measures necessary to comply

with this Directive not later than 30 June 1983. They shall forthwith inform

the Commission thereof.

2. Member States may postpone application of the measures referred to in

paragraph 1 until 36 months from the date on which they bring such

measures into force.

3. As from the notification of this Directive, Member States shall

communicate to the Commission the main provisions of the laws,

regulations and administrative provisions which they adopt in the field

governed by this Directive.

Article

This Directive is addressed to the Member States.

Done at Brussels, 15 February 1982.

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(1) OJ No C 29, 1. 2. 1979, p. 5 and OJ No C 210, 16. 8. 1980, p. 5.

(2) OJ No C 85, 8. 4. 1980, p. 69.

(3) OJ No C 53, 3. 3. 1980, p. 54.

(4) OJ No L 100, 17. 4. 1980, p. 1.

(5) OJ No L 66, 16. 3. 1979, p. 21.

(b)

Harmonization of core conduct of business rules for investor

protection

The FESCO Expert Group on Investor Protection has drafted a proposal

for the harmonisation of core conduct of business rules for investor

protection (article 11 of the Investment Service Directive (93/22/EEC)).

This note sets out a model of a possible EU approach inspired by

FESCO’s work as it relates to information to be provided to customers.

Annex A contains an hypothetical example of a directive providing for basic

principles and conferring implementing powers on the Securities

Committee.

Annex B contains implementing rules which could be adopted by the

expert committee process after the adoption of the basic directive

described in annex A.

ANNEX A

Basic principles to be set out by the legislator in an EU

directive

Information to be provided to the customers

Prior to the provision of investment services, an investment firm

must provide to customers information relating to

itself and the services it provides;

the key features of investments services and financial instruments

envisaged;

the charges relating to the services or instruments envisaged;

the risks associated with the financial instruments and transactions

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envisaged.

During the performance of investment services, an investment firm

must ensure that customers are provided promptly with the essential

information concerning the progress of execution of any transaction

they undertake.

If an investment firm issues a marketing communication, the

promotional purpose of marketing communications must not be

disguised.

The information provided to the customers shall be fair, clear, and not

misleading, so as to enable them to make informed investment

decisions.

Customer agreements

Prior to the provision of any investment service, the investment firm

must enter into a written agreement with the customer setting out the

rights and obligations of the parties, a description of the services to

be provided, and all other items of information necessary for the

proper understanding and performance of the agreement.

The customer agreement must be clear and easily understandable by

the customer.

Implementing measures to be adopted by the Securities

Committee

The Commission shall be assisted by the Committee established by

the Directive on information to be published on a regular basis by

companies the share of which have been admitted to official stock-

exchange listing (82/121/EEC) (The Securities Committee)

The regulatory procedure laid down in Article 5 of Decision

1999/468/EC shall apply in compliance with Article 7 and Article 8

thereof.

The Securities Committee shall have as its functions to set out the

following elements :

guidance as to the appropriate way to present and communicate

II.

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information to the customer;

where appropriate, the time-limit in which any requested information

shall be provided to the customer ;

the content of any information to be provided to the customer;

the content of any marketing communication;

the content of the customers agreements.

ANNEX B

Selection of rules set out in FESCO’s consultative paper on the

harmonization of core conduct of business rules for investor

protection

(1)

•

INFORMATION TO BE PROVIDED TO CUSTOMERS

BASIC REQUIREMENTS

RULES

The firm must ensure that information provided to customers is clear

and comprehensible. The content and purpose of the information

should be easily understood and key items should be given due

prominence. The impact of the message should not be diminished or

obscured by the use of inappropriate content or presentation.

The investment firm must take into consideration the time necessary

for a customer to absorb and react to the information provided and

must supply its customers with information on a prompt basis

according to the urgency of the situation.

If information provided contains comparisons, the requirement of

being fair, clear and not misleading means that the comparisons

must:

be based either on facts verified by the investment firm, or on

assumptions stated within the information;

be presented in a fair and balanced way;

not omit any fact that is material to the comparison.

INFORMATION TO BE PROVIDED TO CUSTOMERS BEFORE

THE PROVISION OF INVESTMENT SERVICES

(2)

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(2.1) MARKETING COMMUNICATIONS

•

RULES

An investment firm must be able to demonstrate that the information

provided in a marketing communication is consistent with the

information it provides to its customers before and during the

provision of the investment services.

Any marketing communication must contain at least the information

about the investment firm defined in points a) and d) of paragraph 35.

In case of a cross border marketing communication, the information

provided must in addition state that information about the firm can

also be obtained from or through the competent authority of the

Member State where the customer resides.

An investment firm must not use the name of the competent authority

to endorse its marketing communication or services.

Where a marketing communication refers to a financial instrument or

an investment service it must provide at least the information referred

to in points a) and d) of paragraph 39.

(2.2) INFORMATION ABOUT THE INVESTMENT FIRM

•

RULE

An investment firm must provide customers with the following

information prior to the provision of investment services:

the identity of the investment firm, its postal address and telephone

number;

the financial group to which the investment firm belongs;

the identity and status within the investment firm of employees and

other relevant agents with whom the customer has or is to have

contact;

the fact that the investment firm is authorised and/or registered and

the name of the competent authority that has authorised and/or

registered it;

the legal capacity in which the investment firm acts and the functions

that it performs so that that the customer is able to assess the scope

of the firm’s responsibilities;

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details of the relevant compensation scheme;

details of any relevant out-of-court complaint and redress mechanism

and how the customer can access it;

any existing or potential conflicts of interest between the investment

firm and its customer and an outline of the firm's policies in relation to

conflicts of interest;

the languages in which the customer can communicate with the

investment firm.

INSTRUMENTS

AND

(2.3) INFORMATION

FINANCIAL

INVESTMENT SERVICES

•

RULES

An investment firm must inform potential customers of the key

features of financial instruments and investment services. This

information must consist of a description of the type of instruments

and services that must be in line with the firm’s assessment of the

customer's knowledge and experience and having regard to any

relevant facts disclosed by the customer.

10. The information provided to customers must include the following:

a description of the main characteristics of the instrument/service,

including the nature of the financial commitment, whether they are

traded on a regulated market or not and the risks involved;

price, including commissions, fees and other charges, of the

instrument/service;

arrangements for payment and performance;

details on any cancellation rights or rights of reflection that may apply.

11. In order to give a fair and adequate description of the investment

service or financial instrument being promoted, an investment firm

must avoid accentuating the potential benefits of an investment service

or financial instrument without also giving a fair indication of the risks.

12. The fair and adequate description of a compound product must contain

all the relevant characteristics of the composing instruments. The

‘relevant characteristics’ of a compound product means all the different

characteristics of the product, for example the different services

involved, the duration of the product, the fact whether you borrow

money, the interest due, etc.

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13. The information on financial instruments and investment services must

not state or imply that the performance of services or of the investment

is guaranteed unless there is a legally enforceable arrangement with a

third party who undertakes to meet in full an investor’s claim under the

guarantee. Sufficient detail about the guarantor and the guarantee

must be provided to enable the investor to make a fair assessment of

the guarantee.

14. When information provided refers to a particular tax treatment the

investment firm must remind the customer that the taxation depends

on his or her personal situation and that the tax treatment is subject

to change. In any event the investment firm must recommend to the

customer to seek independent tax advice.

15. If a reference to historical performance of investment services or

financial instruments is made, it must be clearly expressed that the

figures refer to the past, and that they do not constitute reliable

guidance as to the performance of these services and instruments in

the future.

16. Any estimate, forecast or promise contained in the information on

financial instruments and investment services must be clearly

expressed, must state the assumptions on which it is based, must be

relevant and must not mislead the customer.

17. If the information refers to actual returns based on past performance:

the reference period must be stated and must not be less than one

year, provided that the relevant data are available;

where returns relate to more than one year, they must either be

reduced to an average annual rate or stated separately as annual

returns;

where an average annual return is presented for more than one year,

a reference period of at least five years must be used provided the

relevant data are available. If the relevant data are not available

over a reference period of at least five years (e.g. because the

financial instrument or the investment portfolio has not existed for

such a period), the returns may be measured from the issue date or

the date on which the portfolio was established;

where a benchmark is used to compare returns, it must be identified

and its reference period must be equal to that of the investment

service or financial instrument being promoted;

the information provided must, if simulated returns are used, state

that a simulation has been used;

if the return figures are not denominated in local currency, the

currency used must be stated and reference shall be made to the

currency risk for the return in local currency.

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18. The relevant provisions on actual returns shall apply mutatis

mutandis to the method of calculating and presenting the future

returns. Information on estimated future returns must state that the

estimated future returns are forecasts and that the forecasts are

supported by figures and have been subject to verification by an

independent third party.

19. A direct offer marketing which promotes a specific financial

instrument or investment service must contain a fair and adequate

description of the instrument or service, including the risks involved,

so as to enable potential customers to make an informed assessment

of such instrument or service.

20. A direct offer marketing must contain a prominent statement that, if a

customer has any doubt about the product or service which is the

subject of the marketing communication, he should contact the

investment firm for advice or contact an independent intermediary if

the investment firm does not offer advice.

Derivatives and leveraged transactions

21. If the customer envisages undertaking transactions in derivatives, the

information provided must relate to the types of instruments

concerned (e.g. futures/options/swaps), include an explanation of

their characteristics (especially the leverage effect, the duration of the

premium, the liquidity and volatility of the market) and a description of

their underlying parameter (e.g. equities/interest rates/currencies),

and indicate the method to be used to execute the customer’s

transactions (in particular, on a regulated market or not).

2.4

•

COMMISSIONS, CHARGES AND FEES

RULES

22. The information to be disclosed on commissions, charges and fees

must contain:

the charges for each transaction, product or service, specifying

clearly the reason for the charge and detailing, where appropriate, the

percentage or rate applicable, the frequency with which it is applied,

any maximum or fixed minimum fees and, where the commission or

fee must be paid in foreign currency, the currency involved;

if various investment firms are to be involved in a transaction or

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service, an indication to this effect. An investment firm may elect to

establish the full cost to the customer of the transaction or service or

the cost solely of its own intervention, stating in this case the items

involved plus an indication of the fees relating to the participation of

the other firms.

2.5

•

RISK WARNINGS

RULES

55. In addition to the information to be included in marketing

communications and product literature the investment firm must

provide its customers with specific risk warnings as appropriate.

