RESTRICTEDWORLD TRADE
ORGANIZATIONS/FIN/W/14
17 May 1999
(99-1980)
Committee on Trade in Financial Services
INDICATIVE CHECKLIST  OF ISSUES FOR DISCUSSION
Note by the Secretariat
This note is circulated at the request of the Committee on Trade in Financial Services.  The
checklist below is strictly indicative, and is circulated solely for the purpose of facilitating discussion
by Members in organizing future work of the Committee; i.e. delegations are invited to propose any
other issue of  interest for discussion by the Committee.  The issues are listed without prejudice totheir importance or the order of discussion, except for the first two points under " Legal Issues " which
have been identified by Members in the last meeting of the Committee as priority areas.
It is recognized that several of the issues listed below may be discussed in other bodies, in
particular the Committee on Specific Commitments, and any unnecessary duplication of work shouldbe avoided.
The Annexes to this document reproduces two informal notes by the Secretariat on the issue
of the distinction between Modes 1 and 2.   Another note by the Secretariat (S/FIN/W/9 of 29 July
1996) discussed at length the distinction between the two modes and the sectoral classification offinancial services.    That note also raised a large number of possible issues for discussion (see the
references to this document below).
Indicative list of issues (documents for reference are indicated in parentheses):
Legal Issues
- The distinction between Modes 1 an d 2 (S/FIN/W/9, S/ FIN/2, S/FIN/3);
- Sectoral classification of financial services (S/FIN/W/9, S/FIN/2);- The use of columns and headnotes or footnotes in the schedules (S/FIN/W/5, S/FIN/W/9);- Differences between Members in the use of the market access column and the national
treatment column (S/FIN/W/9);
- The appropriate use of the additional commitments column (S/FIN/W/9);
- The limited cases in which the use of headnotes and footnotes would be helpful (S/FIN/W/9);- How to improve the clarity and legal consistency of the schedules and MFN exemption lists
(S/FIN/M/11, S/FIN/W/9);
- How to schedule phase-in arrangements or staged liberalization in financial services
(S/FIN/W/9);
- The meaning of national treatment in modes 1 and 2 (S/FIN/W/9);
- Clarification of prudential measures (S/FIN/M/14);S/FIN/W/14
Page 2
- Difference in the definition of a (financial) service supplier in Article XXVIII and in the
Annex on Financial Services (S/C/W/103);
- Forced divestiture of equity positions (S/FIN/M/20);- Grandfathering (S/CSC/M/8).
Other Issues
- The need to increase the time available for technical verification of schedules (S/FIN/M/12);
- Availability of financial services data (S/FIN/W/5);- How to improve the procedure for technical verification of the schedules and MFN exemption
lists (S/FIN/W/9).S/FIN/W/14
Page 3
ANNEX I
24.6.97
Committee on Trade in Financial Services
The Distinction between Modes 1 and 2
Informal Note by the Secretariat
At the meeting of the Committee on Trade in Financial Services on 5 June, the Secretariat
was asked to organise informal consultations on the issue of the distinction between modes 1 and 2
which would be open to all delegations.  The Secretariat was requested to report on the results of such
consultations to the next meeting of the Committee on 17 July.  The purpose of this note is to assistdelegations in those informal consultations by identifying the nature of the issue and laying down
some possible options for a solution.
* * *
1. The mode 1 – mode 2 issue arises because of a perceived ambiguity in the distinction between
the two modes for scheduling purposes.  The question becomes particularly relevant when one of the
two modes is unbound in a Member's schedule, while the other mode is either fully bound or boundwith few limitations.1
2. As indicated in the agreed scheduling guidelines (MTN.GNS/W/164 of 3 September 1993),
the modes of supply are essentially defined on the basis of the origin of the service supplier and
consumer, and the degree and type of territorial presence which they have at the moment the service is
delivered.  In both modes 1 and 2, the supplier is not present within the territory of the Member.  The
distinction between mode 1 and mode 2, therefore, hinges upon whether the service is delivered
within the territory of the Member from the territory of another Member or whether the service isdelivered outside the territory of the Member.2
3. The ambiguity is due to the fact that the delivery of a financial service very often does not
require the physical presence of the consumer.  Electronic means associated with the globalization of
financial markets has made it possible to "deliver" a financial service almost anywhere in the world.
