Opinion of the European Central Bank of 7 May 2003 at the request of the Belgian Ministry of Finance on a draft proposal for a Royal Decree on the off-exchange market for linear bonds, strips and treasury certificates (CON/2003/7)
Date: 2003-05-07
Institutions: European Central Bank
Subjects: Belgium, financial stability, financial supervision, national law, payment system, public borrowing

EN

OPINION OF THE EUROPEAN CENTRAL BANK

of 7 May 2003

at the request of the Belgian Ministry of Finance

on a draft proposal for a Royal Decree on the off-exchange market for linear bonds, strips and

treasury certificates

(CON/2003/7)

1. 

On 10 April 2003 the European Central Bank (ECB) received a request from the Belgian Ministry

of  Finance  for  an  opinion  on  a  draft  Royal  decree  on  the  off-exchange  market  for  linear  bonds,

strips and treasury certificates (the draft decree).

2. 

The ECB’s competence to deliver an opinion is based on Article 105(4) of the Treaty establishing

the European Community, the second indent of Article 4(a) of the Protocol on the  Statute  of the

European  System  of  Central  Banks  and  of  the  ECB,  and  the  third,  fifth  and  sixth  indents  of

Article 2(1)  of  Council  Decision  98/415/EC  of  29 June  1998  on  the  consultation  of  the  ECB  by
national  authorities  regarding  draft  legislative  provisions1,  since  the  draft  decree  contains

provisions regarding (i) the organisation, regulation and supervision of an off-exchange market for

government  securities,  in  which  both  the  National  Bank  of  Belgium  (NBB)  and  private  credit

institutions may participate; (ii) operations carried out by the ECB, by the NBB on behalf of the

ECB or by the other national central banks of the Eurosystem in the implementation of monetary

policy;  and  (iii)  the  settlement  by  the  NBB  of  certain  transactions  concluded  on  this  market.  In

accordance  with  the  first  sentence  of  Article  17.5  of  the  Rules  of  Procedure  of  the  ECB,  the

Governing Council of the ECB has adopted this opinion.

3. 

On 18 March 2002 the ECB was consulted on a draft Belgian law on prudential supervision of the

financial  sector  and  financial  services  (the  Law).  The  ECB  rendered  its  opinion  on  this  draft  on

24 April 2002 (CON/2002/13). The Law was adopted on 2 August 2002 and will enter in to force

on 1 June 2003. The Law provides that the Belgian King may implement certain provisions of the

Law by royal decree. The objective of the draft decree is to implement two provisions of the Law

regarding the organisation, membership, transparency and supervision of the off-exchange market

for  linear  bonds,  strips  and  treasury  certificates,  which  are  financial  instruments  issued  or

guaranteed  by  the  Belgian  State.  Considering  the  particular  nature  of  a  regulated  market  for

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OJ L 189, 3.7.1998, p. 42.

                                                     
government securities - i.e. a decentralised market with only one issuer (the Belgian State) and with

primarily professional investors - the ECB broadly welcomes the draft decree.

4. 

The ECB notes that Article 1, 8º, of the draft decree defines “market member” as an “institution

that belongs to one of the categories of institutions referred to in Article 3”. Considering that both

Article 3, §1, of the draft decree and Article 2, 10º, of the Law to which this Article 3, §1, refers

use the term “qualified intermediary”, it could be helpful if Article 1, 8º, of the draft decree also

defined  “market  member”  as  an  “intermediary  that  belongs  to  one  of  the  categories  of

intermediaries referred to in Article 3”.

5. 