Instances where the type of instrument or transaction envisaged

makes specific risk warnings necessary include:

financial instruments not traded on a regulated market;

financial instruments not authorised to be marketed to the public in

the country of residence of the customer;

transactions in illiquid financial instruments ;

derivatives;

financial instruments subject to high volatility;

short sales of financial instruments;

securities repurchase agreements or securities lending agreements;

foreign markets where appropriate;

transactions which involve credit or margin payments;

deposit of collateral;

foreign currency transactions.

As a minimum the investment firm must explain to the customer that

contracts in these instruments and transactions should not be entered

into unless the customer fully understands the nature and scope of

the risk and appreciates the extent of the exposure to that risk.

56. Risk warnings about derivatives must disclose that the instrument can

be subject to sudden and sharp falls in value. Where the investor

may not only lose his entire investment but may also be required to

pay more later, he must also be warned about this fact and the

possible obligation to provide extra funding. In addition the risk

warning must, where appropriate, carry information on a) clearing

house protections (e.g. that although the performance of a

transaction is sometimes ‘guaranteed’ by the exchange or clearing

house this guarantee will not necessarily protect the customer in the

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event of default by the investment firm or another counterparty); b)

suspension of trading (e.g. that under certain trading conditions it

may be impossible to liquidate a position); c) insolvency (e.g. that in

the event of default of an investment firm involved with the customer’s

transaction, positions may be liquidated automatically and actual

assets lodged as collateral may be irrecoverable.

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ANNEX 5

FINAL

7 November 2000

INITIAL REPORT

THE COMMITTEE OF WISE MEN

THE REGULATION OF EUROPEAN SECURITIES MARKETS

Brussels, 9 November, 2000

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THE COMMITTEE OF WISE MEN

Chairman : Alexandre LAMFALUSSY

Cornelius HERKSTRÖTER

Luis Angel ROJO

Bengt RYDEN

Luigi SPAVENTA

Norbert WALTER

Nigel WICKS

Rapporteur : David WRIGHT

Secretariat : Pierre DELSAUX

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TABLE OF CONTENTS

Page

Preamble

Introduction

Chapter I

The benefits of European financial

integration

Financial market developments in

the European Union

The main shortcomings of European

regulation today

Preliminary conclusions

The Committee of Wise Men’s terms of reference

given by the European Union’s Economic and Finance

Ministers on 17 July 2000

Chapter II

Chapter III

Chapter IV

Annex 1

Annex 2

Working methods of the Committee of Wise Men

Annex 3

Highlights of responses to the Committee’s on-line

questionnaire

Annex 4

Recent academic work on links between size and

growth of financial markets and the growth of output

Annex 5

European Union comitology procedures

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PREAMBLE

This document constitutes the Committee of Wise Men’s initial report on the

Regulation of European Securities Markets in conformity with the

Initial report

Committee’s terms of reference which were defined by the European Union’s

Economic and Finance Ministers on 17 July 2000 (see Annex 1). The

Committee has been requested to “…present an initial report to the ECOFIN

Council early in November 2000. This report will present the state of play and

initial approaches to solutions…”. The three main elements of the terms of

reference are :

•

to assess the current conditions for implementation of the regulation

The 3 main elements of

of the securities markets in the European Union;

the mandate

to assess how the mechanism for regulating the securities markets

in the European Union can best respond to developments underway

on securities markets……; and

in order to eliminate barriers and obstacles, to propose as a result

scenarios for adapting current practices in order to ensure greater

convergence and cooperation in day to day implementation, taking

into account new developments in the market.

•

The Committee decided that the main focus of its work should be on securities

Focus is on European

markets, primary and secondary, dealing with equities, derivatives (including

securities markets

the over the counter (OTC) market), corporate bonds, government bonds etc.

As to the type of securities markets, both regulated markets and alternative

trading systems (ATS) were taken into account.

The Chairman, Alexandre Lamfalussy, and Members of the Committee would

like to thank the French Presidency of the European Union, Members of the

European Parliament’s Economic and Monetary Affairs Committee,

Remerciements

representatives of the Member States and the European Commission, notably

the rapporteur, the secretariat and their staffs, for their cooperation and

contributions to the Committee’s work. The Committee would also like to

thank all those who have taken part in the Committee’s hearings, often making

themselves available at very short notice, and those organizations and

individuals who have responded to the Committee’s on-line questionnaire.

The Committee would welcome a wide debate on its initial conclusions in

the short period that remains before its final report which will be released

Wide debate on initial

report findings

in mid-February 2001 in advance of the Stockholm European Council on

encouraged

23/24 March. Comments may be made to the Committee via the

following e-mail address :

[email protected]

or by fax

00.32.2.2955606.

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INTRODUCTION

The speed of change in European and global financial markets today is

breathtaking and accelerating. The velocity and complexity of the changes

underway are among the most profound in the history of financial markets.

There are many forces at work : globalization, which has created a highly

competitive environment; rapid progress in communication and information

technologies, which are reducing the costs of trading, spurring financial

product innovation, with the introduction of new products almost a daily

occurrence; and the euro, which, by removing exchange rate risk in the euro

area, is helping push European financial markets towards more integration.

This process is reshaping European securities markets, including stock

exchanges and market participants.

Changes of this magnitude are posing significant challenges for European

financial regulators, and regulation in general in the context of building an

integrated European financial market. First, the obstacles to integration

arising from unnecessary differences in the various jurisdictions of the EU,

which are a persistent cause of market segmentation should be removed.

Second, European regulation needs to keep up with the rapid pace of

technological and market change, whilst continually ensuring proper investor

protection and stability throughout the whole financial system. One of the

major challenges is to make sure that the European regulatory system can

adjust continuously, flexibly and rapidly to future developments which are

unpredictable today. Yet it needs to do this in a way which does not inhibit

legitimate market development and is neutral as regards competition between

different financial service providers.

Profound market

change : driven by

globalization,

improvements in

communications and

IT, and the euro…

Means new challenges

for securities

regulators and

regulation

An efficient European regulatory process for financial services and capital

markets is crucial for the whole of the European Union and all its citizens.

An efficient regulatory

Crucial for successful economic reform, for boosting European economic

process is crucial

growth. Crucial for helping channel the high rate of European savings

towards the corporate sector. Crucial for strengthening both the international

competitiveness of the European Union in the global economy and for

releasing its entrepreneurial potential. Crucial also for job creation and

consumer protection. There are major strategic, economic and social benefits

to reap from an integrated European capital market.

The Committee is aware of the close historical parallels between the reforms

now needed at European level to create a fully integrated financial services

and capital market and those used to build the

“1992”

internal market. The

parallelism between the European Commission’s 1992 programme and the

Financial Services Action Plan is clear. The aim in both cases is to create a

single economic space. Both require effective and timely regulation at

European level which is a

sine qua non

to ensure that European markets work

better and achieve high levels of integration. A key part of this objective is to

Reforms needed to

create an integrated

European financial

market parallel the

“1992” internal

market process

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make sure that agreed European legislation is properly implemented and

enforced.

Building an open European financial services and capital market in the next

few years - the logical and necessary complement of the euro - is the major

missing piece of the European Union’s internal market. In tandem with

building the information economy, to which there are strong links, this is the

major near-term economic challenge for the European Union – two

judgements that the Lisbon European Council confirmed in March this year.

For the European

Union, financial

services integration is

the major economic

challenge along with

building the

information economy

This initial report evaluates the current situation, and the challenges ahead,

The initial report’s

from both a market and regulatory perspective. It contains the Committee’s

scope

preliminary views on some possible solutions.

There is a need for action now. Delay means delaying the benefits, or perhaps

Time is short to

risking no benefits at all. Delay means the continuation of European financial

capture the benefits

market fragmentation, unnecessary costs and a sub-optimal European

economic performance.

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CHAPTER I – THE BENEFITS OF EUROPEAN

FINANCIAL INTEGRATION

The Committee believes that there will be significant long term benefits if the

European Union can integrate its financial and capital markets quickly. The

box below summarizes the main factors.

Expected Benefits from an Integrated European Financial Services and

Capital Market

II.

III.

Improving the allocation of capital in the European economy :

More efficient, deeper, and broader securities markets enabling savings

to flow more efficiently to investment.

Reduced transaction costs and increased market liquidity.

More diversified and innovative financial system.

More opportunities to pool risk.

More efficient intermediation of European savings to investment :

Intensified competition between financial markets and intermediaries.

Economies of scale, scope and a reduction in inefficiency.

More economic cohesion.

A strengthening of the EU economy, resulting in it becoming a more

attractive location for inward investment

Summary of expected

benefits from an

integrated European

financial services and

capital market

These benefits, if taken together, should be widely shared by European

citizens, small and medium sized businesses, and large companies. Below are

examples of the type of benefits that could be captured :

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(i)

For European citizens

The real return on ordinary investors’ savings in securities (directly

or through funds) should be higher.

European investment funds,

pension funds, and citizens themselves would be able to invest more

freely across the EU. Funds will be better able to use modern

investment management techniques. They would also have a more

diversified investment choice of the whole European market. European

funds could grow in size – reducing administrative costs and improving

net returns for investors. On average a US investment fund is 6 times

larger than its European equivalent and overall, the capitalization of all

US investment funds is twice as large as those in the EU.

Higher investment

returns for European

citizens

Bigger EU investment

funds

Over the period 1984-1998 the average real return on pension funds was

And improved

10.5% in the US and 6.3% in those EU countries where funds faced

performance

severe investment restrictions. Integrated European markets with more

flexible investment rules, therefore, should improve the risk-return

frontier. Higher returns could also lower the cost of pension schemes,

resulting in a reduction of labour costs and an improvement in

competitiveness.

The Committee believes that it is of the utmost importance to

underline that an integrated European capital market, by raising

the real return on capital, will deliver significant direct benefits for

citizens

. The following indicative figures show why.

If a person wants to have benefits that represent 35% of their final salary

by investing in a pension scheme over a 40 year career, pension

contributions need to be :

5% of salary if the real rate of return of the pension plan is 6%.

10% of salary if the return is 4%.

20% of salary if the return is 2%.

As the EU’s demographic trends will lead to far more reliance on

privately funded pension schemes in the future, these benefits are

particularly important. In addition, efficient European capital markets

should improve the overall macroeconomic performance of the

economy, producing higher economic growth with positive impacts on

employment creation and productivity.