Once the physical presence of the consumer ceases to be a benchmark for determining the place ofdelivery of a service, it becomes extremely diffic ult to determine in an unambiguous manner where a
service is delivered.
                                                     
1 If both modes were unbound, a Member would be entitled to introduce any measures inconsistent
with Article XVI or XVII with respect to both modes, and drawing a line between them would not serve any
practical purpose.  If both modes were bound, a Member would be entitled to apply only the measures inscribed
in its schedule.  In this latter case, any ambiguity in the distinction between modes 1 and 2 could result in amisplacement of scheduled measures, but the consequences of this might not be as far-reaching as the non-scheduling of a measure.  If the measures applicable to  services supplied under the modes are prudential, there is
no need to schedule them.
2 In making this distinction between modes 1 and 2, one should focus on the delivery of the service
itself, and not confuse this with the underlying flows of capital or the act of ordering or requesting the supply ofa service.S/FIN/W/14
Page 4
4. Some examples may illustrate this point:
Deposits: A bank account is opened abroad by a consumer of a Member.  If the consumer
travelled abroad to open the account, this may be mode 2 supply, while the absence of
travel (opening of the account through mail order and bank transfer, or though
electronic means) may imply mode 1.  However, the services directly associated withthis account (payment of interest, debiting and crediting of payments and transfers,
offsetting of balances, etc.) can be delivered either abroad or in the consumer's home
country at the request of the consumer.
Loan: A loan is made from a foreign bank established abroad to a consumer of a Member.
The loan can be delivered either within or outside the territory of the consumer's
home country.
Insurance: The consumer of a Member concludes a property insurance contract with an insurer
established abroad.  It can be argued that if the insured property is abroad, the service
is also delivered abroad, since the protection provided by the insurance contract is
"delivered" with respect to the property;  therefore this belongs to mode 2.  However,
it can equally be argued that the insurance provides protection to the consumer in his
or her home country, as the premiums are paid by the consumer, and in the event ofan accident, the indemnity will be paid to the consumer in the home country;
therefore this would come under  mode 1.
5. Given the diversity and complexity of financial services, there may be an infinite
number of such examples.  It would seem very difficult, if not impossible to reach agreement on each
of those cases.  On the other hand, some general substantive solutions have been proposed such as thefollowing:
(a) all financial transactions (between non-resident suppliers and resident consumers)
that take place inside a Member's territory could be classified as mode 1;
(b) mode 1 transactions could be defined as those that take place under the laws of the
Member, while mode 2 transactions could be defined as those that take place underthe laws of the foreign country from which the service is supplied;
(c) the supply of services accompanied by solicitation could be defined as mode 1, if not,
mode 2;
(d) any measure applicable to the supplier of the service could be classified under
mode 1, any measure applicable to the consumer under mode 2;
(e) modes 1 and 2 could be merged.
6. In (a) above, the question of determining where the delivery of the service took place would
be substituted by the question of where a financial transaction took place.  If the answer to the latter
question is based on where the payment of fees, comm issions or charges took place, it would seem to
require a departure from the general principle of determining the place of supply of a service
according to where the service was delivered.  However, this may have the merit of being consistent
with balance-of-payment statistics.
7. In (b) , one would need to recognize the fact that the territorial application of laws differ
between countries, and between civil and administrative laws within a country.  A Member may also
encounter a situation in which its mode 2 commitments would become unenforceable, since it may
not be possible to implement any commitments concerning transactions which took place entirelyS/FIN/W/14
Page 5
outside the Member's legal jurisdiction.  The fact that the parties to a financial transaction could
choose the laws applicable to them might also complicate the issue.
