Communication from the Commission to the European Parliament and the Council - Upgrading the investment services directive (93/22/EEC)
Date: 2000-11-15
Institutions: European Commission
Subjects: EC Directive, financial market, investment company, official market, securities

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 15.11.2000
COM(2000)729 final

COMMUNICATION FROM THE COMMISSION
TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

UPGRADING THE INVESTMENT SERVICES DIRECTIVE (93/22/EEC)

COMMUNICATION FROM THE COMMISSION
TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

UPGRADING THE INVESTMENT SERVICES DIRECTIVE (93/22/EEC)

- EXECUTIVE SUMMARY -

The Lisbon European Council has underlined the strategic importance of sustaining the
greater reliance on market-based financing as a critical element for strengthened economic
prosperity in the EU. The present Communication, foreseen by the Financial Services Action
Plan, defines orientations and seeks public comments for a substantive overhaul of the
Investment Services Directive (ISD: 93/22/EEC).

The ISD is the cornerstone of EU legislative framework for investment firms and securities
markets. In the five years since its entry into force, it has eliminated a first set of legal
obstacles to the single market for securities. The single passport conferred on authorised
investment firms is widely used. Access to “regulated markets” and exchanges has been
liberalised. Pan-European dealing in nationally-listed securities has been facilitated.

New challenges:

The ISD nevertheless needs modernisation to meet the demands of the new securities trading
environment. Market forces, amplified by the single currency, are driving demand for an
integrated financial market. Information technology is revolutionising business practices and
paving the way for the emergence of a new generation of service providers. The drive to
enhance performance, reduce costs and establish a pan-European presence is stimulating
profound restructuring of the securities trading infrastructure. Proposals for mergers and
alliances between exchanges are the most visible manifestation of these profound changes.
Consolidation of clearing and settlement, which can substantially improve efficiency of
European securities trading – is gathering pace.

Following the single currency, these structural changes are operating at a pan-European level.
Deep-rooted segmentation of national financial markets is being eroded and cross-border
transmission effects are being amplified. The number of cross-border transactions is rising.
The value of investment decisions taken by investors and issuers in one Member State is
increasingly sensitive to behaviour on other EU markets.

Achievement of the overarching regulatory objectives of investor protection, efficient and
orderly markets, and market stability requires:

• confidence in the existence and effective implementation of agreed risk-management

techniques;

• clarity as regards the roles and responsibilities of different regulatory and supervisory

agencies;

• continuous cooperation between and convergence of

the enforcement practices of

competent authorities.

2

Priorities for ISD revision:

These challenges require the upgrading of the ISD. This work can focus on four key priorities:

• An effective passport for investment firms: the usefulness of the single passport has been
impaired by extensive exemptions from its scope and widespread application of host
country requirements. Securing the full benefits of an EU passport for investment firms
requires progress on two fronts: first, passage to home country control for all wholesale
business: second, judicious ex ante harmonisation of conduct of business protection for
retail investors, coupled with (non-sectoral) arrangements to facilitate the negotiation,
conclusion and arbitration of cross-border contractual relationships.

• New forms of service provision: technology has spurred the emergence of novel forms of
service provider, such as Alternative Trading Systems (ATSs) which compete with existing
investment
infrastructure providers. The ISD should allow
European securities supervisors to apply suitably calibrated and common safeguards to
such systems, so that they can operate across the Union.

firms and, occasionally,

• Effective competition between exchanges and trading platforms: the ISD should allow
newly commercialised exchanges and trading platforms to compete effectively and
prudently for trading volumes without undue regulatory or supervisory impediment.
Neither should competition be driven by excessive regulatory arbitrage which could
jeopardise the orderly and efficient functioning of markets and investor protection.
Regulatory and supervisory arrangements for European trading platforms and exchanges
should reflect a collective “first-best” assessment of
ISD
provisions for “regulated markets” should therefore be expanded to provide a legal
underpinning for these core benchmarks – particularly those relating to transparency and
disclosure.

risks and opportunities.

• The growing cross-border dimension of clearing and settlement: European level
consolidation of clearing is gathering momentum. This efficiency-enhancing development
concentrates systemic risk and increases the threat of cross-jurisdictional conflict. Mutual
confidence in risk-management techniques and supervisory cooperation will be of central
importance. Collective attention is urgently needed in the area of clearing and the
remaining technical and legal impediments to linkages between securities settlement.

An appropriate legislative response:

Europe needs financial services legislation that will stand the test of time. Prescriptive,
inflexible rules which are quickly overtaken by financial innovation or market developments
must be avoided. Framework legislation that enshrines high-level principles could provide the
legal bed-rock for a dynamic, orderly and stable single financial market. Such high-level
principles must be accompanied by mechanisms which provide supplementary guidance and
ensure uniform interpretation. Without this, framework rules will remain a dead-letter.

An updated ISD must provide a common legal basis for “straight-through” supervision and
enforcement. Regulatory and supervisory cooperation through Forum of European Secusrities
Commissions (FESCO) is already paying dividends but must be stepped up. The Commission,
acting within Treaty provisions and the Union’s institutional framework, and guided by the
analysis of the Committee of Wise Men on securities markets will consider how best to
respond to these needs in developing legislative proposals to update the ISD.

3

The Financial Services Action Plan underlined the heightened political urgency of reviewing
and reinforcing the Union’s legislative framework for securities markets. The Lisbon
European Council has underscored the importance of accelerating and completing this work
before 2005. The present Communication opens an extensive consultation on the possible
upgrading of one of the central pillars of this framework – the Investment Services Directive.
Comments on the analysis and issues presented in this Communication are invited from the
European Parliament, national regulatory and supervisory authorities, other EU level
organisations including FESCO, market practitioners, market users and all other interested
parties. Annex 1 summaries the specific issues on which comments are sought.

Comments should be addressed to the Commission before March 31st .2001 (attention DG
MARKT F, avenue Cortenbergh 107, B-1040 Brussels: e-mail address: MARKT-
ISD@cec.eu.int)

4

- COMMUNICATION OF THE COMMISSION -

1.

INTRODUCTION:

1.1.

Implementing the conclusions of the Lisbon European Council:

The Lisbon European Council underlined the importance of establishing, by 2005,
efficient and integrated financial markets as a critical component of Europe’s
strategy for growth and employment. It identified integration, efficiency and stability
as the key benchmarks for measuring the performance of European securities
markets. . EU policy should be informed by three over-arching principles of investor
protection, orderly and efficient functioning of markets and market stability.