To capture all these benefits a number of conditions will have to be

fulfilled. Among the most important are :

Why this matters so

much for European

citizens – a pensions

example

Macroeconomic

performance could

improve – impacting

positively on

employment creation

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•

an efficient, competitive, innovative and properly regulated EU

But a number of

conditions need to be

financial services market;

fulfilled

intermediaries should exercise good professional judgement, taking into

account the different needs of professional and retail investors. They

should provide full explanations of the risk profiles attached to different

financial products along with accurate, relevant, and timely information

on savings products (including information on companies) in order to

ensure proper protection of the consumer;

rigorous monitoring and control of selling techniques, particularly in the

growing internet/e-commerce distance–selling segments of the market.

The fulfilment of these conditions will contribute greatly to the

Building public

attainment of broad public confidence in European financial

confidence is essential

markets.

•

(ii)

For small and medium sized compa nies (SMEs)

Integration should benefit the financing of small and medium sized

companies

– the essential employment creator and backbone of the

European economy. Today there is still an inadequate supply of risk

capital in the EU with venture capital only 1/5 of US per capita levels.

However if the European Union’s financial markets can integrate (and

develop deeper pools of interconnected liquidity, a common prospectus

for cross-border capital raising, common listing requirements together

with one set of international accounting standards etc), European venture

capital financing will be encouraged from the bottom up. This

correlated venture capital-entrepreneurial axis is absolutely vital for

creating a dynamic European economy – and developing new companies

to invest in. This means the whole financing chain - from start up

capital to Initial Public Offer to wholesale debt raising - has to work

efficiently. The overall strength of European capital market will be as

strong as its weakest link.

During the Committee’s deliberations a number of differing views were

put forward concerning the impact of an integrated European capital

market on small/medium cap liquidity. Some argued that there will be a

“herd”

tendency, (e.g. towards index-tracking instruments)

concentrating liquidity on the blue chip stocks to the detriment of the

smaller stocks and peripheral and local stock exchanges. Others said

that as European markets integrate, investors will seek a broader range

of companies to invest in – including SMEs. Indeed as interconnected

liquidity pools deepen, liquidity for SMEs could improve leading to

benefits for all companies

“rising on the integration tide”.

Investors, it

is argued, will always be on the lookout for highly profitable, even if

riskier investments. This is what happened in the US (e.g. the

NASDAQ market) where capital for new growing companies was found

because many institutional and retail investors saw opportunities in

An integrated EU

capital market can

offer a wider choice of

instruments for SMEs –

and will encourage

venture capital growth

Could financial

integration damage

small/medium cap

liquidity?

Views differ

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balancing the extra marginal risk against the higher returns that small

SMEs themselves must

and start up companies can generate. Obviously these two conflicting

demonstrate that they

are a good investment

trends could be at work simultaneously. In any event SMEs themselves

clearly have the responsibility to demonstrate they represent good value.

(iii) For large companies

For large European companies

the cost of raising capital in the EU is

higher than in the US - even for top blue chip customers. This cost is

caused by the complexity of cross-border capital raising in the EU;

different rules in each Member State impairing liquidity and efficient

pricing; unnecessary costs of establishment plus a higher cost of capital

per se.

The relative cost may well be higher the smaller the company.

At best these are unnecessary, expensive

“non-integration”

costs – at

worst they drive the business out of Europe, usually to the US, with

potentially damaging long term consequences for the European

economy. Firms with long term, innovative investment projects may be

the most affected.

For large companies, an integrated market will offer many more

possibilities to raise equity capital and to gain access to a growing euro

corporate bond market to securitize their debt.

(iv) Stimulating competition and innovation

One of the most important elements for building an integrated securities

market is to encourage competition and to ensure there is open entry and

access to

“contestable”

markets on non-discriminatory terms. In an

integrated and open European market, competition and innovation

would stimulate new financial products and financial services. They

would also reduce the costs of standard products (e.g. commercial loans,

credit card, and mortgage or private equity transactions) which can be

expected to converge over time to lower levels. In an integrated

European market, total transaction costs would also fall and the price

mechanism would work more efficiently. The experience of applying

the principles of open access to telecommunications networks and to

many other sectors of the European economy is an indication of the

positive gains to be seized for the users of financial services from the

construction of a competitive, integrated single market.

Fragmented EU capital

markets means a

higher cost of capital

for large companies

Integration benefits –

securitizing

debts/growth of

corporate bonds and

easier to raise equity

capital

Integration will

strengthen competition

and innovation –

driving down the cost

of standard financial

products

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It has been suggested to the Committee that more rational and integrated

clearing and settlement systems for cross-border European securities

trading could save around 1 billion euros annually. It is apparent that

Big clearing and

clearing and settlement systems in the EU are not cost-efficient at

settlement savings are

present and so progress towards cost reduction in Europe could have a

possible

significant beneficial effect in promoting EU cross-border investment

and market integration. This is primarily a question for the markets to

determine. However there is a public interest in ensuring that access to

clearing and settlement systems is open and fair, and that prudential

safety is ensured.

As markets integrate and competition strengthens, there will be an

inevitable

“creative destruction process”.

Rationalization and

restructuring can be expected particularly among intermediaries and in

the banking sector, as the combination of the effects of

disintermediation, concentration and conglomeration multiply. As has

proven to be the case in the opening up of telecommunications markets

in the EU, new financial markets, products, companies, and indeed job

creation should be able to offset any downside effects, with systemic

stability ensured.

(v)

The size of the benefits

It is not simple to quantify

the net sum of these benefits, but potentially

they are large. Recent evidence from cross-country data suggests that

there is a close link between the size and growth of financial markets

Magnitude of benefits

and the growth of output. Furthermore, most of this increase appears not

not precisely known –

but potentially large

to be driven by faster capital accumulation but by higher productivity.

The evidence from some recent academic studies can be found in Annex

However there will be

some “creative

destruction” that

should be offset by

more innovation

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CHAPTER II – FINANCIAL MARKET DEVELOPMENTS

IN THE EUROPEAN UNION

The Committee has identified five overarching trends in the financial markets.

Trend 1 : Significant growth in securities business and demand for equity

The European corporate sector has traditionally been more dependent on bank

loans as a source of external finance than its US counterpart. At the start of

the 1980s, over 80% of external financing of continental European firms was

provided by banks and the European commercial paper market was non-

existent. The raising of finance through the issuance of equity and corporate

bonds has now overtaken bank loans as a source of corporate finance (see

Table 1). Nevertheless, these sources of finance are still less developed than

in the US.

The most notable growth has to date been achieved in equity, where recent

annual growth rates of volumes traded have exceeded 30% per annum over the

period 1995-1999. Similar progress has been observed in fixed income

securities particularly the issuance of asset-backed (mortgage) bonds and

securitization of loans by financial institutions. The European corporate bond

segment is also starting to increase (with 18% growth in 1998 and 58% in

1999). The size of the average corporate bond issuance also doubled in 1999,

reflecting the better absorption capacity of the markets.

European equity and

fixed income business

growing strongly

– but sizewise, still

way behind the US

New securities and new listings have been a significant component in the

growth of European stock market capitalization. In 1999, stock market

New European

capitalization of EU-15 markets reached 109% of GDP (85% for Euro-11

securities and listings

countries). This compares with cumulative total of 181% of US GDP. The

beginning to expand

number of companies listed on EU-15 exchanges has grown steadily from

6401 in 1995 to 8111 in 1999 (with the bulk of this growth occurring in the

Euro-11 markets – from 3475 to 4416).

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EUR-15 FIGURES

Table 1 : Comparative data on financial systems (euro-zone, US) (% of GDP, 1999):

Euro-zone

45.2

Bank loans to corporate sector

Fixed income securities:

98.8

166.2

12.4

- corporates:

- financial institutions:

- public sector

Stock market capitalization

7.4

36.4

54.9

29.0

46.8

48.4

90.2

179.8

Source: ECB monthly bulletin, July 2000.

Figure 1

% of GDP

300

272

STOCK MARKET CAPITALIZATION (end-1999)

250

206

192

174

176

155

181

200

150

105

102

100

IRL

FIN

EU-11

LUX

Jap

Source: BIS, FIBV (2000).

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The supply of new equity is matched by a greater appetite on the part of

European investors and households for securities-based investment. Whereas

this demand in some countries was traditionally mediated through the banks, it

is now being expressed through two additional channels :

•

Retail investors.

There are emerging signs that an equity culture is

beginning to develop in the EU. In Germany, the number of

shareholders directly owning shares climbed by 25% in 1999 to over 6

Evidence of an equity

million. In the UK, one out of every three adults owns shares. At

culture developing in

present, the participation of retail investors in securities markets is still

the EU?

routed through intermediaries. However increasingly, exchanges and

new trading systems seem interested in serving the customer directly.

Electronic brokerage has also driven down transactions costs, prompting

a rapid increase in the number of on-line brokerage accounts in some

Member States.

Institutional investors.

European institutional investors have yet to

assume the dominant role played by institutional investors in the US in

equity trading. However, steps to relax regulatory constraints on the

investment strategies of occupational retirement schemes should sustain

a greater presence by European funds in equity and investment funds

business. In the investment funds market, there is a major portfolio

switch underway towards the equity segments – a 20% increase in

proportion compared to 1994. However, in 1999 the average proportion

of equities in European investment funds was 40%, still well below the

60% figure in the US.

Institutional investors

also swinging more

towards the equity

markets

•

Trend 2 : Europeanization/internationalization of securities markets

The investment horizons of funds and private investors are slowly becoming

more European. The relative share of domestic equity in portfolios of unit

New pan-European

trusts is in decline. The volume and number of cross-border transactions is

investment strategies

increasing. The same investment firms constitute the membership of different

are being defined

exchanges and serve multiple national client bases. Finally, exchanges and

new types of trading platforms are competing across borders for order flow

and are increasingly dependent on consolidated clearing houses/central

counterparty facilities.

Despite these growing linkages, a strong home bias persists in primary and

But there is still a

secondary market activity in the EU markets. In part, this situation reflects

strong home country

inertia in investment patterns. However, it is also the case that cross-border

bias

issuance, trading and settlement are beset by numerous outstanding legal and

technical obstacles.

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Globalization is also impinging directly on European securities markets in

many different ways. There are now far more linkages, cross-border and

between markets and participants. While investment services have long been

marked by strong international competition, the elimination of obstacles to

international competition in trading and execution is a more recent

phenomenon. Provision of trading infrastructure services is now a business

like any other. Such services are exposed to international competition through

a number of powerful financial marketplaces in an increasingly globally

integrated 24 hour trading environment. The competition from, and incursion

of, third country trading systems on the European market is likely to develop.

