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Brussels, 30th March 2004

Investment Services: European Parliament approval of proposed Directive brings integrated capital market nearer

The European Commission has welcomed the European Parliament's approval of the proposed Directive on Financial Instruments Markets, also known as the Investment Services Directive. The proposed Directive will give investment firms an effective "single passport", which would allow them to operate throughout the EU on the basis of authorisation in their home Member State. It will, for example, require all Member States to allow investment firms to process client orders outside regulated exchanges, whereas this is not currently possible in some Member States. It will also make sure investors enjoy a high level of protection when employing investment firms, wherever they are located in the EU. The Directive seeks to establish, for the first time, a comprehensive regulatory framework governing the organised execution of investor transactions by exchanges, other trading systems and investment firms. It is a crucial part of the Financial Services Action Plan. Negotiations between the Parliament, the Council and the Commission in the run up to the Parliament's vote have prepared the ground for swift adoption by the EU's Council of Ministers, to which the text as approved by the Parliament will now return.

Internal Market Commissioner Frits Bolkestein said: " I am very pleased that the Parliament has endorsed this important measure. This is a vital pillar of an integrated European capital market that we want completed by the 2005 deadline. I would like to thank the European Parliament for its efforts to find solutions to a number of controversial issues, including pre-trade transparency. I now urge the Council to move quickly to adopt the Directive. This Directive will give investment firms a "passport" to work legally anywhere in the EU without being assailed by the red tape brigade. And it is a key element in our drive to give investors Europe-wide protection. Today's vote is more bad news for financial wide boys and that means good news for ethical operators, for the markets as a whole and for Europe's economy."

The European Parliament, in voting in favour of the Directive, has maintained all the key principles and objectives in the Commission's original proposal of November 2002 (see IP/02/1706 and MEMO/02/257). The Directive will thus allow investment firms, banks and exchanges to provide their services across borders on the basis of their home country authorisation. It will bring closer into line national rules on the provision of investment services and the operation of exchanges, with the ultimate aim of creating a single European "securities rule book". It will benefit investors, issuers and market participants by promoting efficient and competitive markets, notably by allowing banks and other investment institutions to compete fairly with stock exchanges.

Last but not least, it will considerably enhance investor protection, including by setting minimum standards for the mandate and the powers national competent authorities must have at their disposal and establishing effective mechanisms for real-time cooperation in investigating and pursuing breaches of the Directive.

Discussions in the Parliament centred on the "internalisation" of client orders by investment firms. Internalisation is where banks and other investment institutions process client orders in-house without going through a regulated market such as a stock exchange, for example if a client has placed an order to sell a particular security and another client or the bank itself is willing to buy.

The text the Parliament has approved maintains the principle of a pre-trade transparency obligation whereby "internalisers" would be obliged to disclose to the market the prices at which they will be willing to buy from and/or to sell to their clients. However, it limits this disclosure obligation to transactions up to "standard market size", defined as the "average size" for the orders executed in the market. This will guarantee that European wholesale markets will not be subject to the rule and that wholesale broker-dealers will not be subjected to significant risks in their role as market makers.

The Parliament has also agreed to a set of protective measures for "internalisers" when they are obliged to quote, so that they can provide this essential service to their customers without incurring undesirable risks. These measures include the possibility to update and withdraw their quotes.

The proposed Directive as voted by the European Parliament will in addition establish a fair marketplace for retail investors and prevent financial institutions from discriminating between small investors, for example by offering some of them undisclosed improvements to prices publicly quoted (so-called 'price improvement').

The Parliament has decided to modify the list of financial instruments by including within the scope of the Directive all those derivatives that, not being commodity or financial derivatives (such as derivatives on freight rates, emission allowances, economic statistics), share with them the same characteristics. The inclusion of those "new" financial instruments, together with commodity derivatives as originally proposed by the Commission, will help protect investors against "Enron-type" manipulations and help guarantee the reliability, fairness and stability of financial markets.


Structural changes in EU financial markets have made new legislation on investment services necessary. The intensification of linkage between national financial markets has meant that the 1993 Investment Services Directive, which relies heavily on mutual recognition, no longer provides adequate investor protection, sufficiently guarantees market efficiency or provides an effective legal foundation for fully realising the extensive benefits of an integrated financial market. Research recently published by the European Commission indicates that financial integration could lead to additional economic growth of about 1 % over a decade or so and to a 0.5 % rise in total employment (see IP/02/1649).

The proposal is for a framework Directive in line with the February 2002 agreement with the European Parliament on improving the regulation of EU securities markets, following the recommendations of the Committee of Wise Men chaired by Alexandre Lamfalussy (see IP/02/195). It therefore confines itself to setting out the general high-level obligations which Member State authorities should enforce. More detailed implementing measures will be set down by the Commission, following consultations with market participants and Member States, and taking into account advice from the Committee of European Securities Regulators (CESR).

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