These goals are mutually-reinforcing: integration of markets will result in pooling of
liquidity, will permit the most productive allocation of capital and foster competition
between service providers. Efficient exchanges will experience a virtuous circle in
which they attract further liquidity, reinforce their competitive edge and boost the
efficient pricing of European securities. Prudential stability and trading security are
essential features of any trading system.

The pooling of (previously fragmented) national
liquidity will allow European
savings to be put to their most productive use. Demographic trends require a secure
and productive complement to statutory pension schemes. Investment in securities
will be an integral part of successful medium/long-term investment strategies. In
addition, pooling of liquidity will provide capital borrowers, especially companies,
with a flexible and competitive alternative to bank-borrowing for
financing
employment-generating investment. Deep and liquid financial markets will allow
companies to fine-tune their financial structures and complete the financing chain
from start-up to initial public offer. Companies and issuers will obtain a better price
for their securities. Access to the widest possible pool of potential investors, will
strengthen the price-discovery mechanism and ensure the most competitive pricing
of capital. Finally, intermediation and transaction costs – commissions and fees
charged by middle-men – will be kept to a competitive minimum. The assessment
that market-based financing heralds substantial benefits for European investors and
issuers is not overturned by periodic bouts of volatility or occasional market
corrections.

Removing obstacles to free circulation will not be sufficient. Regulatory action is
also needed to correct market failure and to facilitate the efficient interaction of
supply and demand for capital. A regulatory framework which emphasises open
market access, shareholder rights, effective financial disclosure,
legally secure
clearing and settlement, and contractual enforcement is needed to secure the benefits
of efficient and stable market-based systems. The Financial Services Action Plan
maps out a first set of improvements to the EU legislative framework for securities
markets which includes a single passport for issuers, rules on market manipulation
and cross-border use of collateral.1

1

COM(1999)232, 11.5.1999.

5

The regulatory system itself has to work efficiently. EU rules must be clear and
comprehensive, implemented by the Member States and enforced effectively by
supervisors and lend themselves to expeditious adjustment. This will ensure that
regulation keeps pace with market developments and contributes to the emergence of
integrated and efficient securities markets.

1.2.

Structural changes in EU financial markets:

Market-based financing is beginning to overturn the traditional predominance of
bank-based lending in most EU Member States. New companies are issuing shares in
unprecedented numbers.2 Institutional investors and a new generation of competitive
brokers are mobilising household savings: in some Member States, more than one in
three adults now owns shares. Trading infrastructures are also undergoing profound
changes. New technology facilitates entry by service providers who can compete
with incumbent players at all stages in the trading system – from rudimentary order-
routing systems to fully-fledged exchange-like entities. At the level of exchanges, the
race is on to provide issuers, investors and intermediaries with a platform for pan-
European trading. This has spurred ambitious proposals for mergers and alliances
between exchanges. Clearing (and to a lesser extent settlement) are of central
importance as an important cost-centre in European trading where large benefits can
be reaped from consolidation. The pressure from market users is eroding the
boundary between national and European/international clearing and settlement.

Encouraged by the elimination of exchange risk in the euro-zone, these structural
developments have assumed a pan-European dimension. Market inter-dependencies
are being reinforced at all levels. The investment horizons of funds and private
investors are becoming more pan-European. The same financial instruments are
potentially tradable on competing exchanges and trading platforms across the EU.
The same investment firms constitute the membership of different exchanges and
serve the same national client bases. Finally, exchanges and new types of trading
flow and are increasingly
platforms are competing across borders for order
dependent on consolidated clearing houses/central counterparty facilities.

2.

ASSESSMENT OF THE ISD:

2.1.

Structure and design:

The ISD provides the legal framework for regulation and supervision of investment
firms and some aspects of the exchanges and markets on which they operate. It
comprises three main pillars.

1. Single passport for investment firms:

The ISD allows investment firms to provide services, or establish branches in other
Member States, on the basis of home country authorisation. Reliance on mutual
recognition is complemented by harmonisation of core principles for
initial
authorisation and ongoing operations. Particularly important in this regard are basic
principles for organisational requirements and conduct of business rules for

2

One third of the total volume of new shares issued on European stock exchanges in 99 emanated from
newly listed companies.

6

investment firms. The key ISD provisions are supplemented by the Capital Adequacy
Directive (93/6) and CAD II (98/31).3 Where harmonising provisions are included in
the ISD, they are confined to statement of core principles.

The traditional broker-dealer is the business model which has inspired key ISD
provisions – this is evident from the heavy emphasis on transactional requirements
designed to protect investors from abusive or improper conduct by the investment
firm. National
implementation of these provisions has also reflected traditional
modes of investment service delivery, consisting of iterative contacts between firm
and client based on phone and written correspondence. Underwriting and placing
also benefit from ISD authorisation in their own right. However, firms providing
related services such as advising and safekeeping/administration do not benefit from
the ISD passport unless they are providing these services in conjunction with one of
the “core services”.

The ISD has eroded market segmentation at the level of investment firms and access
to “regulated markets”. Large numbers of firms have made use of the single passport.
Figures 1a and 1b in annex provide some data on incoming investment service
providers or branches.4

2. Access to “regulated markets”:

As a corollary to the single passport for investment firms, the ISD has dismantled
official restrictions to membership of or access to regulated markets which would
otherwise have obviated the impact of the single passport for investment firms. It
prohibits quantitative or other arbitrary restrictions on access to or membership of
“regulated markets”. In addition, markets operating an electronic based trading
system are required to admit “remote members” located in other Member States. EU
and third country members now account for between 30-50% of total membership of
Amsterdam, Paris, Eurex, Frankfurt and a sizeable share of market turnover. This
pattern is widespread but not universal (some exchanges, for example Madrid, have
no remote members). The ISD also provides for right of access of partner country
participants to related clearing and settlement.

Regulated markets are entitled to place screen trading facilities in partner Member
States, so as to serve “remote members” in other Member States. This possibility has
been actively used by a small number of exchanges. In this regard,
the ISD
foreshadows the competitive climate which currently prevails between exchanges.

3

4

These Directives define the capital reserves that investment firms must set aside to cover position and
market risk on their trading book. As capital adequacy issues are already the object of regulatory and
supervisory review in the Community, based on the Basle Banking committee work, they will not be
further considered in this Communication.
To these figures must be added credit institutions which are authorised to provide investment services
under authorisations granted under the Second Banking Coordination Directive. In addition to 2BCD,
these firms are subject to ISD provisions 4, 8, 10, 11, 12, 14(3), 14(4) and 15. For many Member States,
the numbers of incoming partner country firms far exceeds domestic authorised companies. No data is
available on national market share accounted for by partner country firms. The limited use of branching
option could be attributed either to relatively onerous notification and authorisation procedures or to
limited commercial interest in the branching mode.