The European securities industry will need to respond to remain competitive.

The European market is, rightly, open to non-EU firms. European firms,

service providers and markets should also have the opportunity to compete on

an equal footing in third country markets. This means that those entry barriers

or regulatory impediments to European financial service providers should be

removed. There are still far too many, with some of the most important ones

being in the United States.

Trend 3 : Competition and cooperation between exchanges and trading

systems

International

competition

intensifying as global

dimension of securities

markets strengthens

International trade

barriers to EU

companies must be

removed

Exchanges, organized and managed traditionally as national monopolies, are

now competing for order flow between themselves and with new competitors.

Major changes in

Technology has lowered entry costs and allows virtual marketplaces to serve

European stock

wide geographical zones. Competition between trading platforms holds out

markets underway

the prospect of efficiency benefits in the processing and execution of trades.

Some exchanges and new entrants are seeking to achieve European reach

Mergers and alliances

through organic growth. However, other exchanges are looking to far-

are accelerating

reaching alliances or fully-fledged mergers.

Technology has also facilitated the emergence of more efficient trading

Many European the

exchanges are at

systems and a new tier of trading systems functioning without a need for

technological frontier

physical trading floors.

In the US, Alternative Trading Systems ( TSs) compete head-on with the

large exchanges and have now captured some 30% of NASDAQ trading

volumes, and 5% of NYSE.

In Europe, ATSs provide specialized

intermediary services for professional participants which complement rather

than substitute for exchange – based trading arrangements. There are now

more than 20 ATSs operating in Europe – largely based in the UK and

Germany. ATSs have the potential to become a potent force in the European

securities landscape.

New competition in the

form of over 20

alternative trading

systems in the EU

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These new platforms are also paving the way for organized trading of fixed

income securities and some derivatives business which were previously

Now spilling over to

conducted on a bilateral/OTC basis. To the extent that these new trading

the fixed income and

arrangements are publicly accessible to a wide population of investors, they

derivatives markets

may give rise to some regulatory and supervisory challenges comparable to

those that arise in equity markets.

Trend 4 : Growing pressures for consolidation of clearing and settlement

The pressures for a more efficient securities trading infrastructure are being

brought to bear on clearing and settlement - an area where European

significantly underperforms when compared to US markets, and which

constitutes a major hindrance to efficient cross-border transactions.

According to some industry sources, settlement charges in Europe for cross-

border transactions are ten times those levied in the centralized US Depository

Trust & Clearing Corporation (DTCC) system. When inefficiencies at the

level of clearing/central counterparty are added in, the gap is higher. The

Committee has been told that annually a maximum of up to 1 billion euros of

the current annual cross-border settlement outlay could be saved through the

creation of a single European settlement infrastructure.

Submissions to the Committee have highlighted the widespread differences as

regards the optimal configuration of European clearing and settlement

facilities.

Some market participants and some clearing and settlement leaders expressed

a strong preference for consolidation along functional lines (the horizontal

Horizontal or vertical

model). According to this view, the organization of multilateral

“netting”

integration?

through a European central clearing counterparty could minimise counterparty

risk and would provide the conditions for maximizing the efficient use of

capital and exploiting cost efficiencies.

The jury is still out as to whether full integration of Central Securities

Depositories (CSDs) is required or whether technical linkages between

existing entities will be sufficient. Technology also provides the key to the

technical inter-linkage/integration of heavily fragmented securities settlement

systems. Managing the full web of bilateral linkages (which could amount to

up to 650 bilateral links between the 26 existing settlement systems in the EU)

is generally regarded as extremely cumbersome and a source of operational,

some have said even systemic risk in itself. This is sometimes coupled with

calls for a dominant structure in the clearing or settlement area to be organized

on a

“public utility”

basis (as in the US where the DTCC is owned by the

market participants themselves). The integration of trading, clearing and

settlement in vertical

“silos”

is dominant in several Member States.

European clearing &

settlement – major

progress required to

cut costs

One European central

counterparty, like the

US, or interlinkages?

A “public utility” to

help reduce cost (and

systemic risk)?

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The importance of open and fair access to clearing and settlement systems to

stimulate competition and market integration was frequently raised in the

Committee’s work. The alternative will be financial marketplace competition

based on bundled services – with the risk of less competition at each stage of

the transaction cycle.

Trend 5 : Increased volatility of financial asset prices

The Committee has noted that, more recently, there has been a sharp increase

Recently, noticeable

in the volatility of stock prices. This has been the case worldwide, and has

increase in volatility of

been especially noticeable for prices relating to the

“new economy”

segment.

financial assets

Increased volatility can be observed in the behaviour of indices, but even more

so in that of individual prices.

These developments may turn out to be a passing phenomenon to the extent

that volatility reflects uncertainties regarding current business perspectives or

the difficulty in assessing the working of, and the prospects for, the

“new

economy”.

But they may well relate to longer lasting forces operating in our

Unclear whether this

volatility is a long or

globalized economy. While a number of firms will enter the market, others

short term phenomenon

are bound to disappear. Worldwide financial integration, combined with the

efficiency of communication and information technology, mean that asset

price changes are transmitted instantaneously across borders; and, via the OTC

derivatives markets (which may themselves be a source of instability as a

recent IMF paper has indicated

∗

) price movements originating in one

particular market may be transmitted across the border to the whole range of

financial assets.

Summary

All these five trends are having, and will continue to have in the future, a

major impact on European securities markets because these dynamics have not

yet run their course. This is of considerable importance for European

regulators and the process of European regulation.

∗

International capital markets :

Developments, prospects and key policy issues by an IMF staff team led by

Donald J. Mathieson and Gary J. Schinasi – September 2000.

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CHAPTER III – THE MAIN SHORTCOMINGS OF

EUROPEAN REGULATION TODAY

THE EU REGULATORY FRAMEWORK…..

The current EU legislative framework for securities markets covers mutual

recognition of listing particulars, public offer prospectus, investment firms,

investor compensation schemes, regulated markets, insider dealing,

harmonized investment rules for UCITS (investment funds), and some

company law provisions. It is based on minimum harmonization and mutual

recognition. There is no single template for supervision. Cooperation

between securities regulators for dealing with cross-border practices and

trading is only lightly covered. The investigative powers of national

authorities and sanctions are not defined at EU level.

The current approach has begun to open previously closed national markets.

For instance, figures show that a large number of investment firms have

benefited from the single passport given by the Investment Services Directive

(ISD) and the ability to provide services on a cross-border basis. (No data are

however available on the market share of these companies.) On the other

hand, a limited number of firms have so far used the freedom to establish

branches in another Member State.

…..IS NOT SUFFICIENT

The EU’s regulatory

framework for

securities today is

limited – it is based on

minimum

harmonization and

mutual recognition

The results of the hearings conducted by this Committee, as well as the

answers to the questionnaire, show that

far more needs to be done to achieve

a real single market for financial services.

A large majority of interested

participants share the feeling that transposition and implementation of EU

directives is unsatisfactory, inhibiting the development of cross-border

securities business. In the Committee’s work and in the hearings some issues

have repeatedly emerged as being particularly damaging to the construction of

a integrated market. They are :

(i)

Issuers

are still confronted with numerous practical difficulties. For

instance:

Far more needs to be

done to achieve a real

single market in

financial services

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The

EU passport for issuers

is still not a reality. Firms wishing to

EU passport for issuers

raise capital in other jurisdictions are obliged to comply with different

is not a reality

or additional requirements in order to gain the approval of local

Regulatory Authorities. There is not even an agreed definition of a

public offer of securities, with the result that the same operation is

analyzed as a private placement in some Member States and not in

others. The current system discourages firms from raising capital on a

European basis and therefore from real access to a large, liquid and

integrated financial market.

Rules on disclosure of price-sensitive and relevant market and

company information

differ greatly between Member States.

Accounting rules are not yet harmonized.

More information on EU

companies is often available in the US than in Europe.

For investors

several deficiencies remain, for instance:

Professional investors

are often subjected to multiple sets of conduct of

There are still multiple

rules for investors…

business rules. There is still no legally agreed definition of what

constitutes a professional investor, despite some recent progress.

Retail investors

are faced with

different sets of consumer rules

with

Different consumer

rules

varying levels of consumer protection.

There is no agreed definition of

market manipulation.

Effective functioning of cross-border clearing and settlement is still

impeded by legal differences in the

treatment of collateral.

Markets and trading systems

There is

no single passport for organized markets and trading

No single passport for

systems

(i.e. they do not have the right to provide services directly on a

organized markets

cross-border basis).

The over the counter (OTC) market

is mostly outside the scope of the

The OTC market is

EU directives – with, for example, OTC transactions having to be

outside EU Directives

declared in some jurisdictions but not in others.

And no cross-border

collateral rules

Disclosure rules and

other information

requirements vary

considerably

(ii)

(iii)

(iv) Investment firms

now have a European passport but are often faced

Different obligations

with different obligations in each Member State because the firms

are placed on

investment firms

providing core services, i.e. e-brokers, broker/dealers, portfolio

managers and underwriters, are subject to substantially different

supervisory regimes in different Member States.

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(v)

The

large number of Regulatory Authorities

for securities in the

On top of a

Member States creates unnecessary cost and confusion among market

multiplication of

players. In the EU there are approximately 40 regulatory organisations

regulatory authorities

– far too many for an efficient system.

A FIRST INITIATIVE : THE CREATION OF THE FORUM OF

EUROPEAN SECURITIES COMMISSIONS (FESCO)

FESCO was founded in 1997 by the Statutory Securities Commission of the

European Economic Area (EEA). It is seeking to develop standards

FESCO is helping

develop standards

complementing the legal framework created by the EU Directives.

Specialized papers prepared by FESCO on specific issues constitute a helpful

analysis of the difficulties encountered by the national regulators and can

provide some solutions.

FESCO members have also agreed on multilateral Memoranda of

exchanged

Understanding to establish a general framework for cooperation and

communication between each other. It provides for mutual assistance between

the parties.

And MOU’s are being

However useful this work is, FESCO is confronted with several drawbacks: it

But FESCO has

drawbacks…

has no official status, it works by consensus, and its recommendations are not

binding. Furthermore, the actual implementation of decisions in the different

Member States is dependent upon the regulatory powers granted internally to

each respective regulator – and these differ widely.

A SECOND INITIATIVE : THE EUROPEAN COMMISSION’S

FINANCIAL SERVICES ACTION PLAN (“FSAP”)

The FSAP is the Commission’s response towards improving the single market

in financial services.

