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Brussels, 16 November 2000

Securities markets: Commission urges update of current rules to spur closer market integration and improve investor protection

The European Commission has published a Communication on Upgrading the Investment Services Directive. It is designed to launch an extensive review of how this legislation, now in force for five years, could best be updated to reflect the profound changes in investment services and the securities trading infrastructure in the European Union. The Communication has been identified by the Commission as one if its ten priorities in the next six months under the Financial Services Action Plan (FSAP - see IP/00/1269) The FSAP aims to create a fully integrated single market in financial services by 2005 and is an essential element in developing a coherent EU response to the fundamental changes sweeping through European financial markets. The need to update EU rules to take account of the accelerating pace of change in European financial markets was emphasised in the initial report presented on 9 November by the Committee of Wise Men on the Regulation of European Securities Markets chaired by Alexandre Lamfalussy.

Internal Market Commissioner Frits Bolkestein said: "We need to update the Union's securities markets legislation to reflect profound changes in securities trading infrastructure, exchanges, clearing, and settlement systems since the Investment Services Directive came into force five years ago. Under the influence of the euro and new technologies the pace of change can only accelerate. We want to ensure that the new rules protect investors, promote orderly, efficient and integrated markets, and preserve financial stability. We have launched this review of the legislation in order to encourage as wide a range of contributions as possible from all interested parties, including the European Parliament, national authorities, market players and regulators."

The Investment Services Directive (93/22/EEC) has helped create a single market in securities by eliminating a first set of legal obstacles. It introduced the 'single passport' for investment firms whereby a firm can operate EU-wide on the basis of mutual recognition of supervision by its home Member State. This 'single passport' is widely used and access to "regulated markets" and exchanges has been liberalised. But it now needs extensive review so as better to reflect the market change that is witnessed by exponential growth in equity volumes (over 30% per annum in the years 1995-1999) and the erosion of national financial frontiers. These structural trends will continue despite bouts of short-term volatility or temporary market corrections.

Updating existing legislation

The Communication opens discussion on the modifications needed if the ISD is to reflect the many changes that are reshaping investment services business and securities markets.

The consultation, which runs until March 31 2001, focuses on two specific areas:

A fully operational 'single passport' for investment firms: The legal and practical conditions need to be created to facilitate the progressive elimination of remaining obstacles to the cross-border provision of investment services subject to home country authorisation. According to the 'single passport' principle, a provider authorised in one EU Member State is free to provide that service anywhere else in the Union but can still be subject to conduct of business rules in the host Member State. Revision of the ISD should create the legal environment in which the 'passport' can become effective immediately for inter-professional business and be progressively extended to cover provision of services to retail investors.

Appropriate regulatory framework for the trading infrastructure: Many of the changes in European securities markets are occurring at the technical level of exchange organisation, as well as trading, clearing and settlement systems. At present, EU securities legislation provides for "regulated markets" to serve investment firms in other Member States but does not properly provide for safeguards in relation to disclosure, transparency, integrity and stability. This potentially distorts competition and co-operation between exchanges and trading systems. This Communication discusses whether it would be useful to apply common principles to trading systems including new electronic trading arrangements - and if so, what these principles should be. It also seeks to stimulate collective debate on the need for common regulatory and supervisory responses to consolidation of clearing and settlement functions.

The ISD's role in reinforcing the legislative framework

This Communication is only part of a comprehensive strategy to reinforce the legislative framework for securities markets. The wide-ranging review based on this Communication will also consider related initiatives such as the application of the host Member State's conduct of business rules (as provided for by Article 11 of the ISD - see IP/00/1314). Future actions include proposals for legislation for a single passport for issuers of securities and on market abuse.

Link to the work of the Committee of Wise Men on Securities Markets

The work of the Committee of Wise Men on Securities Markets (Lamfalussy Group) is closely linked to the Financial Services Action Plan and in particular to this Communication and related future proposals. While the Commission's analysis and consultations are designed to look at what technical changes are necessary to the policy, to reflect current market operations and speed closer integration, the Committee is charged with looking at what technical tools are necessary to ensure such changes can be properly implemented in practice. The Group of Wise Men published its interim report on 9 November, and will publish its final report in February 2001. The timing of the ISD consultation will give interested parties the opportunity to take account of the Committee's final report. For its part, the Commission will take into account both contributions to the ISD consultations and the Wise Men's final report before presenting any proposals to amend the ISD.

Comments on the issues raised in this Communication should be addressed to the Commission before March 31st 2001 (European Commission, attention DG MARKT/F, rue de la Loi/Wetstraat 200, B-1049 Brussels, e-mail address:

The full text of the Communication is available on the Europa Website:

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