7

“Regulated markets” are defined by reference to rudimentary requirements for
admission of official listing, reporting and transparency. Each national authority
retains responsibility for nominating markets for “regulated market” status, and
awarding special or exclusive rights to those markets. Furthermore, national
authorities have the option, in the interests of ensuring that investors benefit from
best price inter-action, of requiring that certain transactions be performed on a
“regulated market” (concentration rule of 14(3)).

3. Supervisory co-operation:

Prior to the ISD, statutory safeguards and supervisory practices differed widely
across the EU. Important provisions of ISD lay down requirements for national
competent authorities, assign responsibilities and obligations for supervising and
policing regulatory provisions laid down in the ISD. Articles 22-27 of the ISD
underpin minimum convergence in terms of supervisory responsibilities and calls for
a clear assignment of lead responsibilities between different national agencies or self-
regulatory organisations. These provisions have given a significant
impetus to
convergence of regulatory and supervisory practice. In addition, the ISD formalises
mechanisms for extensive event-specific and continuous cooperation between
national authorities. This cooperation is a pre-condition for the preservation of
investor confidence and market integrity in an integrated market. The recent creation
of the Forum of European Securities Commissions (FESCO) has placed cooperation
between national competent authorities on a more organised, albeit non-binding,
basis.

2.2.

Structural limits to the effectiveness of the ISD:

Mutual recognition of national authorisation and supervision has, in general, served
European markets well. The broad definitions and core concepts of the ISD have
been flexible enough to accommodate evolution in business practices and national
supervision. However, the generic nature of many ISD provisions, unsupported by
more detailed guidance or implementing measures, also presents drawbacks. In
particular, the effectiveness of the ISD has been mitigated by:

• Extensive dilution of the home country philosophy of the ISD. Numerous
provisions of the ISD admit host country intervention or supervision to uphold the
“general good”. The most notable provisions in this regard are Articles 13, 17(4),
18(2), 19. In addition, Article 11(2) entrusts responsibility for the implementation
and supervision of rules of conduct to the Member State “in which a service is
provided”.5 There are objective reasons for admitting host country interventions in
the interests of protecting retail investors. However, the failure to provide for
effective mechanisms to smooth a transition to home country principle or to
circumscribe the scope of host country principle is a shortcoming of the present
Directive;

5

In the absence of a clear understanding as to how to determine the Member State where the serive is
provided, almost all national authorities apply local conduct of business rules to incoming services
provided to nationally-domiciled investors.

8

• Unclear provisions or definitions which have paved the way for widespread
discrepancies in interpretation and implementation at national level – for example,
as regards implementation of core service definitions, application of conduct of
business principles, designation of “regulated markets” and provisions for use of
emergency powers under Article 19. ISD provides no mechanism which could be
used to provide further guidance or
to the
interpretation and implementation of harmonising measures.

forge common approaches

A wide-ranging overhaul of the ISD is required to overcome these difficulties so as
to seize the unprecedented opportunities and rise to the regulatory challenges of the
new securities trading environment. Based on its assessment of the regulatory
implications of current market developments,
the Commission has identified a
number of themes which could be the focus for ISD revision. These themes are
grouped under two headings – one set of issues relates to the functioning of the
single passport for investment firms and service providers. The second set of issues
the level of exchanges and the trading
arises from structural developments at
infrastructure.

3.

A FULLY OPERATIONAL SINGLE PASSPORT:

3.1.

Clarifying and extending passport rights:

The scope of the ISD passport is limited by numerous exemptions. Articles 2(2)
and 2(4) provide for a wide range of exemptions, some of which may no longer be
pertinent6. Some non-core services – in particular custodians – might also benefit
from ISD authorisation in their own right. In re-assigning services from non-core to
core status, consideration would need to be given to whether ISD provisions are
adequate for dealing with the supervisory issues related to the service in question.
Moreover, the tangible benefits from ISD passport should outweigh the costs of
compliance with regulatory provisions (e.g. capital adequacy).

conduct of business

to which they tailor

Competent authorities differ in the extent
to which they apply different ISD
provisions to specific core investment services. For example, Member States diverge
for
in they extent
reception/transmission services and/or “execution only” brokerage. Firms authorised
in one Member State may be subjected to a qualitatively different supervisory regime
when operating in another. Greater consistency of national approaches should
facilitate cross-border service provision and the emergence of new technology-based
business models. New methods and formats for investment service provision can be
compatible with existing conduct of business principles. Therefore, providing greater
certainty as to how different ISD provisions can be applied and adapted to individual
core services can have a double dividend.

regimes

• The effective operation of the single passport for investment firms requires a
reconsideration of the exemptions of Article 2(2) and 2(4), and an assessment of
whether some or any of the non-core services should be upgraded to core service.

6

In view of changing market practices, particular attention should be given to the relationship between
services foreseen under Art. 2(2)g and services relating to the reception and/or transmission of orders.

9

• ISD revision should clearly indicate how individual provisions should be tailored
to different core-services so as to avoid pronounced divergences in national
supervisory regimes which impede cross-border service provision. Respondents
are invited to identify those provisions of
the ISD could be applied in a
differentiated manners, and how they should be adapted for the different core
services.

3.2.

Protecting investors and managing supervisory overlap:

The most widespread difficulty encountered in the operation of the ISD passport is
the scope for jurisdictional uncertainty and conflict. As admitted by key provisions of
the ISD, host country authorities generally apply domestic conduct of business and
advertising rules and some organisational/prudential requirements (holding of client
money) on services provided to domestic investors. This resulting duplication of
supervisory regimes inhibits cross-border provision of brokerage and dealing
services in particular.

a number of

Ultimately, a single passport will require systematic reliance on the home country
principle for supervision of firms’ obligations to the market and fair dealing with
country
clients. At present,
implementation, or give unqualified prominence to “general good” exceptions. These
exceptions to the underlying home country philosophy of the Directive need to be
carefully examined. This should not result in a watering-down of investor protection:
home country authorities are frequently best-placed to supervise and enforce investor
protection requirements once they are detected.