8. The solution in (c) above would also seem to require a departure from the principle of
determining the mode of supply by the place of delivery of a service.  The exact meaning of
solicitation (or active marketing) would also need to be clarified and agreed.
9. In (d), there could be cases in which the regulatory measures are applicable to both suppliers
and consumers.
10. Finally, (e) would not seem to be feasible without modifying the basic principle of scheduling
and possibly Article I of the GATS.
11. If Members find it difficult to agree on any substantive solutions such as those above within
the time-frame of the current financial services negotiations, i.e. before 12 December 1997, some
practical solution may need to be found.3  Such a practical solution could involve clarifying in theheadnote of each schedule the distinction employed by the Member.
                                                     
3 Another point worth noting is that any substantive solution would have immediate implications for a
broad range of other services which are commonly trad ed cross-border, such as telecommunication services.
Since any attempt to draw the line between the modes of supply for a financial service would have direct
relevance to other service sectors, this issue might ideally be dealt with in parallel by the Committee on Specific
Commitments.  Such a major exercises would not be completed in the time-frame of the financial servicesnegotiations.S/FIN/W/14
Page 6
ANNEX II
Job 3706 3.7.97
Committee on Trade in Financial Services
Report of Informal Consultations held on 27 June 1997
on the Distinction between Modes 1 and 2 in Financial Services
Informal Note by the Secretariat
At the meeting of the Committee on Trade in Financial Services held on 5 June, the Secretariat
was asked to organize informal consultations open to all delegations on the question of the distinctionbetween modes 1 and 2 in financial services schedules.  The Secretariat was also requested to report on
the results of such consultations to the next meeting of the Committee on 17 July.  The purpose of this
note is to summarize the results of an informal meeting held in accordance with this request which took
place on 27 June 1997.
* * *
1. Discussions in the informal meeting took place on the basis of an informal note by the Secretariat
dated 24 June 1997.  The Secretariat also made an oral presentation at the beginning of the meeting,
explaining the technical nature of the issue and some options for removing the ambiguities oruncertainties in the schedules.  Ideally, a definitive and watertight solution for clarification of the
distinction between modes 1 and 2 should be found, which would be accepted by all Members and would
be valid not just for financial services but for all sectors.  It was recalled, however, that at the formal
meeting of the Committee on 5 June, there seemed to be a general view that it would be impossible to
find the necessary time before the end of the current negotiations to look for such a definitive solution.  A
new definition of the coverage of modes 1 and 2, or the merging of the two modes, would entail re-
negotiation either of the scheduling guidelines or of articles of the GATS itself, and would be very time-consuming.  To develop an agreed list of financial transactions falling under mode 1 and those falling
under mode 2 would also require substantial time and effort.  There had been general agreement at the
5 June meeting of the Committee that it would not be possible or desirable to devote a great deal of time
to this question in the final months of the negotiation.
2. It was therefore necessary to try to find a pragmatic solution which would suffice for the
purposes of the current negotiations.  Such a solution must provide as much clarity as possible, must be
neutral with regard to existing commitments while facilitating the negotiation of new ones under the two
modes, should if possible be accepted at the 17 July meeting of the Committee, and should close the
discussions on this issue until the conclusion of the  financial services negotiations in December this year.
3. A large number of delegations stated that they had not encountered any major problems or
difficulties regarding the distinction between modes 1 and 2 in financial services schedules.  They were,
however, willing to discuss this issue in order to achieve as much clarity as possible.  Several delegations
also added that while they themselves had not encountered difficulties with regard to this issue, they werewilling to discuss bilaterally with any delegation which had found difficulties in scheduling commitments
under these modes.