Adopted in 1999 following a Commission

Communication and a consultation with all interested parties, the FSAP

contains a list of 42 measures to be implemented, grouped around 4 strategic

objectives (retail markets; wholesale; prudential rules and supervision; and

wider conditions for an optimal single financial market). Its purpose is to

serve as an inspirational programme for rapid progress towards a single

financial market. Most of the points mentioned above are covered by the

FSAP, but prioritization of the different measures is needed.

Some of the points mentioned in the FSAP are also part of the Risk Capital

Action Plan which the Lisbon European Council stated should be delivered by

2003 (e.g. prospectuses, accounting rules etc).

The European

Commission’s

Financial Services

Action Plan is a

blueprint for an

integrated financial

services and capital

market

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The FSAP was endorsed by the Lisbon European Council in March 2000

which set a deadline for its implementation of 2005 at the latest. Some of the

measures have already been adopted.

New proposals made by the

Commission are following the legislative process while others will be

submitted in the next few months. The Commission is continually monitoring

the implementation of the FSAP with half-yearly progress reports to the

ECOFIN Council.

THE MAIN DIFFICULTY : THE FUNCTIONING OF THE

INSTITUTIONAL FRAMEWORK

…And it was endorsed

at the Lisbon European

Council – with a 2005

deadline set for

delivery

Markets participants share the view that the FSAP is the right answer to the

But the regulatory

problems outlined above. However, most fear that it will not be implemented

system is not working

with the required urgency. If the EU is to capture the benefits of an integrated

efficiently enough

European capital market, it must have a regulatory system that works more

efficiently and flexibly, and one which is more comprehensive in scope.

The present system as it now functions is not meeting these objectives :

The process to adopt legislation is often too slow.

Even when

political problems do not arise, it takes three years on average to agree a

Regulation or a Directive. Such a timescale is unacceptable when

legislation is meant to bring an appropriate response to a fast changing

The EU’s regulatory

world. For instance, the UCITS proposals are still pending more than

system is too slow

two years after being proposed by the Commission. In worst cases,

delays are much longer : more than eleven years for the Take-over

Directive which has still not been enacted. However, examples (outside

the financial services domain) show that some proposals can be adopted

and implemented quickly at European level (in some extreme cases,

adoption in less than eight months), when the political will is there.

Seeking a political consensus leads sometimes to the adoption of

ambiguous texts

or texts with a level of harmonization so minimal that

no real integration is achieved. An example is Article 11 of the

Community texts are

Investment Services Directive. It has not given sufficient clarity about

sometimes ambiguous

whose conduct of business rules should apply to wholesale business.

The same provisions are often interpreted and applied by the Member

States in a very different manner. Without legal clarity, no efficient

delivery mechanisms can subsequently guarantee equivalent

implementation.

Too many

delays also occur in the transposition process

by Member

States. However, few infringement cases have been brought against the

Member States given ambiguities in certain Community texts, a lack of

Commission resources and a low number of complaints.

Few infringements

have been brought

against the Member

States

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Some important issues are still not appropriately covered at EU

level

(e.g. pension funds, international accounting standards, the

Some sensitive areas

are not covered at all

European company statute…) ,whilst some texts are clearly obsolete but

remain untouched. As an illustration, more than twenty years have

elapsed since the adoption of texts on prospectuses and listing

requirements. This is explained, in part, by the acute political

sensitivities of some issues.

There is

no rapid mechanism in place to update Community

No rapid regulatory

Directives

to new market developments.

updating system exists

Existing

obligations to cooperate, procedures for notification and

Insufficient obligations

information sharing are not sufficient

and do not deliver enough

to cooperate

predictability in enforcement mechanisms (a key issue for all financial

actors).

In short, the current system, as it is now functioning, is :

•

Too slow

Too rigid

Containing too much ambiguity and is therefore resulting in inconsistent

implementation

Over-reliant on primary legislation for determining detailed rules

A short term solution

has to be found within

existing Treaty

arrangements

Conclusions on the

current regulatory

system

Urgent action is needed. The Committee is therefore persuaded that in the

short term any solution has to be found within the confines of existing Treaty

arrangements.

OTHER SIGNIFICANT OBSTACLES

Even if the EU Regulatory Framework in the field of securities were a

complete success, there are a range of other obstacles that would still need to

But there are a range

of other important

be tackled to achieve a completely integrated European financial services

obstacles

market. Such obstacles are not within the remit of the Committee’s terms of

reference, but the Committee wishes to underline in particular the importance

of :

Differences in the Member States’ legal systems

which have

Such as different

important consequences in the field of securities (e.g. bankruptcy

Member State legal

regimes, sanctions regimes or jurisdictional regimes which are all

systems

potential obstacles to cross-border trading).

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The patchwork of applicable legislation

in the field of securities is

creating uncertainty and increasing dramatically the costs of cross-

border services. In particular it is complicating the tasks of smaller

firms which have insufficient resources to cope with such complexity.

Patchwork of

legislation causes

uncertainty and extra

costs

Taxation differences

which are a major impediment leading to

Tax differences

distortions of trading flows for non-economic reasons.

Cultural differences

(such as attitudes towards corporate governance

Cultural barriers as

and investor protection) are additional complicating factors hindering

well play a role

the development of an integrated EU financial market.

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CHAPTER IV – PRELIMINARY CONCLUSIONS

The Committee considers that the pace of accelerated change in financial

markets, the benefits of channelling the high level of European savings

Initial report shows

efficiently towards the corporate sector, and the requirement for the European

change required

regulatory system to reshape to meet this new challenge recognized in the

European Commission’s Financial Services Action Plan, needs a programme

of comprehensive and coordinated reform. The Committee’s preliminary

views on a number of the main issues are set out below :

ECONOMIC BENEFITS

If the European Union can integrate its capital and financial markets in the

near-term, the European economy will strengthen – improving both long-term

economic growth and job creation. To highlight this,

the Commission might

Economic benefits

undertake to construct a comprehensive series of macro and micro

indicators to continuously benchmark progress towards an integrated

European financial market, including more precise measurements of the

overall macro and micro benefits.

The results should be widely publicized.

If possible, preliminary results should be made available by summer 2001.

TRADE ISSUES

As European financial markets integrate, reciprocal and open access to the

financial markets of the EU’s major trade partners is essential to ensure a level

Removing trade

international playing field for EU financial services/companies. However,

barriers in next Trade

Round

barriers to entry are prominent in many non-EU countries including several

important ones in the United States.

The European Commission, working

with the Member States, should consider establishing a comprehensive

list of these external trade barriers which should be removed in the

forthcoming WTO trade round, if not before.

MARKET VOLATILITY

In an environment in which volatility may be increasing, regulators should pay

enhanced attention to the need for intermediaries and others promoting

investment products to provide investors – and, in particular, retail investors –

with reliable and clear information so that they can make informed investment

decisions in full knowledge of the risks.

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Increased asset price volatility may also entail risks to systemic stability. It is

not within the remit of this Committee to evaluate such risks, and even less to

make recommendations on how to deal with them. However, given the

growing interlinkages between all segments of the securities markets and the

full range of financial intermediaries, the Committee believes that there is an

urgent need for structured cooperation at the European level between financial

market regulators and those in charge of micro and macro prudential

supervision. The proper functioning of securities clearing and settlement

systems as well as that of the OTC derivatives markets should be a shared

concern.

The Council might wish to ask the Economic and Finance

Committee to look at some of these prudential issues.

THE FINANCIAL SERVICES ACTION PLAN (FSAP)

Particular attention

needed to deal with

market volatility and

possible risks to

systemic stability

The European Commission’s Financial Services Action Plan is widely seen as

containing the key elements for constructing an integrated European financial

services market. This Plan was fully endorsed by Heads of State and

Delivery of FSAP

essential

Government at the Lisbon European Council in March 2000 and is widely

supported by Member States, market participants and national regulators.

Furthermore, at the Lisbon European Council a date was set for its completion

– namely 2005. This Plan must be delivered. But in the view of the

Committee, delivery by 2005 is too late.

The Committee suggests that further political efforts should be made to

complete the Plan by 2004. There could also be political commitments to

accelerate work on a small number of priorities, some by the end of 2003,

given that some of the measures form part of the EU’s Risk Capital

Action Plan – whose deadline was set at the Lisbon European Council to

be 2003. These new dates and key priorities could be endorsed, as soon

as possible, by political commitments at the highest levels.

These

commitments should filter down to all parts of the decision making process –

particularly to the negotiator level. Swift and accurate transposition and

implementation into national legislation is equally necessary.

The Committee’s priorities, all of which are contained in the FSAP, are :

But efforts should be

made to accelerate to

2004, and some

priorities even to 2003

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Modernizing the Investment Services Directive

[Required : Sorting out country of origin/country of destination rules for

wholesale financial transactions; defining who are professional and retail

investors and appropriate conduct of business rules; drawing up

appropriate rules for regulated/non-regulated markets (ATSs)]

Making cross-border capital raising as easy as domestic capital

raising

[Required : a single passport for issuers; a common definition of public

offer; modernizing listing requirements and introducing a distinction

between admission to listing and to trading]

Creating open, transparent European markets

[Required : Harmonizing transparency and disclosure requirements;

encouraging use of international accounting standards for all listed

companies; defining more clearly European market abuse and finally

agreeing take-over rules]

The Committee’s

priorities

Creating European financial products

[Required : Updating investment rules for pension and investment funds

and providing for cross-border collateral]

Establishing proper levels of consumer protection

[Required : Establishing high and equivalent levels of consumer

protection and efficient methods for resolving cross-border consumers

disputes]

EUROPEAN REGULATION

The present functioning of the European legislative system cannot meet the

challenge of regulating modern financial markets. For reasons that have been

developed in the previous chapter, the Committee is indeed concerned that the

present system will not be able to deliver the Financial Services Action Plan

on time.

The Committee believes that at this present stage of development of the

European Union’s market for securities, this regulatory challenge can best be

met by building on the methods and political determination which underlie the

successful creation of the single market for goods and services, while adapting

those methods to particular needs of securities.

Present regulatory

system requires some

urgent change –

otherwise FSAP will

not be delivered on

time

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The Committee has noted during its deliberations how national securities

markets regulation is often organized. In general, framework laws are passed

by national Parliaments that outline the basic principles that regulators must

follow. Legal implementing powers are then delegated to them to turn these

principles into workable day to day rules for the market. This model is used by

a number of Member States and by the United States.