ISD provisions privilege host

In promoting a more effective single passport, a distinction should be drawn between
services provided to professional counterparties and those provided to retail
investors. Insofar as services provided to professional
investors are concerned,
progress towards exclusive reliance on home country enforcement of prudential rules
and conduct of business does not require further harmonisation. Commission
Communication on Article 11 of the ISD provides a detailed and non-binding
analysis of practical and substantive considerations which support this approach.7
The recent FESCO agreement on the boundary between professional and retail
investors provides a consensual and practicable basis for identifying professional
investors for whom host country conduct of business rules could be waived. The
revision of the ISD should seek to give full legal underpinning to this approach – not
only in respect of conduct of business rules for fair dealing, but also as regards
advertising and the firms’ obligations to the market.

As regards retail investors, the transition to home country supervision of investment
services will need to be carefully managed. It is currently the case that host country
authorities may have a comparative advantage as a first-line of defence in detecting
and initiating action against firms which transgress in their dealings with retail
investors. Moreover, conduct of business rules in the different Member States cannot
be assumed to offer comparable protection to retail investors. Consequently, retail
investors may derive benefit and confidence from the possibility of seeking redress
within their own jurisdiction.

7

Commission Communication COM (XX) 2000: The application of conduct of business rules under
Article 11 of the ISD. Nov. 2000.

10

The Commission is considering practical means of meeting these concerns. Retail
investors clearly need to benefit from key elements of the domestic supervisory and
legal regime. The Distance Marketing Directive will harmonise requirements relating
to generic information supplied to purchasers of financial and investment services,
marketed and sold at a distance. Ongoing FESCO work aims to approximate conduct
of business rules for retail investors. Other practical difficulties remain. For example,
where customer agreements or other contractual arrangements underpin the firm-
consumer relationship, the determination of the law applicable to the contractual
obligations will be governed by the Rome Convention. This may result in some of
the mandatory rules of the consumer country being applied through the contract
governing the firm-client relationship. Finally, mechanisms for supervisory co-
operation may need to be intensified so as to foster mutual confidence as regards the
practical implementation and enforcement of common investor protections. Solutions
to these challenges – which are not specific to investment services – will also be
needed.

The E-commerce Directive already entails a decisive shift towards the country of
origin principle for all investment services provided electronically. Revision of the
ISD must pave the way for further systematic move to the home country principle.
Henceforth, residual host country responsibilities must be strictly demarcated, and
should be confined essentially to conduct of business rules for fair dealing with retail
clients. Where host country responsibility is exceptionally permitted, conditions
should be identified which, once fulfilled, should lead to their automatic expiry.

• Home country supervision should be implemented without pre-condition for
services provided to professional counterparties. Apart from conduct of business
rules, are there other ISD provisions which could incorporate a clear and
operational professional/retail distinction?

• Respondents are invited to comment on regulatory and supervisory issues which
flanking
call
for residual host country role on a transitional basis. What
conditions are needed as a precondition before the phasing-out of residual host
country responsibilities?

In replying to these questions, respondents are invited to take account of the analysis
presented in the Commission Communication on Article 11 of the ISD.

3.3.

New players – Alternative Trading Systems:

Information technology has reduced entry barriers at all stages in the securities
trading business – from provision of brokerage/dealing services, through pure order-
routing and transmission, to the establishment of advanced platforms for order
matching and execution. At
this end of the spectrum, new entrants may be
functionally similar to fully-fledged exchanges and several have been authorised as
“regulated markets”.

Greater uncertainty has surrounded the appropriate regulatory and supervisory
treatment under EU law of Alternative Trading Systems (ATSs) which are currently
authorised as investment firms in different Member States. Users of these systems
must be adequately protected and the interaction with the overall securities trading
environment must be optimised. The key issue is whether ISD (and national)
provisions relating to investment firms are sufficiently responsive to the potential

11

regulatory risks presented by these new entities. ATSs do not constitute a
homogeneous group.8 However, detailed analysis undertaken within FESCO reveals
that these systems can very often be assimilated with investment firms.9 Based on a
case-by-case assessment of
individual ATSs, a
graduated application of organisational requirements (Article 10) and conduct of
business rules (Article 11) could be applied to counter any supplementary risks for
investors or the orderly functioning of markets.

the regulatory risk-profile of

National securities regulators propose to implement this policy as the preferred short-
term approach to the supervision of ATSs. Subject to any interpretation of the ECJ
on the consistency of this approach with the ISD, the Commission considers that this
an expedient
that any supplementary
requirements be applied in a uniform manner so as not to infringe passporting rights
of authorised investment firms.

transitional solution.

It will be crucial

This pragmatic solution cannot be the final word. Certain ATSs may be the focal
point for organised trading in financial instruments. They will thus be vulnerable to
the same risks as exchanges and “regulated markets” in terms of preserving market
confidence, transparency, and orderly and efficient trading. This may call for the
application of provisions of the “regulated market” regime. Currently, there is a strict
dichotomy in ISD between “investment
firms” and “regulated markets”. This
precludes the extrapolation of elements of the “regulated market” regime to
investment firms. Revision of the ISD could therefore allow for a (proportionate)
transparency, and disclosure
application of provisions relating to reporting,
requirements to those ATSs which closely resemble exchanges.

• Which of the principles and requirements of Articles 10, 11 will be of most
relevance in catering for situations where Alternative Trading Systems (ATSs)
provide infrastructure services? Are other elements of the “investment firm”
regime potentially relevant?

• In view of functional approach to the regulation of ATSs, which elements of the
regulatory framework for “regulated markets” (e.g. for reporting, transparency,
monitoring/enforcement) could be of most relevance to different types of ATSs?

4.

REGULATED MARKETS AND THE TRADING INFRASTRUCTURE:

By broadening the membership base of exchanges and regulated markets, the ISD
has indirectly facilitated competition between trading systems. The incentive to
increase trading volumes has been accentuated by the move to a “for-profit” basis.
in open membership
Many exchanges have embraced the opportunities implicit
networks. Competition between exchanges is intensifying. Further reductions in
transaction costs through application of new technologies are limited as many
European exchanges are operating at the technological frontier. The most promising
route for future revenue growth will be increased trading volumes, resulting in scale
and scope economies. Some exchanges and new entrants are seeking to achieve pan-

8

9

Some ATSs provide a rudimentary electronic meeting-point (bulletin-board) for matching orders
whereas others closely can be equated with electronic inter-dealer-brokers or dealer order-books.
“The Regulation of Alternative Trading Systems in Europe”: FESCO 00-064C, 25.9.2000. This
document is available at www.europefesco.org.

