RESTRICTEDWORLD TRADE
ORGANIZATIONS/C/W/89
16 December 1998
(98-5087)
Council for Trade in Services Original: English
COMMUNICATION FROM UNITED STATES
Financial Services
The following communication received from the delegation of the United States was
circulated informally on 15 December 1998 to the Members of the Council for Trade in Services to
assist in the discussion on Financial Services in the context of the Information Exchange Programme.
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I. GROWTH OUTLOOK AND BENEFITS OF LIBERALIZATION
The development of a sound, transparent  and efficient financial system, including for
insurance, banking, securities and other financial services, is an indispensable factor for determining
whether countries can reach their true growth potential.  This is particularly important for the
emerging economies as a means to enhance infrastructure development and to provide a basis fortrade in a diverse range of goods and services. Liberalization of trade in financial services can play a
vital role in helping countries build improved financial systems.  As such, we believe that the
international community stands to benefit from continued liberalization of trade in financial services.
The opening of a country’s financial sector to foreign capital and foreign service providers
results in greater competition, which increases market efficiency and encourages innovation.  These
factors help ensure that foreign and domestic savings are channelled to high-return investments.  They
also lower costs and increase the quality of financial services provided to consumers.  In countries
with less advanced financial systems, foreign service providers can introduce more advanced
management practices, credit quality control, and risk diversification to the market, which makes
financial markets more stable.  Foreign investment can also play a vital role in strengthening the
capital base of under capitalized financial systems.  Finally, liberalization of financial data servicescan enhance transparency and the flow of financial information, which reduces market imperfections
and enhances the stability of financial markets.
At the same time, the emerging economies them selves are becoming increasingly competitive
suppliers of financial services and need to guarantee themselves access to new and expanded markets.For example, the Secretariat note highlights that countries such as Brazil, Singapore, China and other
emerging markets are beginning to play a major role in provision of financial services.
Liberalization of the financial service sectors offers another benefit in terms of job creation.
Both the underlying financial services activities (banking, securities, insurance, other financial
services) and the additional trading activities that they support are highly labour intensive, and
promote the development of high-skilled employment.  The growth of the sector also promotes theS/C/W/89
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transfer of important technologies.   Access to new technology, such as the Internet, has sped the
development of on-line banking and securities trading, insurance services and other financial services,
and should, over time, increase cross-border provision of financial services.
Liberalization of the financial services sector is not inconsistent with maintaining financial
sector stability.  A recent study prepared by the WTO’s Economic Research and Analysis Division
(Financial Services Trade, Capital Flows, and Financial Stability ) found that financial services trade
liberalization, including the presence of foreign financial institutions, results in less distorted and less
volatile capital flows and promotes financial sector stability.
According to official U.S. trade data, in 1997, U.S. banking and securities firms generated
cross-border exports of US$ 11 billion, while imports  measured US$ 3.9 billion.  In 1996 (the most
recent year for which data is available), sales by foreign affiliates of U.S. banking and securities firms
amounted to at least US$ 22 billion; purchases from U.S. affiliates of foreign firms totaled
US$ 11.3 billion.
According to official U.S. trade data, in 1997, U.S. cross-border exports of insurance services
totaled US$ 2.4 billion; imports reached US$ 5.2 billion.  In 1996, the sales of U.S.-owned affiliates
in foreign markets totaled US$ 41.3 billion.  Foreign insurers in the U.S. market reaped sales of
US$ 56 billion through their U.S. affiliates.
II. POSSIBLE AREAS FOR FUTURE DISCUSSION AND WORK
• First and foremost, we note that the deadline for WTO members to notify acceptance of the
Fifth Protocol to implement the WTO Agreem ent on Financial Services is 29 January 1999.
We encourage all countries that have accepted the Agreement to complete domestic
ratification procedures and to notify their acceptance of the Protocol as quickly as possible.
• As broad as those commitments are, there is important potential for expanding market access
and national treatment in the future, especially for those members who took on very limited
obligations in the financial services sector, or none at all.