The  ECB  notes  that  the  third  paragraph  of  Article  3,  §1  of  the  draft  decree  specifies  that  the

“quality  of  member  is  acquired  either  as  a  matter  of  law,  or  by  a  simple  notification  to  the

Committee or by a Committee decision taken pursuant to a request to obtain the quality of market

member”. Although the draft decree sets out how membership is acquired as a matter of law (see

Article 3, §2, of the draft decree), it defines neither the difference between the two other means of

acquiring  membership  nor  the  categories  of  qualified  intermediaries  to  which  these  two  means

apply. The ECB notes in this respect that Article 2bis of the Royal Decree of 22 December 1995 on

the  organisation  of  the  secondary  off-exchange  market  for  linear  bonds,  strips  and  treasury

certificates  (“the  Royal  Decree  of  22  December  1995”),  which  the  draft  decree  is  intended  to

replace,  also  contains  three  similar  options  for  acquiring  membership.  However,  it  explicitly

mentions which intermediaries fall under each of them. It is proposed that the draft decree should

also state which categories of qualified intermediaries (other than those mentioned in Article 3, §2,

of the draft, who are members as a matter of law) may become members by simple notification or

by Committee decision pursuant to a request for membership. The ECB suggests that the ECB and

the other central banks of the Member States of the European Economic Area, which are listed in

Article  2,  10º,  h),  of  the  Law,  are  categorised  as  qualified  intermediaries  who  may  become

members by simple notification to the Committee.

6. 

The ECB notes that Article 4 of the draft decree specifically deals with the issue of market makers,

who are in charge of contributing to the liquidity of the market (the ECB would point out that the

Dutch version of the draft refers to “verhogen van de liquiditeit” (“increasing the liquidity”). The

ECB  also  notes  that  this  Article  is  drafted  along  the  lines  of  Article  8  of  the  Royal  Decree  of

22 December 1995. However, in contrast to Article 8 of the Royal Decree of 22 December 1995,

Article 4 of the draft decree refers to “primary dealers” without further specification. Therefore, the

following  proposed  clarification  to  Article  4  of  the  draft  decree  could  usefully  be  added:  “The

Minister  of  Finance  shall  establish,  as  necessary,  organised  bodies  of  market  makers  who  are  in

charge of increasing the liquidity of the market, called ‘Primary Dealers’. (…) Through the signing

of the terms and conditions by the Primary Dealers a contractual relationship arises between them

and the Belgian State and the Primary Dealers automatically become market members”. The ECB

further  notes  that  on  international  financial  markets  the  terms  “market  makers”  and  “primary

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dealers” have different meanings and refer to different functions. The term “primary dealers” refers

to credit institutions formally chosen by the issuer (the Treasury Ministry) on the basis of the fact

that  they  guarantee  regular  participation  in  the  primary  market  and  ensure  liquidity  on  the

secondary  market.  In  contrast,  the  term  “market  maker”  is  understood  as  meaning  dealers  who

decide to be active on the secondary market and thus ensure its liquidity. The ECB understands that

primary dealers in Belgian government securities also usually have  to  perform  functions on  both

the primary and the secondary market. Due to their role on the secondary market, Belgian primary

dealers are, thus, also market makers. However, given the conceptual difference between the two

terms,  they  should  not  be  used  as  synonyms  in  the  text  of  the  Decree.  Therefore,  Article  4  and

Article 3, §2, 6º, of the draft decree should be clarified on this point. Finally, the ECB notes that

Article  3,  §2,  6º,  of  the  draft  decree  mentions  that  “Primary  Dealers”  are  market  members  as  a

matter of law. The first paragraph of Article 3, §1 of the draft decree provides in this respect that

only “qualified intermediaries” as referred to in Article 2, 10º, of the Law (with the exception of

the entities referred to in Article 2, 10º, g) and i), of the Law) may be market members. However,

Article 2, 10º, of the Law does not refer to “Primary Dealers”. It would therefore be  good  if the

draft decree stated that “Primary Dealers” should be regarded as “qualified intermediaries” within

the meaning of the first paragraph of Article 3, §1 of the draft decree.

7. 