4. Delegations generally thought that the issue was a horizontal one, which meant that any
definitive agreement or understanding on the distinction between the two modes would necessarily applyS/FIN/W/14
Page 7
to other services as well as financial services.  Given the difficulties involved in finding a definitive
solution, there was general support for a pragmatic solution to the issue, which could be put together in
the limited time frame of the current financial services negotiations.  It was made clear that no solution to
this issue could affect the rights of Members to modify or withdraw commitments during the
negotiations;  the solution should be "neutral" in the sense that it would not affect the substance ofexisting commitments.  It was also confirmed that the rights of Members to take necessary prudential
measures could not be affected by any discussion or "solution" of the modes issue.
5. There was a broad willingness to consider the use of headnotes as a means of clarifying the
distinction between modes 1 and 2.  Several delegations cautioned, however, that it would be extremely
difficult to negotiate a common headnote for use by all Members.  It was also pointed out that if all
countries needed to adopt a common headnote, all existing schedules in financial services would need tobe reconsidered, regardless of whether there were changes in the substance of the commitments.  Based
on these discussions, there was general support for a suggestion to consider developing a non-binding
model headnote or a menu of possible headnotes which could be used by delegations on a voluntary
basis.
6. The Secretariat distributed an example of such a headnote (see attached) which focused on the
object of the measure to be listed in the schedule.  The example was based on the question on whom a
mode 1 or mode 2 binding conferred rights of action and on whom limitations would consequently bite; if
it was the foreign service supplier who was restricted from supplying the service, the limitation would be
scheduled under mode 1, while if it was the consumer who was restricted from consuming the serviceabroad, then the limitation would be scheduled under mode 2.  It was pointed out that such a headnote
would not address the issue of location - where the supply of the service took place - but it would make
clear the limits of the obligations, in terms of rights conferred, assumed by governments in making
commitments under these two modes.  Delegations generally thought that such an example would be
helpful in considering options.
7. Another possible headnote listed in the example was a reference to solicitation.  The example
stated that there was no commitment to allow solicitation of business or active marketing under mode 2.
It was accepted that headnotes clarifying other issues might be required, and that the Secretariat  should
be ready to assist in drafting them on request. It was made clear that any delegation which thought that
the examples were insufficient could ignore or modify them at will.  Discussion of these models implied
no commitment to use them.
8. The main conclusions of the informal consultations were therefore as follows.  It was agreed that
the responsibility for clarifying the content of commitments under modes 1 and 2 must lie with those
individual Members feeling the need to do so;  to develop a common multilateral solution for the
purposes of the financial services negotiations would be infeasible in the time available and was in anycase unnecessary.  The simplest means of providing such clarification appeared to be the use of a
headnote.  Again, it was not thought necessary or feasible to develop a common headnote, but delegations
undertook to give thought to the possible value of the two examples circulated by the Secretariat, and to
any other examples which may come forward.  There was also wide support for the view that in the
longer term - after the conclusion of the financial services negotiations - consideration should be given,perhaps in the Committee on Specific Commitments since this was a horizontal issue, to definitive
clarification of the distinction between modes 1 and 2.  However, some delegations had reservations on
this point, being unconvinced of the need for further consideration of the matter in the near future.S/FIN/W/14
Page 8
27.6.97
Example of a headnote explaining the distinction between Modes 1 and 2 in financial services
schedules
- Market access and national treatment limitations with respect to the mode (1) (cross-
border supply) and mode (2) (consumption abroad) supply of financial services are
inscribed in this section of the Schedule in accordance with the following distinction
between the measures affecting these two modes of supply:
1. Measures affecting mode (1)
Any limitation on the ability of a non-res ident supplier of financial services to
supply the service in the territory of the Member.
2. Measures affecting mode (2)
Any limitation on the ability of a resident consumer to purchase the service in the
territory of another Member.
Optional texts
If applicable, the following can be added as optional texts.
"The absence of any limitation on the ability of a resident consumer to purchase the service
in the territory of another Member does not signify a commitment to allow a non-residentservice supplier to solicit business or to conduct active marketing in the territory of the
Member."
____________