12

European reach through organic growth. However, other exchanges are looking to
fully-fledged mergers with potentially significant
far-reaching alliances or
concentration in trading volumes and deeper and more liquid securities markets. The
benefits are not limited to scale and scope efficiencies in the execution of trades: the
increased liquidity and better price
more elusive improvements in terms of
interaction will ultimately be much more significant. Adjustments or extensions to
the ISD may be needed to optimise these developments to:

(1)

(2)

(3)

(4)

Support effective competition for order flow between exchanges (“passport”);

Clarify the regulatory requirements for “regulated markets” so as to preserve
the benefits of orderly and efficient trading (“high level principles”);

Promote transparent pricing of securities on individual exchanges and across
the trading system as a whole;

Forge a collective approach to the integration and supervision of clearing and
securities settlement functions.

4.1.

A single passport for “regulated markets”:

Although the right for electronic-based markets to operate screen trading facilities in
Member States may be seen as a fore-runner, the ISD does not confer full pass-
porting rights on “regulated markets”. To facilitate the provision of trading services
for a broad range of European of securities, the ISD definition and provisions
relating to “regulated markets” will need to be examined.

Currently, the concept of “regulated market” in Article 1.13 is defined partially by
reference to the requirement for admitting securities to listing (including the the
conditions for the admission of securities to official stock exchange listing laid down
in Directive 79/279). Conditions for admission to listing are the front-line of defence
in ensuring the quality of the instruments which are traded on markets and adequate
disclosure to investors. Difficulties arise because of prevailing uncertainty as regards
the way in which “regulated markets” should fulfil their obligations to ensure that all
listing” (as specified in
securities comply with the requirements for “official
Directive 79/27910 In essence, the practice to date has been that the regulated market
should provide listing functions in respect of all securities which are dealt in on that
market. This practice for “regulated markets” officially to list securities prior to
trading can add significantly to costs and limit the scope for competing markets and
exchanges to admit the same security to trading. admission to listing and admission
to trading must therefore be decoupled if more active competition between trading
systems
the
demutualisation of exchanges call for a redefinition of how listing and public
disclosure objectives are realised. However, before such far-reaching adjustments
can be envisaged, an equitable basis must be found for sharing the regulatory
overheads of listing and fulfilling related requirements such as dissemination of
profit-driven
price-sensitive

to be facilitated. Furthermore,

information. Without

structural changes

arrangements,

appropriate

such as

is

10

Dir. 79/279 of 5.3.1979 (OJ L 66, 16.3.1979). Uncertainty as regards compliance with official listing
requirements is exacerbated in respect of securities to which Directive 79/279 is not applicable. Here,
the need to prepare a public offer prospectus for all transferable securities issued on a market provides
one safeguard.

13

exchanges may seek to divest costly listing functions, particularly if they perceive
competitors as “free-riding” on their listing services. This would jeopardise the
important “public good” functions served by listing. Implementation of this approach
should be foreshadowed in an updated definition of “regulated markets”. It also calls
for a re-examination of the provisions of Directive 79/27911.

The concentration rule of Art. 14(3) of the ISD offers Member States the option of
requiring the execution of transactions in certain financial
instruments on a
“regulated market”. This provision was intended to enhance investor protection by
limiting “off-market” transactions to professional investors. However, trading in
financial instruments could be artificially diverted to a particular regulated market.
Investor protection is better served by appropriate provisions addressed to market
participants acting on behalf of investors, and by strict enforcement of “best
execution” requirements. In order to avoid arbitrary or disproportionate restrictions
on competition between “regulated markets”, it may be appropriate to examine the
continued rationale and/or present form of the “concentration rule”.

Article 15(5) ISD empowers Member States to restrict the establishment of new
markets on their territory. As recognised by IOSCO, there are legitimate concerns
relating to governance and orderly operation of markets which call for appropriate
licensing and authorisation arrangements for exchanges. However,
the current
provision should be reviewed to ensure that it is not used to obstruct the activities of
“regulated markets” authorised by partner country authorities.

The Commission also notes that nurturing competition between commercially-driven
exchanges will also call for vigilance on the part of anti-trust authorities to curb any
to proprietary trading networks. New
anti-competitive control over access
technology-based entrants or competition from overseas markets may limit
this
danger by increasing contestability at
the level of trading systems/exchanges.
Nevertheless, excessive concentration of trading volume in one or more privately-
owned trading systems may give rise to concerns. These would be particularly
pronounced if horizontal concentration at
the level of the trading system was
accompanied by vertical integration spanning trading, clearing/central counterparty
systems. The advantages of cost-reducing “straight through processing”, could then
be outweighed by the anti-competitive consequences of dominance in the trading
infrastructure.

• The requirements for “regulated markets” in terms of compliance with listing
conditions and criteria for admission to trading need to be clarified. This will also
require a parallel update of Directive 79/279. What conditions are required for
the successful implementation of such an approach so as to preserve disclosure
and safeguards the quality of securities trading.

• The concentration rule of Article 14(3) and the right of prohibition of Article
15(5) need to be reviewed with a view to reducing any disproportionate or
unnecessary restrictions on the cross-border activity of “regulated markets”

11

In addition to the issue of the linkage between listing and admission to trading, Directive 79/279 lacks
clarity as regards the scope of certain key concepts such as “official listing” and “stock exchange”.
Discrepancies in the quality of securities traded on different “regulated markets” and the associated
level of disclosure could arise.

14

4.2.

High-level principles for “regulated markets”:

The ISD provides for limited convergence of the conditions which markets and
exchanges should respect so as to uphold confidence in and stability of the market.
Recent structural developments have highlighted how divergences in regulatory and
supervisory requirements can complicate integration of trading. Harmonisation of
trading rules is a precondition for a unified market. There is also a need for common
regulatory and supervisory responses in other areas.

Timely and high-quality disclosure of material information on an equitable basis
requires uniform listing requirements, prospectus, regular reporting and disclosure of
price-sensitive information. A common model for transparency and reporting is
essential especially where transactions are highly sensitive to transparency
requirements. Disparities within a system will lead to concentration of this trading at
the point where transparency obligations are least demanding, thus compromising
efficient price-discovery within the unified market. Rules on market membership and
standards for market access must be aligned to prevent participants arbitraging
between different points of entry to the integrated platform. The content and
implementation of any membership or admission criteria be non-discriminatory and
objective. Finally, equivalent approaches to monitoring, enforcement, and disciplines
are required to ensure equal levels of risk-deterrence and severity of punishment.