The  ECB  notes  that,  according  to  the  second  paragraph  of  Article  5  of  the  draft  decree,  the

Securities Regulation Fund (“RF”), which is both the market organiser and supervisory authority

under the draft decree, will establish the market rules for the off-exchange market. The ECB notes

and welcomes in this respect the fact that the penultimate paragraph of Article 5 of the draft decree

provides that specific market rules may be established for, amongst other things, operations by or

on behalf of the ECB or by the national central banks of the Eurosystem in the implementation of

monetary  policy.  However,  in  view  of  the  fact  that  the  basic  tasks  to  be  carried  out  through  the

Eurosystem as listed in Article 105(2) of the Treaty are not limited to monetary policy operations,

the  following  clarifications  to  the  penultimate  paragraph  of  Article  5  would  be  helpful:  “for  all

operations carried out by the ECB or on behalf of the ECB by the NBB, or by other national central

banks of the European System of Central Banks, in implementing their respective tasks, the market

rules may differ  from  the  general  market  rules.” The  ECB  also  points out that  national  law  (e.g.

rules established by the RF pursuant to the penultimate paragraph of Article 5 of the draft decree)

cannot unilaterally impose obligations on the ECB and the Eurosystem with regard to operations

conducted as part of their tasks. The ECB considers that the draft decree should explicitly confirm

both this and the fact that “when carrying out such operations, neither the ECB nor the NBB acting

on  behalf  of  the  ECB,  nor  the  other  national  central  banks  of  the  European  System  of  Central

Banks shall be considered to be members of the market”.

8. 

The ECB notes that the draft decree does not list the RF as a market member of the off-exchange

market  although,  pursuant  to  the  penultimate  paragraph  of  Article  5,  the  RF  can  carry  out

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transactions on this market. Furthermore, although the RF primarily guarantees market liquidity on

the (secondary) exchange fixing market of Euronext (Brussels) for the benefit of private investors,

the  legal  tasks  of  the  RF  do  not  exclude  it  from  intervening  directly  on  the  (secondary)  off-

exchange market for linear bonds, strips and treasury certificates to guarantee market liquidity for

the  benefit  of  professional  investors.  Indeed,  according  to  Article  2,  1º,  of  the  Law-Decree  of

18 May 1945 on the establishment of the RF (the Law-Decree of 18 May 1945), one of the tasks of

the RF is “to guarantee the liquidity of the secondary market for State securities, mainly [but not

exclusively] for the benefit of persons that act on this market outside the exercise of a professional

activity”. Should the draft decree not intend for the RF to become a market member when it carries

out transactions on the market, then, similarly to what is stated in Article 6, second paragraph, of

the Ministerial Decree of 26 August 2002 on the establishment of the rules of the exchange market

for bonds, the draft decree could also provide that the RF will not acquire the capacity of member

of the market if it carries out transactions on that market. Such a provision would be in line with

Article 14, §1, 2º, of the Law, according to which a royal  decree  may  allow  the  RF  to  carry  out

transactions directly on a regulated market for government securities without  becoming  a  market

member  for  this  purpose.  The  same  remark  would  then  apply  to  transactions  carried  out  by  the

Belgian State.

9. 

The  ECB  welcomes  the  fact  that  Article  6  of  the  draft  decree  contains,  for  reasons  of  market

transparency, guarantees with regard to informing the general public about the market conditions

on the market (e.g. information about quotes, interest rates and trading volumes).

10.  As  regards  the  supervision  and  enforcement  of  the  rules  regarding  the  off-exchange  market  (see

Articles 7 to 9 of the draft decree), the ECB notes that, whereas the Belgian Banking and Finance

Commission  (CBF)  is  the  supervisory  authority  under  the  Law,  the  draft  decree  provides  for  a

division of supervisory tasks between the RF and the CBF. The ECB understands that this division

is  permitted  under  Article  14,  §1,  4º,  of  the  Law  and  Article  2,  3º,  of  the  Law-Decree  of

18 May 1945.  The  ECB  understands  in  this  respect  that  the  RF  supervises,  on  its  own  behalf,

compliance with the rules applicable to the off-exchange market and the market members with the

exception  of  the  rules  laid  down  in  the  terms  and  conditions  between  the  Belgian  State  and  the