• The U.S. agrees with the conclusion reached in the recent WTO research study (mentioned
above) that financial services trade liberalization enables the use of a broad spectrum offinancial instruments and that the presence of foreign financial institutions promotes financial
sector stability.  We also support the conclusion in the Secretariat background note thatimproved commitments made in mode 3 (commercial presence) as a result of the recent
negotiations on financial services are expected to support steady flows of foreign direct
investment in the future.
• Many WTO members and acceding countries, including the U.S., have chosen to schedule
commitments according to the comprehensive defi nition of financial services in  the Annex
on Financial Services (paragraph 5 (a)).  Therefore, it would seem reasonable to use the
classification in this Annex as the basis for further discussion.
III. U.S. REGIME/SCHEDULE
The current U.S. schedule of commitments, in force since 30 June 1995, protects the existing
operations and activities of  foreign services providers in the United States.
As part of the WTO Financial Services negotiations, the U.S. agreed to guarantee access to
the U.S. market - already one of the most open and liberal in the world.  The U.S. commitments,S/C/W/89
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which cover all sub-sectors included in the Financial Services Annex,  bind substantially full market
access and national treatment for foreign banking, securities and insurance service suppliers.  The new
schedule also would lock in a broad most-favour ed nation commitment (with only a targeted, limited
exemption for countries that maintain policies of forced divestiture in their insurance sector).
As a result of the 1997 negotiations, with respect to banking and securities, the U.S. would
provide for substantially full market access and national treatment, including the right to establish
through 100 percent foreign-owned subsidiaries and direct branches, and would provide national
treatment to foreign banks in interstate banking.  With respect to insurance, the U.S. would provide
for commercial presence (Mode 3) through 100 percent foreign-owned subsidiaries and branches, for
the sub-sectors of life, non-life, reinsurance, marine, aviation and transport insurance, brokerage and
auxiliary services, with limited exceptions to market access and national treatment. The U.S. wouldprovide for cross-border (Mode 1) and consumption abroad (Mode 2) of  insurance services for life,
non-life, reinsurance, brokerage and auxiliary services, with limited state-level exceptions to market
access and national treatment.  Temporary entry (Mode 4) is bound by the horizontal provisions of the
schedule.
The U.S. has notified WTO members of its acceptance of the Fifth Protocol on the WTO
Financial Services Agreement.
IV. REMARKS ON SECRETARIAT PAPER/QUESTIONS FOR DISCUSSION
• Regarding classification, work is needed to examine whether there are new financial services
whose placement within the definitions in the Annex will not be self evident.  We also should
give careful thought to whether any further clarification of existing categories is needed and
could be readily agreed.  Without more detailed analysis, we are not in a position to state
whether further disaggregation of the classification in the Annex would be useful, such as the
points raised in footnote 11 to paragraph 9 of the paper.
• Prudential regulation is essential to the conduct of banking and securities  services and
economic stability.  There are discussions underway on emerging international principles andstandards for prudential regulation (such as the Basel Core Principles for Effective Banking
Supervision  and the IOSCO Objectives and Principles of Securities Regulation ) which can
contribute to higher levels of supervision internationally and greater cooperation and
harmonization among regulators for the banking and securities sectors.
• In the securities sector, however, we are sceptical about the efficacy of mutual recognition
arrangements to meaningfully address concerns arising from differences in prudential
regulation between countries.
• Regarding hedge funds (see paragraph 14, page 8),  the Secretariat background note raises
several important issues, such as leverage, disclosure, and systemic risk.  However, we find
the background note’s statement overly conclusive.  The U.S. Government has undertaken a
study of hedge funds and has proposed an international task force to study the broader issue
of strengthening regulation of financial institutions, and examination of highly leveraged and
offshore institutions.
• The existence of consolidated supervision of the functions of the banking and securities
sectors  varies among countries.  It would be inappropriate for the WTO to endorse a
particular form of supervision.
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