Any legislative approach must provide an efficient, timely and adaptable way of

delivering the necessary European legislation to move towards the

accomplishment of a single securities market in Europe. Within the present EU

institutional arrangements, the approach should be constructed in a way which

would :

•

Respect democratic processes at both national and Union levels;

Some national

securities market

regulators are

organized rather

differently

maintain the present institutional balance in the European Union and be in

institutional criteria to

conformity with the present structure of the Treaties;

be fulfilled

take full account of the established agreements regarding proportionality

and subsidiarity.

Basic legal and

The details of one way which might work are set out below and are presented

here as a basis for further discussion and analysis. This approach could be

A possible approach

introduced quickly. Ideally it would require political endorsement at the highest

political level, namely by the European Council, by the Commission and by the

Member States as well as the support of the European Parliament.

A POSSIBLE APPROACH

•

The broad framework principles

of securities legislation could be

enacted at EU level in accordance with normal EU legislative procedures.

Level 1 :

Broad

At this political level, legislative texts should not be detailed, but

principles agreed by

normal EU procedures

concentrate on the key principles of each issue (

EVEL 1).

In other

words, the European Commission, having consulted widely, could make

the necessary proposals to the Council of Ministers and the European

Parliament for adoption by them using co-decision procedures. Wherever

possible, these proposals could be agreed using

“fast track”

procedures

that already exist, even if they are rarely used. Furthermore, Regulations

∗

could also be used rather than Directives to improve the transparency,

speed and accuracy of transposition and implementation.

∗

Regulations are legislative acts that once agreed by the Council and the European Parliament do not need

Member State transposition. Directives require Member State transposition which can take up to 18 months or

more.

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•

The modalities of how to implement the principles set out in the

Level 1 framework would be laid down also at EU level using

Level 2 :

A new

Securities Committee is

comitology procedures (LEVEL 2)

[for details see Annex 5]. This

needed…

would require the setting up of an EU Securities Committee. It would be

made up of the European Commission and representatives of the Member

States and would have powers to decide on the technical implementing

details of Level 1 legislation and the responsibility to update them when

required. The technical rules decided through this mechanism would,

inter alia,

provide the basis for the practical implementation of the single

market principle of mutual recognition. They would form part of

Community law and be binding on all Member States.

Most importantly, the EU Securities Committee should be supported by a

Supported by an EU

committee composed of EU regulators

, in a format similar to that of

Regulators Committee

FESCO, but with a precisely defined role and status. The Regulators

could advise the Commission on the technical implementing details of

Level 1 framework principles.

Furthermore, there should be

arrangements whereby market practitioners could systematically and

regularly provide input to this Regulators Committee and the European

Commission.

•

The Member States have the responsibility to implement Community

law. They should do so within

a framework of enhanced and

strengthened cooperation and networking between their regulators

with a view to ensuring consistent and equivalent transposition of the

Level 1 and 2 legislation (LEVEL 3).

National regulators should be

encouraged to agree joint protocols on certain interpretations for

implementation purposes and also a peer review process to ensure

consistent enforcement practice in the EU Regulators Committee.

Member States should also ensure that only one National Regulatory

Authority with sufficient and comparable powers is responsible for each

aspect of European financial services regulation.

Level 3 :

Enhanced

and strengthened

transposition and

implementation

•

There would be

strengthened enforcement of Community rules

through more vigorous action by the Commission and enhanced

Level 4 :

Reinforced

cooperation between the Member States and their regulators

enforcementlaw

Community

(LEVEL 4).

In particular, the Commission should act more vigorously

to enforce Community legislation and be given sufficient resources to

carry out this essential task.

The overall success of this 4 level regulatory approach will depend on the

political will of the Member States, the European Parliament and the

Commission to make it work. If agreed, the Committee believes that every

effort should be made to ensure such an approach could be functioning by

the end of 2001.

Of crucial importance also will be the readiness of national

regulators to cooperate and work closely together to help deliver the framework

of European legislation that is needed for an integrated market.

Success will depend on

the political will of all

concerned

It should start by end

2001

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The Committee considers it essential that this new approach is properly

Proper accountability

accountable to the European Parliament. Annual reports on the work of

to the European

Securities and Regulators Committees should be submitted to the Council and

Parliament is essential

Parliament. Both Committees should report regularly to the European

Parliament.

Furthermore, the Committee believes that

a continuous monitoring process

would be necessary to evaluate how the new approach is functioning, both from

a procedural stance and also by assessing how rapidly European financial

services integration is taking place. Half-yearly reports could be given to the

Council and the European Parliament on the progress, or lack of it, being made.

Continuous monitoring

with half yearly reports

to the Council and the

European Parliament

The functioning of this approach should be fully reviewed around 2004,

Full review around

though if, in the light of the half-yearly reports, it were manifestly failing to

2004

secure sufficient progress, there would be a case for a full review earlier.

It is clearly impossible to foresee the substance of a review of developments

that have yet to take place. Various scenarios are conceivable however. At one

extreme, the approach sketched out above might be succeeding in developing

the single market in securities. In that case, its essentials could be maintained

Scenarios for the future

or strengthened if that seemed necessary. At the other extreme, if the approach

did not appear to have any prospect of success, it might be appropriate to

consider a Treaty change, including the creation of a single EU regulatory

authority for financial services generally in the Community.

At this stage of the development of the EU’s securities markets, the Committee

Case for single

believes that there are good reasons for not considering the establishment of a

regulatory authority

single regulatory agency. First, the basic harmonized rules necessary for the

not yet made

appropriate functioning of an integrated market are not yet in place. Second,

speedy action is needed to correct the identified shortcomings of the present

regulatory framework; and speed requires reforms carried out within the

confines of the present Treaty. Third, some time will be needed to ascertain

whether any such reforms deliver, or fail to deliver, results.

THE ROLE OF THE PRIVATE SECTOR

Legislation and regulation provides the framework in which the private sector

operates. The private sector has a major role to create the single market within

that framework. In particular the private sector has an important role to reduce

European financial market inefficiency, such as the excessive costs of trading

securities in the EU notably clearing and settlement. Progress should be

benchmarked.

Private sector has

important role to play

– e.g. reducing

clearing and settlement

costs

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The private sector should also work intensively with regulators on building

…And building cross

consumer trust to enhance the cross-border retail trade of financial services

border confidence for

(e.g. networks of alternative disputes settlement using national financial

retail trade

ombudsmen; and trust marks etc). The private sector should also work with

the European Commission to remove international trade barriers, and ensure

constructive input to the Level 2 decision-making process described above.

DELIVERING THE CHANGE

Not all of these changes can be delivered quickly. But the regulatory changes

are especially urgent. The Committee suggests that the Stockholm European

Council, in March 2001, might consider a

European Council Resolution

similar in structure to that used for establishing the Growth and Stability Pact

in June 1997. In this Resolution, Heads of State or Government could agree

with the European Commission on a series of differentiated commitments –

for the Member States, the Commission and the Council to deliver the essence

of the regulatory proposals so they can begin to function from 2002 onwards.

AREAS FOR FURTHER REFLECTION

Impact of integrated securities markets on small and medium sized

companies (SMEs)

Many of the actions outlined in this chapter can benefit SMEs, particularly

those seeking to tap capital markets. However the Committee wishes to

reflect further on this issue.

Competition

The Committee believes that encouraging competition throughout EU

Key importance of

securities markets will benefit the integration process. Essential public policy

strong competition

objectives to be pursued are open access to markets and clearing and

policy

settlement systems on a non-discriminatory basis. At the same time,

competition authorities should pay particular attention to any possible

detrimental effects of concentration in European financial markets as

integration accelerates. The Committee wishes to reflect further on this issue.

Committee wishes to

reflect further on the

issue of the impacts on

SMEs

Delivering change –

importance of

Stockholm European

Council – March 2001

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Clearing and settlement

Whilst it is certain that in Europe major progress to reduce clearing and

settlement costs is required (indeed the EU must reduce cross border trading

costs towards US levels as soon as possible), there are a number of important

public policy issues that merit further attention – such as the role of

competition policy, the need to ensure systemic stability and the future

structure of clearing and settlement in the European Union.

FUTURE WORK

The Committee’s final report will be presented in mid-February 2001. The

Committee’s intention is to deepen its reflections on a number of issues,

Future work – up to

final report mid-2001

notably those mentioned above, and on the legal and political analysis of the

regulatory approach described above. The Committee will take into account

the general political and market reactions to these proposals. It may also

launch a second series of consultations.

Clearing and

settlement – major

progress required…

and further reflection

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ANNEX 1 – THE COMMITTEE OF WISE MEN’S TERMS

OF REFERENCE GIVEN BY THE EUROPEAN

UNION’S ECONOMIC AND FINANCE MINISTERS ON

17 JULY 2000

The introduction of the Euro and the resulting structural changes have speeded

up integration of the European financial market. To deliver the full

prospective benefits to European business and the EU economy, to compete in

the global market for financial services and to help European business to

compete in the global market for goods and services, EU capital markets need

to be dynamic, competitive and innovative. They need to embrace new

technology and new opportunities. To support this, regulation of capital

markets needs to support the Lisbon vision of a dynamic knowledge-driven

economy, with good access to capital in order for businesses to invest, grow

and create jobs.

A single market in securities must be achieved rapidly to allow :

more competitive financing on the markets of EU enterprises, including

SMEs

increased liquidity and

greater competitiveness between intermediaries and infrastructures, in

order to achieve better provision of services at lower cost.

However, growth and competitiveness will be hampered unless the

administrative, regulatory or other types of obstacles which in practice impede

cross-border securities transactions are eliminated.

Regulation of the markets and of financial reporting in Europe is based

primarily on European directives which have established standards for

regulation of a broad range of financial activities. This legislation, which was

drawn up in the context of fragmented national markets, may need to be

adjusted in the light of market developments. The Financial Services Action

Plan is designed to make progress in these areas and remove the most

significant barriers to the single market.

However, given the scope of the changes taking place on the market, it seems

clear that an appropriate response is also required from national regulators.

It is therefore necessary to follow up the Action Plan with discussion on the

conditions for practical implementation of the directives by the competent

national authorities so as to meet the expectations of dealers and brokers,

issuers and investors who wish to be able to deal with one another throughout

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the European Union in an effective, entirely secure and informed manner.