The regulatory and supervisory challenges of managing the implications of inter-
exchange competition for the transparent, efficient and orderly functioning of the
European market system as a whole are formidable. Two issues call for particular
attention. First, closer integration of securities markets increases the possibility that
regulatory or supervisory differences influence competition between exchanges for
trading volume. Where trading is sensitive to regulatory overheads, there is a risk
that competition between regimes will come at the expense of transparency and
efficiency of EU securities markets as a whole. Secondly, EU regulatory approaches
need to be re-appraised in the light of increased transmission effects. Developments
in one regulated market could well have immediate and potentially major
repercussions on the trading environment
in other Member States. Measures to
uphold market
integrity, confidence and stability can no longer be designed or
implemented in isolation.

issuers and infrastructure providers throughout

A shared EU regulatory perspective is needed. The interests at stake are not confined
firms,
to Member States which are home to merging exchanges:
investors,
the EU are directly
concerned. Regulatory or supervisory arrangements governing a large share of
European securities trading cannot be permitted to evolve on an ad hoc basis in
response to the technical challenges presented by a particular merger/alliance. Such
an approach also threatens to perpetuate regulatory and supervisory diversity in
Europe if each large–scale merger/alliance gives rise a distinct set of regulatory and
supervisory solutions.

investment

ISD provisions on “regulated markets” should be reinforced to provide a common set
of principles in respect of orderly trading, disclosure and transparency, market
integrity and standards of monitoring and enforcement. Incorporation of high level
principles in EU law can smooth structural changes at the level of exchanges by:

15

• Limiting legal uncertainty over applicable law or jurisdiction in respect of
“regulated markets” which are present, active or susceptible to review in different
Member States;

• Giving legal teeth to obligations for cooperation between market supervisors,
including the definition of practical arrangements to facilitate cooperation
between administrative authorities and commercial Self-Regulatory Organisations
(SROs);

• Building on mechanisms and provisions effectively applied in other EU financial
services legislation. In this regard, attention could be given to capital adequacy
requirements (to ensure that “regulated markets” possess the capacity to maintain
systems), large exposure requirements, “fit and proper” tests for management and
mechanisms on acquisition of qualifying interests (to provide control over
emerging conflicts of interest in governance structures);

• Enhancing transparency by the market operators and supervisor as regards rules

for fair and orderly trading, operating conditions and ownership structures.

National securities supervisors, meeting in FESCO, have produced a set of generic
“standards for regulated markets”. These standards provide a useful reference point
for further reflection in the above areas.

A final consideration relating to the fleshing out of high level principles for
“regulated markets” in the context of ISD revision concerns the coverage in terms of
securities trading. One option would be to limit the focus to “regulated markets”
which provide for publicly accessible trading in equity, on the grounds that the real
economy and the retail investor are most heavily exposed to this type of securities
business. Consequently, it is here that the need for transparency and disclosure is
greatest. A second approach would be to encompass all organised systems providing
for publicly accessible trading, irrespective of the financial instrument (including
commodity derivatives and any other instruments excluded from annex B of the
ISD). This approach may require a graduated application of high-level principles to
take account of the fact that organised trading in different instruments gives rise to
different regulatory issues depending on the market model and the extent to which
trading is dominated by inter-professional business.

• The current definition and provisions of the ISD relating to “regulated markets”
are inadequate to contend with regulatory and supervisory challenges which
result from the intensification of competition and cooperation between exchanges.
In which areas could regulatory arbitrage across exchanges compromise the
orderly, efficient and transparent functioning of securities trading?

• Should high-level principles for markets be restricted to publicly accessible
trading in securities, or extended to organised in all financial instruments. Should
high-level principles be tailored to the regulatory and supervisory risks
associated with different types of market or trading? Which provisions should be
applied in a graduated fashion?

• Respondents are invited to comment on whether and how certain principles might
be enshrined in EU law and which regulatory objectives should be the focus of
attention?

16

4.3.

Transparency:

investor interests. Despite Article 21 ISD,

A high level of transparency is the hall-mark of an efficient market, and is the best
safeguard for
there are enormous
discrepancies in the level of transparency across EU regulated markets. With the
emergence of electronic order-driven systems as the dominant market model for
equity trading, provisions to promote effective transparency in the part of the market
which stands to benefit from it the most. Requirements should be formulated in terms
of the results to be achieve, rather than prescribing detailed market practices.

Divergences are particularly marked as regards transparency requirements for trading
with institutional investors. On several European markets, this business is conducted
“off market”, possibly impairing overall liquidity and price-discovery for securities.
In a context where markets are competing aggressively for this type of business,
common solutions may be needed to ensure that opaque block-trading does not
unduly diminish the quality of securities pricing for retail and other investors.

The segmentation of securities trading based on national administrative and currency
frontiers must not be replaced by a market-based solution involving insufficient
technical or regulatory links between trading systems. If there are several European
trading platforms, interaction between the separate price-discovery systems may
need to be promoted. However, regulation should not seek to dictate market
structures or solutions. It should, instead, enhance the benefits of transparency and
this the potential opportunities of a single
effective price-interaction. Without
integrated market will not be optimised. A further consideration is that price-
sensitive information may not be made available to investors at the same real-time
across different trading systems12.

• How should ISD provisions on transparency can be usefully upgraded? To what
extent are common approaches required to ensure that “off-market” trading does
not unduly impair efficient pricing of securities for all investors?

• Does the fragmentation of trading across different systems represent a threat to
liquid and efficient securities markets? What practical steps could be used to
promote effective and efficient price interaction across competing “regulated
markets”?

4.4.

Clearing and settlement:

Remote access: Clearing and settlement functions are addressed indirectly by
Article 15(1) ISD which requires that access to regulated markets be accompanied by
access to underlying clearing and settlement functions. Some Member States have
obliged remote members to rely on the offices of locally-established intermediaries
for the purposes of clearing and settlement. This indirect access increases complexity
and costs, and interferes with timely and effective execution of transactions. The
Settlement Finality Directive removes one uncertainty by eliminating complications
arising in the event of insolvency by a counterparty in another Member State.
However, difficulties remain. One example is the reluctance of monetary authorities

12

The US precedent (dating back to 1970s) demonstrates how effective mechanisms for cross-market
price transparency can be in fostering the pooling of liquidity.

17

firms account

to offer partner country investment
facilities needed to settle
transactions in “central bank money”. This forces remote members of the local
“regulated market” to rely on local correspondent banks with a view to definitive
settlement (in legal tender) of the cash-leg of the securities transaction. In the
absence of solutions to these issues, remote membership of clearing and settlement
system will be fatally undermined.

