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Brussels, 24th April 2002

Investment services: constructive open hearing on revision of Directive

There was a constructive discussion amongst over 200 participants representing financial intermediaries, exchange operators and supervisory authorities who attended the second open hearing on revision of the Investment Services Directive (ISD), hosted by the European Commission in Brussels on 22 April. The revised Directive will bring EU regulation up to date with the reality of modern investment markets, where orders from buyers and sellers of stock are increasingly being executed outside "traditional" regulated exchanges, in particular by Alternative Trading Systems (ATS) and in-house by banks. Debate at the hearing focussed on creating a level playing field so that exchanges, ATSs and banks can compete transparently without fragmenting the market, compromising efficiency and weakening investor protection. The open hearing was the latest demonstration of the Commission's commitment to systematic consultation of the financial services industry and the public, in line with the approach to reforming securities markets agreed with the European Parliament and the Council on the basis of proposals by the committee of wise men chaired by Alexandre Lamfalussy (see IP/02/195). Discussions at the hearing were based on the Commission's latest consultation document on ISD revision, published on 25 March 2002 (see IP/02/464) and available on the Europa website at: The deadline for responses to the consultation is 31 May 2002.

The hearing began with a discussion by a high-level panel comprising Christa Randzio-Plath, Chair of the European Parliament's Economic and Monetary Affairs Committee, Miguel Mora Hidalgo, Special Advisor to the Director General of the Spanish Treasury and Eddy Wymeersch, President of the Dutch Banking and Finance Commission.

Some participants in the hearing advocated limited regulation to clarify the conditions that must be respected before client/investor orders can be executed "off-exchange". However, others supported more robust intervention aimed at ensuring that orders from buyers and sellers can only be matched away from exchanges if alternative ways of trading are subject to broadly equivalent regulatory conditions.

Despite these differences of view, participants' constructive and open approach allowed the hearing to identify elements which could provide the basis for a balanced solution, in particular:

  • clarifying conditions under which market participants can be expected to have access to ATS or internalising systems which display limit orders better than competing trading venues;

  • strengthening obligations on providers of investment services to ensure that orders are executed in the way most beneficial to the customer ("best execution" obligation). This would be a means of bringing about effective linkage between different types of market and of ensuring that orders are only fulfilled internally within banks where this delivers demonstrable benefits for clients;

  • clarifying the obligations of banks or investment firms when they receive orders from clients. Should banks be required to display such orders to the wider market if the order represents an improvement on best prevailing bids or offers in the marketplace?

Some participants were sceptical about the value of pre-trade transparency obligations as a means of fostering market efficiency, claiming that the benefits have been over-stated and that over-concentration on this issue risked becoming a stumbling-block to revision of the Investment Services Directive.

Others took the view that, where trading arrangements support the display of and reaction to limit orders, the information on potential trading opportunities inherent in these orders should be made widely available as an aid to overall market efficiency. From this perspective, limit order-books should be subject to comparable regulatory disciplines irrespective of the particular legal capacity in which they had been licensed.

Fabrice Demarigny, Secretary General of the Committee of European Securities Regulators (CESR, see IP/02/195) noted that the recently constituted CESR Transparency Working Group may help to shed light on the role of pre-trade transparency as a support for overall market efficiency. An issue which warrants particular attention in this regard is whether in-house internalisation can be equated with a limit order book to which pre-trade transparency obligations can be effectively applied.

There was broad support for the extension of ISD to include investment advice and commodity derivatives, but some participants noted that these businesses currently operate outside ISD and are subject to tailor-made national regulatory regimes which are sensitive to their particular risk-profile. They felt the revised ISD should replicate this sensitivity.

Representatives of small and specialised investment firms (for example investment advisors and individual asset managers) emphasised the dangers of expanding the scope of ISD to such firms if this would trigger the application of disproportionate capital adequacy requirements.

Concluding the hearing, the Commission reminded participants of the need to arrive at a consensus on a single template for the regulation of market structure. ISD revision must - at all costs - avoid an 'à la carte' approach to infrastructures for trading. Allowing optional approaches on such fundamental issues would fatally undermine the capacity of the revised ISD to underpin an efficient, liquid and integrated EU financial market.

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