“primary dealers” (see Article 7, §1, of the draft decree), whereas the RF supervises, on behalf of

the CBF, compliance with the rules applicable to the transactions on the off-exchange market (see

Article 7, §2, of the draft decree). The ECB also understands that the CBF itself is only involved in

a supervisory inquiry undertaken by the RF, if the inquiry concerns rules applicable to transactions

on the off-exchange market (see the first paragraph of Article 7, §4 of the draft decree), but not if

the  inquiry  involves  rules  applicable  to  the  off-exchange  market  and  the  market  members  since

these rules are not explicitly referred to in Article 7, §4.

11.  The  ECB  further  understands  that  complaints  regarding  the  rules  applicable  to  the  off-exchange

market and the market members must be filed with the RF, which will carry out the inquiry on its

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own  behalf  (see  the  first  paragraph  of  Article  7,  §5  of  the  draft  decree).  However,  complaints

regarding  the  rules  applicable  to  transactions  on  the  off-exchange  market  must  be  filed  with  the

CBF, which will inform the RF thereof and the RF will, in principle, carry out the inquiry on behalf

of the CBF (see the second paragraph of Article 7, §5). The third, fourth and fifth paragraphs of

Article  7,  §5  of  the  draft  decree  are  thereby  not  entirely  clear  as  to  whether  the  CBF  is  only

involved in the inquiry carried out by the RF when the RF is acting on behalf of the CBF, or also

when  the  RF  is  acting  on  its  own  behalf.  It  could  be  helpful  if  the  draft  decree  clarified  this  by

including an explicit reference as is the case in Article 7, §4. 

12. 

In general, as regards this division of supervisory tasks, the ECB notes and welcomes the fact that

Article  7,  §7,  of  the  draft  decree  provides  that  the  RF  and  the  CBF  will  conclude  a  protocol  to

coordinate  these  tasks.  Such  a  protocol  will  contribute  to  increasing  the  effectiveness  and

practicality of the division of tasks and will limit coordination issues related to the splitting up of

supervisory tasks. The ECB also understands that, as a result of this division, the CBF will not be

involved in supervising the rules applicable to the  off-exchange  market  and  the  market  members

(not even within the framework of a so-called “secondary line supervision”), for which the RF shall

be  the  sole  supervisory  authority.  Considering  that  the  RF  is  also  the  market  organiser  for  the

market (see the first paragraph of Article 5 of the draft decree), that the RF establishes the market

rules (see the second paragraph of Article 5 of the draft decree) and that the RF itself can carry out

transactions on this market (see the third paragraph of Article 5 of the draft decree), it is important

to establish arrangements regarding independent control and the identification and management of

the potential adverse consequences of conflicts of interest, in particular where these conflicts may

arise  from  regulatory  and  supervisory  functions  delegated  to  the  market  organiser.  The  ECB

welcomes  in  this  respect  the  fact  that  decisions  of  the  RF  are  subject  to  judicial  review  under

Article 9 of the draft decree.

13.  The ECB notes that pursuant to Article 11 of the draft decree certain enforcement provisions in the

Law  (regarding  the  appointment  of  a  special  commissioner  and  the  levy  of  penalties)  are  not

applicable to the RF as market organiser. The ECB understands that this deviation from the Law is

permitted under Article 14, §1, 4º, of the Law and is justified by the public authority nature of the

RF.

14.  The  ECB  welcomes  the  fact  that  the  NBB  remains  pursuant  to  Article  12  of  the  draft  decree

entrusted  with  the  settlement  of  transactions  in  dematerialised  linear  bonds,  strips  and  treasury

certificates, which have been notified to its settlement system.

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15.  The  ECB  confirms  that  it  has  no  objection  to  the  competent  national  authorities  making  this

opinion publicly available at their discretion. This opinion will be published on the ECB’s website

six months after the date of its adoption.

Done at Frankfurt am Main on 7 May 2003.

The President of the ECB

[signed]

Willem F. DUISENBERG

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