Settlement: Despite the blurring of the boundary between national Central Securities
Depositaries (CSDs) and International CSDs (ICSD), the cross-border settlement of
securities transactions is fraught with technical and legal difficulties. The ESCB is
currently seeking to overcome technical obstacles to effective linkages between
securities settlement systems by building on standardisation work in international
fora13. To be fully optimised, remaining legal impediments to the cross border
transfer and perfection of property titles should be removed14.

Clearing: Now well-established in trading in derivatives and fixed income securities,
multilateral netting and central counterparty functions are also becoming central to
mainstream equity trading. While this development supports efficient trading, it also
entails a concentration of systemic risk on the books of central counterparties. This
will be exacerbated by geographic consolidation which may result in some trading
systems being dependent on clearing functions performed in other Member States.

All authorised clearing houses are subject to continuous supervision and extensive
risk-management techniques15. The definition, supervision and enforcement of these
standards is undertaken predominantly at national level. EU level consideration of
these issues may now be warranted. This could focus on the key principles and
elements for regulation and supervision of clearing and the mechanisms needed to
ensure effective cooperation and communication between relevant supervisory
authorities.

In parallel with ISD modification, this common reflection should aim to establish a
clear understanding of the supervisory arrangements for clearing houses needed to
preserve the stability of an integrated system for securities trading.

• Respondents are invited to comment on practical problems relating to access to
partner country clearing and settlement systems, and the nature of legal and
administrative impediments to cross border securities settlement.

• On which areas should securities supervisors focus their attention when
considering possible cross-border ramifications of consolidation of clearing and
central counterparty functions? What safeguards might be most effective in
managing such risks?

13

14

15

G-10/IOSCO (International Organisation of Securities Commissions) joint task force for defining
principles for securities settlement
transactions (modelled on the “Lamfalussy” standards for
systemically important payment systems.
These problems are particularly marked for bearer securities.
These arrangements include regular mark-to-market revaluation of positions, calling in of losses, use of
initial and intra-day margin requirements, standards for money settlement, membership requirements
and capital adequacy provisions. These safeguards are subject to intensive surveillance.

18

5.

THE WAY FORWARD:

A comprehensive review of the ISD, as foreseen by the Financial Services Action
Plan, is a key element in the reform of the European legislative and supervisory
framework to meet the challenges of the new securities landscape. Updating of the
ISD can facilitate European progress towards enhanced liquidity, efficiency and
stability. Inaction risks undervaluing the positive externalities and public goods that
efficient securities markets, characterised by transparency and integrity, embody for
the overall economic system.

In view of the numerous issues relating to interpretation and implementation of many
ISD provisions which have arisen over the life-time of the ISD, the Commission
is to provide an
considers that the ISD should be extensively overhauled if it
operational passport for investment firms. This is the only means of delivering the
requisite legal certainty and clarity.

• In the event that respondents see merit in the elaboration of EU high-level
principles for “regulated markets”, they are invited to indicate whether these
elements be encompassed in a single extended ISD or whether high level
principles on regulated markets be devolved to a self-standing item of EU
legislation? What level of urgency should be attached to the adoption of high level
principles?

5.1.

The form of revised ISD:

The pace of change in financial markets,
the dangers of codifying detailed
implementing provisions in EU law, are overwhelming arguments in favour of an
ISD which is confined to a core statement of principles. These principles should
reflect clear set of underlying principles, based on Treaty freedoms, and lend
themselves to unambiguous interpretation.

An ISD which is confined to a statement of high-level principles must not lead to a
proliferation of national interpretations and implementing provisions. Continually
updated guidance on the definitions and provisions of the ISD will be needed to
ensure that the Directive provides gilt-edged investor protection and effective market
access. This will a coherent and structured approach to (1). formulating up-to-date
interpretations of concepts; (2). fostering continuous real-time cooperation between
national authorities and (3). ensuring common standards of enforcement and
implementation at the level of front-line supervisors. Channels are also needed which
allow supervisors and enforcement agencies to draw the attention of the legislator to
substantive problems called for regulatory action, and devising solutions.

These issues are currently the focus of deliberations by the Committee of Wise Men
on Securities markets which is scheduled to issue a final report in the first half of
2001. The conclusions of that Committee will hopefully provide a blueprint for EU
legislation which combines legal clarity and certainty with responsiveness to market
developments as well as even-handed and rigorous enforcement.

19

5.2.

Guiding principles for revision of the ISD:

Clearly, the prevailing fluidity in market conditions makes the preparation of EU
legislative initiatives more complex. The issues which are to the forefront now may
not be the predominant concerns once market outcomes have stabilised. On the other
hand, change is needed to harness efficiency-enhancing developments which might
otherwise be stifled or considerably delayed. Furthermore, in the absence of a
collective regulatory or supervisory, market developments in a subset of EU Member
States may dictate the shape of market models and regulatory paradigms for years to
come. Failure to act now could present EU policy-makers and market practitioners
with a solution which is sub-optimal when viewed from a collective or longer-term
perspective.

A number of guiding principles will help to ensure that the ISD successfully rises to
the challenges of the new securities trading environment:

• A revised ISD should underpin an effective passport, effective competition
between securities trading platforms, which guarantee access on fair and non-
discriminatory basis to essential
trading infrastructures. Underpinning and
overseeing this open access condition will be critical to ensuring sustainable
competitiveness of the trading architecture.

• The promotion of Treaty freedoms must not come at the expense of investor
judicious
integrity and stability. This will
protection, market
harmonisation of key regulatory safeguards – particularly for the protection of
retail investors. The regulation and supervision of intermediaries is one of the
mainstays of investor protection and market integrity.

require

• the benefits of deep and liquid securities markets must be available to all issuers –
regardless of size: This objective will best be served by promoting the emergence
of deep and liquid markets, which are accessible on the basis of clear and up-to-
date rules and streamlined procedures. Reducing the content of disclosure
requirements for small issuers could prove counterproductive.

• the competitiveness of European financial marketplaces should be enhanced.
Vibrant and competitive securities markets, characterised by efficient trading and
settlement can be a powerful magnet for international capital inflows.

• European markets should be well-placed to take advantage of

imminent
globalisation of securities markets. Global 24-hour trading is on the horizon. The
European regulatory and supervisory framework should ensure that European
markets and firms benefit fully from this process and enjoy full access to third
country markets – a central theme of the next WTO Trade Round.