Taking into account the existing institutional framework, the need to respond

effectively to the challenges of integrating the financial markets makes it

necessary to set up a committee of independent persons, to be assisted by the

Commission. The Committee will therefore focus its discussion on the

practical arrangements for implementation of the Community rules concerning

the areas identified by the Action Plan and will propose various approaches to

adjusting the practice of regulation and cooperation between regulators in

response to current developments. Without prejudice to the work being done

in the framework of the Financial Services Action Plan and taking into

account the measures being undertaken by securities market regulators within

FESCO, the Committee will consider how to achieve a more effective

approach towards transposition and implementation, in particular in the

following areas of regulation : the listing of enterprises, the public offer of

securities and requirements relating to reporting by issuers, the conduct of

cross-border financial operations, the day-to-day operation of the regulated

markets, the protection of consumers and investors in the provision of

investment services, and the integrity of the market.

In this context, the Committee will have to :

Assess the current conditions for implementation of the regulation of the

securities markets in the European Union.

In addition, the Council invites the Commission to identify a priority-

related critical path to achieving the relevant parts of the Lisbon target

of Financial Services Action Plan, and the implementation, by 2003, of

the Risk Capital Action Plan. The Commission will propose possible

indicators of progress in realising economic benefits. The Commission

will report to the Council on November 27th.

Assess how the mechanism for regulating the securities markets in the

European Union can best respond to developments under way on the

securities markets, including the creation of markets resulting from

either the alliance of European (and non-European) stock exchanges or

from technical innovation (ATS), while still guaranteeing the effective

and dynamic operation of markets throughout the European Union to

achieve a level playing field.

In order to eliminate barriers and obstacles, propose as a result scenarios

for adapting current practices in order to ensure greater convergence and

co-operation in day-to-day implementation and take into account new

developments on the markets.

It will not, however, deal with the prudential supervision.

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100

The Committee should be able to present an initial report to the ECOFIN

Council early in November 2000. This report will present the state of play

and initial approaches to solutions. The final report will be presented to

ECOFIN during the first six months of 2001.

The Council appointed the following members of the Committee :

Alexandre Lamfalussy

Cornelius Herkströter

Luis Angel Rojo

Bengt Rydén

Luigi Spaventa

Norbert Walter

Nigel Wicks

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101

ANNEX 2 – WORKING METHODS OF THE COMMITTEE OF WISE

MEN

The Committee began work on 7 August 2000, and finished the first phase on 6 November

2000 after a total of 8 meetings.

Given the broad range of issues covered by the ECOFIN Council mandate, the Committee

considered it essential, even in the short time available, to canvass opinions in an open way,

from the widest possible number of institutions, organizations and the public at large.

The Committee met President Prodi and Commissioners Bolkestein and Solbes on 5

September 2000 and Mr Lamfalussy appeared before the European Parliament EMAC

Committee (Economic and Monetary Affairs Committee) in a closed session on 11 October

2000.

The Member States were contacted in a variety of ways. Member States’ Financial

attachés/counsellors were invited to make contributions. The Chairman met Member

States’ representatives at the HLSS (High Level Securities Supervisors Committee) on 20

September 2000, and Member States’ delegates at the FSPG (Financial Services Policy

Group) meeting of 12 October 2000.

As to the organizations concerned with European securities markets (the industry itself and

regulatory authorities), the Committee invited them to submit written contributions.

Moreover, and as a key element of the consultation process, the Committee invited leading

representatives of the major constituencies of European securities markets to confidential

hearings in Brussels. The Committee had a total of 25 confidential hearings, divided into

separate sessions, covering markets and exchanges; ATSs (Alternative Trading Systems)

and news vendors; clearing and settlement organizations; issuers ; supervisors/regulators;

and institutions such as FESCO, the EU-EFC (Chairman of the Economic and Financial

Committee), and the ECB (European Central Bank). In addition, a representative of the

Trade Unions and several outstanding personalities from the financial world were also

heard. The Committee also held a video-conference with a senior official of the US-SEC

(the Securities and Exchange Commission) on 16 October 2000.

Furthermore, the Committee launched on 21 August 2000 an ad-hoc website,

with a

questionnaire for anyone to express their views on a series of key questions for the

Committee’s work. To date 69 contributions, from a variety of sources and countries, have

been received (see Annex 3 for a summary).

Finally, as part of the Committee’s policy for openness and transparency, the Chairman, Mr

Lamfalussy held a press conference in Brussels on 7 September 2000 in order to inform

journalists about relevant aspects of the Committee’s work such as organization, working

method and timetables.

The initial report will be presented to the Press on 9 November in Brussels.

Website :

http://europea.eu.int/comm/internal_market

(financial services, general matters section).

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ANNEX 3 – SUMMARY OF RESPONSES TO THE

COMMITTEE OF WISE MEN’S ON-LINE

QUESTIONNAIRE

Sixty-nine responses have been received. These come from a wide range of

69 responses

market participants. Replies have come from all over the European Union and

also from third countries (the US and Switzerland).

THE MAIN OBSTACLES TO THE COMPLETION OF A SINGLE

MARKET FOR FINANCIAL SERVICES

Concerning the main obstacles standing in the way of an integrated European

securities market, a distinction between

general obstacles

and

specific

Main obstacles in an

obstacles

affecting the securities sector needs to be made. Within the general

integrated market…

obstacles, the most mentioned are different legal traditions (i.e. solvency

regulations) in 62% of the replies, tax differences (that hinder the cross border

selling of financial products) in 42% of the replies, and cultural and linguistic

problems. The most quoted specific obstacles are the lack of unified securities

legislation (51%), the inadequate implementation of European legislation, and

the differences in the powers, competencies and duties (26%) of national

supervisory bodies.

Other obstacles have also been mentioned, such as accounting differences

(preventing a real comparison of financial statements), the lack of a unified

clearing and settlement system, institutional regulatory procedures, the

imposition of host country rules and national protectionism (used by Member

States not only to protect their investors but also their national industry).

Assessment of the current transposition and implementation of European

securities legislation

Three-quarters of the respondents consider that EU securities legislation is

Transposition and

neither transposed nor implemented consistently. The same proportion

implementation – ¾

considers that current implementation is impeding the development of cross-

say is not satisfactory

border securities business.

The main reasons for these problems arise from the differing interpretations of

directives (mentioned in 59% of the replies), from the ambiguity of certain

The reasons why

provisions of some directives and from the length of the implementation

periods. Some replies also mention the absence of any EU infringement

proceedings for inadequate implementation. Others argue that powers granted

by the Directives to the Member States in the implementation process and the

unclear drafting of the Directives allow a divergent implementation of the

Directives, without infringing them.

The main areas of concern are the inadequate transposition of EU legislation

(36%), the need for convergence in the organization and competences of

national authorities (19%) and the structure of financial markets.

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Respondents particularly emphasized as barriers and major problems : the

Main market

rules, differentiation of different types of investor etc), the lack of a single

barriers…

trading calendar and a unified policy regarding best execution of customers

orders; the lack of a single market for mutual funds or private pension

schemes on their investments. The obstacles to the development of the single

passport for issuers are the main concerns for investment services providers.

Differences in national insolvency regulation and lack of a uniform standard

of regulation and supervision of central securities depositories are the main

ones mentioned by clearing and settlement institutions.

Equity, primary and bond markets, pension and investment funds are the

activities and markets which, according to the responses, are most adversely

affected. There were differing opinions as to whether wholesale markets were

affected or not; some responses claiming that they were, but with some others

stating that they tend to be less affected. It should be noted, however, that

there were relatively few responses to this question.

And the victims =

European equity, bond,

pension and investment

fund markets

There were differing views on the role of self-regulation and market

conventions. Nearly 50% of respondents consider that self-regulation should

play a major role in rapidly developing markets, but they disagree on what

exactly that role should be. Several think that self-regulation should play a

major role in some specific fields (e.g. in mutual exchanges, the adoption of

internal codes of conduct or in professional markets) but that it should play a

Self regulation and

secondary role in other fields (such as retail markets). Respondents also raised

market conventions

some concerns as to whether self-regulatory organisations are well placed to

supported

take into account wider public interest considerations and whether

competitiveness in the securities markets could raise conflicts of interest in the

case of exchanges charged with certain regulatory responsibilities. They

generally agreed on the need to check market conventions against the Single

Market goal.

Assessment of the current arrangements for cooperation

Forty-five percent of the responses state that the current arrangements for

Pan-European

cooperation and mutual assistance between national supervisors are not

regulatory cooperation

sufficient. However 40% of the respondents did not explicitly answer this

not sufficient

question and even those that consider that they are sufficient call for them to

be reinforced.

The main perceived shortcomings are differences in supervisory powers and

duties (23%), duplication of supervisory control (19%), deficient channels for

cooperation, excessive costs and lack of expertise. Lack of transparency in the

current arrangements was also mentioned.

Main developments affecting the European securities markets in the near

future

The key structural developments that will affect European securities markets

in the future, according to the replies, are the consolidation in the financial

sector (mentioned in 62% of replies), the new profile of investors, the role of

private pension schemes and the new trading platforms.

Main developments

affecting the EU’s

securities markets :

consolidation and

technology

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On the issue of the key technological developments, the Internet and e-

business (65%) and new software for market players (49%) are by far the most

frequently mentioned.

As investors become more experienced and have direct access to the markets

due to the development of the on-line trading, there could be an increase in

cross-border activities that will highlight these differences between Member

States.

Moreover, the introduction of the euro, the consequent move from national to

sectoral diversification of investments in the euro zone and the role of private

pension schemes are already affecting European securities markets.

Euro is catalyzing pan-

European investment

strategies

Many respondents highlighted the need to speed up EU legislative procedures

Level playing field

in order to follow changes in the market; to establish a level playing field

needed for stock

between regulated markets and new markets (ATS), to ensure competition in

exchanges and ATS

the markets and in the clearing and settlement procedures, avoiding

monopolies, and to reduce differences between the supervisory powers and

competences of the national authorities.

Prospectives on structural developments

In order to create an integrated European securities market, most respondents

consider that certain regulatory and supervisory arrangements are needed.

As far as regulatory arrangements are concerned, a greater level of

harmonization of legislation at European level and more emphasis on mutual

recognition was called for. However, a high number of respondents also call

for improvements in the way that EU legislation is adopted, amended and

implemented.

Directives cannot establish detailed regulation without

becoming rapidly outdated. Directives should set a framework of enduring

principles. Secondary detailed legislation could then be determined by a

European Securities Committee with enough comitology powers to revise and

update EU legislation. The great majority of respondents are satisfied with the

work of FESCO. Nevertheless they urge prompt clarification of its legal

status and role. Greater transparency and broader consultation with the

industry in the regulatory process are also called for. In any case, new EU

institutions or agencies should not lead to additional unreasonable costs.