• regulatory bias towards particular business models or market structures must be
avoided. Rules which inadvertently favour particular business models or market
structures could stifle innovation and damage the competitiveness of EU markets.
The design and application of rules must also be neutral in terms of market-model
or technology. Finally, regulatory and supervisory arrangements for equity trading
are not necessarily appropriate for organised trading in other instruments such as
derivatives and fixed income securities. In designing and applying regulatory
provisions, a light-touch differentiated approach may be justified for markets

20

dominated by inter-professional activity. To meet
these different needs, ISD
provisions should embody a functional approach to regulating risk rather than
establish provisions which reflect an existing institutional landscape.

Comments are invited on the scope, presentation, and analysis of this discussion
paper and the detailed commentary on individual ISD provisions attached in the
working document of the Commission services.

21

Figure 1a:

Incoming service providers notified under Art. 18 ISD
(freeprovisionofservices)

825

845

843

795

814

657

537

398

171

s
n
o
i
t
a
c
i
f
i
t
o
n
f
o

.

o
n

900

800

700

600

500

400

300

200

100

0

Italy

France

Sweden Belgium Austria

UK

Ireland Germany

Lux,

Source: National securities supervisors. Situation, Sept. 2000.

Figure 1b:

Incoming service providers notified under Art. 17
(branches)

16

s
n
o
i
t
a
c
i
f
i
t
o
n
f
o

.

o
n

30

25

20

15

10

5

0

27

21

10

8

6

2

3

Italy

France

Sweden

Belgium

UK

Ireland

Germany

Lux,

22

- LIST OF ISSUES FOR COMMENT -

An effective single passport for investment firms:

• The effective operation of

requires a
reconsideration of the exemptions of Article 2(2) and 2(4), and an assessment of whether
some or any of the non-core services should be upgraded to core service.

the single passport

investment

firms

for

• ISD revision should clearly indicate how individual provisions should be tailored to
different core-services so as to avoid pronounced divergences in national supervisory
regimes which impede cross-border service provision. Respondents are invited to identify
those provisions of the ISD could be applied in a differentiated manners, and how they
should be adapted for the different core services.

• Home country supervision should be implemented without pre-condition for services
provided to professional counterparties. Apart from conduct of business rules, are there
other ISD provisions which could incorporate a clear and operational professional/retail
distinction?

• Respondents are invited to comment on regulatory and supervisory issues which call for
residual host country role on a transitional basis. What flanking conditions are needed as
a precondition before the phasing-out of residual host country responsibilities?

New forms of service provision:

• Which of the principles and requirements of Articles 10, 11 will be of most relevance in
catering for situations where Alternative Trading Systems (ATSs) provide infrastructure
services? Are other elements of the “investment firm” regime potentially relevant?

• In view of functional approach to the regulation of ATSs, which elements of the regulatory
transparency,

markets”
framework
monitoring/enforcement) could be of most relevance to different types of ATSs?

“regulated

reporting,

(e.g.

for

for

Effective competition between “regulated markets”:

• The requirements for “regulated markets” in terms of compliance with listing conditions
and criteria for admission to trading need to be clarified. This will also require a parallel
the successful
update of Directive 79/279. What
implementation of such an approach so as to preserve disclosure and safeguards the
quality of securities trading.

conditions are

required for

• The concentration rule of Article 14(3) and the right of prohibition of Article 15(5) need to
be reviewed with a view to reducing any disproportionate or unnecessary restrictions on
the cross-border activity of “regulated markets”

High level principles for “regulated markets”:

• The current definition and provisions of the ISD relating to “regulated markets” are
inadequate to contend with regulatory and supervisory challenges which result from the
intensification of competition and cooperation between exchanges. In which areas could
regulatory arbitrage across exchanges compromise the orderly, efficient and transparent
functioning of securities trading?

23

• Should high-level principles for markets be restricted to publicly accessible trading in
instruments. Should high-level
securities, or extended to organised in all
principles be tailored to the regulatory and supervisory risks associated with different
types of market or trading? Which provisions should be applied in a graduated fashion?

financial

• Respondents are invited to comment on whether and how certain principles might be
enshrined in EU law and which regulatory objectives should be the focus of attention?

• In the event that respondents see merit in the elaboration of EU high-level principles for
“regulated markets”, they are invited to indicate whether these elements be encompassed
in a single extended ISD or whether high level principles on regulated markets be devolved
to a self-standing item of EU legislation? What level of urgency should be attached to the
adoption of high level principles?

Promoting transparency:

• How should ISD provisions on transparency can be usefully upgraded? To what extent are
common approaches required to ensure that “off-market” trading does not unduly impair
efficient pricing of securities for all investors?

• Does the fragmentation of trading across different systems represent a threat to liquid and
efficient securities markets? What practical steps could be used to promote effective and
efficient price interaction across competing “regulated markets”?

Clearing and settlement:

• Respondents are invited to comment on practical problems relating to access to partner
legal and administrative

country clearing and settlement systems, and the nature of
impediments to cross border securities settlement.

• On which areas should securities supervisors focus their attention when considering
possible cross-border ramifications of consolidation of clearing and central counterparty
functions? What safeguards might be most effective in managing such risks?

24

- TABLE OF CONTENTS -

EXECUTIVE SUMMARY -.................................................................................................. 2

1.

Introduction: ................................................................................................................ 5

1.1.

1.2.

Implementing the conclusions of the Lisbon European Council: ............................... 5

Structural changes in EU financial markets:.............................................................. 6

2.

Assessment of the ISD:................................................................................................ 6

2.1.

2.2.

Structure and design: ................................................................................................ 6

Structural limits to the effectiveness of the ISD: ....................................................... 8

3.

A fully operational single passport:.............................................................................. 9

3.1.

3.2.

3.3.

Clarifying and extending passport rights:.................................................................. 9

Protecting investors and managing supervisory overlap: ......................................... 10

New players – Alternative Trading Systems: .......................................................... 11

4.

Regulated markets and the trading infrastructure:....................................................... 12

4.1.

4.2.

4.3.

4.4.

A single passport for “regulated markets”:.............................................................. 13

High-level principles for “regulated markets”: ........................................................ 15

Transparency:......................................................................................................... 17

Clearing and settlement: ......................................................................................... 17

5.

The way forward:....................................................................................................... 19

5.1.

5.2.

The form of revised ISD: ........................................................................................ 19

Guiding principles for revision of the ISD: ............................................................. 20

25