Regarding supervisory arrangements, close cooperation between supervisors is

also necessary. Greater convergence in supervisory powers, duties and

competences would help to achieve this goal. The issue of a Single European

Regulatory Authority was referred to in roughly half of the responses. Among

those who did comment, there is clear opposition to the creation of such a

body in current circumstances. Some respondents said that it might be an

option for the medium- or long-term after further harmonization of the

regulatory framework.

More harmonization

required, but with

emphasis on mutual

recognition

Framework principles

should be set in

Directives – with

detailed legislation in a

European Securities

Committee

Single European

Regulatory Authority

not supported at this

stage

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KEY ISSUES

Prospectuses

Professional investors

Conduct of business rules

Collateral

Pension funds

Market abuse

number of replies

FSAP

UCITS

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Main obstacles standing in the way of an integrated European securities market

Number of replies

Legal differences

Inadequate implementation

Lack unified securities legislation

Cultural and linguistic problems

Tax differences

national supervisory differences

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Reasons for inconsistent transposition

Diverging interpretations of the Directives

Unclear Directives

Number of replies

Implementation periods

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Main areas of concern

Transposition

Organisations and competences of national authorities

Structure of financial markets

Number of replies

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ANNEX 4 : RECENT ACADEMIC WORK ON THE LINKS

BETWEEN SIZE AND GROWTH OF FINANCIAL MARKETS

AND THE GROWTH OF OUTPUT

There has been a large body of economic literature over the last century,

including renowned economists like Joseph A. Schumpeter, who have

consistently underlined the positive influence of the development of a country’s

financial sector on the level and rate of growth of its per capita income. Some

academics, however, have contested this conclusion on the grounds that the

direction of the causality is not proven.

In the 1990s this question has been given increasing attention and an expanding

theoretical literature has emerged. It has tended to depart from the traditional

focus on bank financing by examining the possible links between stock markets

and long-run growth. For instance, liquidity and risk based models have been

designed which show that greater international risk sharing through

internationally integrated stock markets result in accelerated productivity growth

by inducing shifts from safe, low-return portfolios, into high-return alternatives.

Until recently, however, little empirical evidence was made available to sustain

the theoretical predictions foreseen by these models. However, the findings of

three recent papers, briefly discussed below, shed light on this issue by showing,

using new methodology, the validity of the positive predictions of the theoretical

models.

Rajan and Zingales (1998),

in order to avoid the debate about reverse causality,

focus on the theoretical mechanism through which financial development affects

economic growth. In particular, they argue that, according to the theoretical

models, financial development should disproportionately help firms, or

industries, typically dependent on external finance for their growth. To test this

assumption they examine a large cross section of industries and countries to

verify whether industries that are more dependent on external financing grow

relatively faster in countries that, a priori, are more financially developed. Their

empirical findings suggest that

ex ante

development of financial markets

substantially facilitates the

ex-post

growth of sectors dependent on external

finance.

The results also suggest that financial development may play a particularly

beneficial role in the development of new firms. Therefore, if these firms are

disproportionately the source of ideas, financial development can enhance

innovation, and thus enhance growth in indirect ways. This finding is very

relevant for the new economy and shows the importance of having adequately

developed risk capital markets.

Raghuram G. Rajan and Luigi Zingales.

“Financial Dependence and Growth”.

American Economic Review

Nr. 88, pp. 559-586, June 1998.

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Another consequence of the results is in the trade area. The existence of a

well-developed financial market represents a source of comparative advantage

for that country (or group of countries) in industries that are more dependent

on external finance.

Levine and Zervos (1998)

ask whether well-functioning stock markets

promote long-run economic growth. Their paper empirically investigates

whether measures of stock market liquidity, size, volatility and integration

with world capital markets are robustly correlated with current and future rates

of economic growth, capital accumulation, productivity improvements and

saving rates. They use data on 47 countries from 1976 to 1993.

They find no support for theories which contend that stock market liquidity,

international capital market integration, or stock return volatility may reduce

private savings rates or hinder long-run growth. On the contrary, they find

that stock market liquidity, as measured both by the value of stock trading

relative to the size of the market and by the value of trading relative to the size

of the economy, is positively and significantly correlated with current and

future rates of economic growth, capital accumulation and productivity

growth.

Moreover, the positive link between financial development and economic

growth suggest that financial factors are an integral part of the growth process.

Beck, Levine, Loayza (2000)

centre their research not only on the direct

impact of financial development on economic growth but also on its impact on

the sources of economic growth. In particular, they examine the impact of

financial intermediary development on savings rates, physical capital

accumulation and total factor productivity growth. They use data from 63

countries over the period 1960-1995.

Their findings do not show a robust relation between financial intermediary

development and either physical capital accumulation or private savings rates.

However, they show a robust positive link between financial intermediary

development and both real per capita GDP growth and total factor productivity

growth. In sum, their results are consistent with the Schumpeterian view that

financial intermediaries affect economic development primarily by influencing

total factor productivity growth.

Levine, Ross and Sara Zervos.

“Stock Markets, Banks and Economic Growth”.

American Economic Review

Nr. 88 pp. 537-558, June 1998.

Beck, Thorsten, Ross Levine and Norman Loayza.

“Finance and the Sources of Growth”.

Journal of

Financial Economics Nr. 58, pp. 261-300 (2000).

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ANNEX 5 – EUROPEAN UNION COMITOLOGY

PROCEDURES

Description of the procedures for the exercise of implementing

powers conferred on the Commission

WHAT IS COMITOLOGY?

“Comitology”

refers to the delegation of implementing powers by the Council

to the Commission for the execution of EU legislation. Representatives of the

Member States, acting through Committees called

“comitology committees”,

assist the Commission in the execution of the implementing powers conferred

on it.

A first Comitology Decision was adopted in 1987. The new Comitology

Decision was adopted on June 28, 1999, in execution of a Declaration adopted

by the 1996 Intergovernmental Conference. It entered into force on July 18,

1999.

The objective of the new comitology decision is twofold :

To harmonize and simplify the various existing comitology procedures.

To provide the European Parliament with extended monitoring powers

on the Commission’s use of its implementing powers.

THE DIFFERENT COMITOLOGY PROCEDURES

The Council Decision lays down three different procedures – an advisory, a

management and a regulatory procedure – for the exercise of implementing

powers conferred on the Commission.

It provides criteria for the determination of the relevant procedure. These are

based on the needs comitology intends to fulfil.

According to the text of the Council Decision, the regulatory procedure shall

be used for measures of general scope designed to :

Apply essential provisions of basic instruments, and

Adapt or update non-essential provisions of basic instruments.

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DESCRIPTION OF THE REGULATORY PROCEDURE

Legal base

The Treaty provisions do not provide any direct basis for the use of

comitology. The use of comitology must be provided in a basic legislative act,

whether a regulation or a directive.

This basic legislative act must stipulate the scope of the powers granted to the

Commission.

The implementing powers delegated to the Commission must be strictly

defined. There is no possibility for an open-ended delegation of powers.

Furthermore, comitology procedures cannot be used to modify essential

provisions of the basic instruments.

How the procedure works

The basic legislative act must provide for the establishment of a comitology

Committee, composed of representatives of the Member States and chaired by

a representative of the Commission. The Parliament does not delegate

representatives or observers.

The Regulatory Committee works as follows :

•

The Commission submits the draft measures to the Regulatory

Committee.

The Committee votes on the draft measures in a fixed delay.

∗

If approved by the Committee, the draft measures are then adopted by

the Commission and become binding.

In case of disapproval by the Committee, the draft measures are

submitted to the Council as the Commission’s proposal.

The Committee shall deliver its opinion on the draft within a time-limit which the chairman (the representative

of the Commission) may lay down according to the urgency of the matter. The Committee votes by qualified

majority in the case of decisions which the Council is required to adopt on a proposal from the Commission.

The votes of the representatives of the Member States within the Committee shall be weighted in the manner set

out in the Treaty for the votes in Council. The chairman shall not vote.

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•

The Council votes within a determined period

to adopt or oppose the

proposal.

In case of rejection by the Council, the Commission shall re-examine

the proposal.

The Commission may chose between three options : (1) submit an

amended proposal of implementing measures to the Council, (2) re-

submit its initial proposal or (3) abandon the draft implementing

measures and present a legislative proposal based on the EC Treaty by

use of its initiative powers. In that case, the draft implementing

measures are replaced by a draft legislative act, e.g. a regulation or a

directive.

If the Council neither adopts the draft measures proposed by the

Commission nor indicates any opposition to them, the Commission shall

adopt the proposed implementing act.

•

Role of the European Parliament

The European Parliament does not formally participate in the work of the

Regulatory Committee. It nevertheless plays an external supervising role.

The European Parliament must be kept informed of the Committee’s work and

receive all related documents (agendas, draft measures, results of the votes,

minutes of the meeting, list of presence).

If the European Parliament considers that draft measures submitted by the

Commission exceed the implementing powers provided for in the basic

instrument, the Commission shall re-examine its proposal.

The Council may, where appropriate in view of any such position, decide on

the Commission’s proposal of implementing measures. Notwithstanding the

Parliament’s opinion, the Council may adopt the proposed measures. It may

also oppose to them. The Commission shall then re-examine the draft

measures. In case the Council neither adopts the proposal nor indicates any

opposition to it, the Commission shall then adopt the draft implementing

measures.

This period is laid down in the basic legislative instrument from which the Committee originates. It cannot

exceed three months from the date of referral to the Council.

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ABBREVIATIONS

ATS - Alternative Trading Systems

Basel – Basel Capital Review

CSD - Central Securities Depository

ECOFIN – Economic and Finance Council

ECB – European Central Bank

ECJ – European Court of Justice

EFC - Economic and Finance Committee

EMAC - Economic and Monetary Affairs Committee

EP - European Parliament

ESRC – European Securities Regulators Committee

ESC – European Securities Committee

FESCO – Forum of European Securities Commissions

FSAP - Financial Services Action Plan

GDP – Gross Domestic Product

HLSS – High Level Securities Supervisors’ Committee

IAS - International Accounting Standards

IGC – Intergovernmental Conference

ISD - Investment Services Directive

OTC - Over The Counter

QMV – Qualified Majority Vote

SME’s – Small and Medium Sized Enterprises

UCITS – Undertakings for Collective Investment in Transferable

Securities