BVR. By . The Committee of European Securities Regulators Mr Demarigny Secretary General. Dr. La - sk Berlin, 20 January 2005

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1 BVR The Committee of European Securities Regulators Mr Demarigny Secretary General By Bundesverband der Deutschen Volksbanken und Raiffeisenbanken BVR Schellingstraße Berlin Postfach Berlin Telefon (030) Durchwahl: Telefax (030) info@bvr.de Dr. La - sk Berlin, 20 January Consultation on CESR s Draft Technical Advice on Possible Implementing Measures of the Directive 2004/ 39/ EC on Markets in Financial Instruments, 2 nd Set of Mandates Ref.: CESR 04/ 562 October 2004 here: Response to Section III Markets Dear Mr Demarigny, May we introduce our association: As the central organization of the cooperative banking group the Federal Association of German Cooperative Banks functions as promotor, representative and strategy partner of its members German Volksbanken and Raiffeisenbanken with over 15 million members and some 30 million customers are a pillar of German banking and a major force in the German economy. For sections I and II of the Consultation Paper we would like to refer to the answers of the Zentraler Kreditausschuss which we, as a member, of course fully share. Our additional response to the Consultation Paper focuses on Section III Markets as follows.

2 2 In general we support CESR s approach to these very technical items related to internalisation. As for the method, we could have thought of a different approach. CESR seems to use a top down- instead of a bottom up-approach. Recalling the work performed by FESCO with regard to the ATS, starting with a close look at the existing internalisation systems could have also been a way. However, some corrections are necessary going into the details of the questions. The main issue concerns the definition, which seems to go far beyond the scope of the Directive and would need to be narrowed. In this respect it should be noted that CESR definition, leaves totally aside the exclusion of the OTC-trade from the meaning of systematic internalisation which is expressis verbis mentioned in the Recital 53 of the Directive. Detailed remarks are outlined as follows: Question 7.1.: In your view, what types of arrangements other than RMs and MTFs could be considered as complying with article 22.2? Delivering the limit order to an internalising system could also comply with article Following the Directive it should be also sufficient to make the limit order public in an accessible manner. Question 7.2.: Do you consider the proposal on publishing the client limit order in a quote-driven system appropriate? No, because transferring the order to a venue with a not public order book must be possible because it is a normal way to the execution of the (limit) order. The concept of transparency would be exaggerated denying this.

3 3 Question 8.1.: Do consultees agree with criteria for determining systematic internaliser? Should additional/other criteria be used and if so, what should these be? In general we share the proposed way to find a qualitative approach rather than a quantitative one. CESR seems to use a top down-approach instead of a bottom up-approach. To start with the existing internalisation systems as FESCO delivered a list of the existing MTFs could be also a way. In detail there should be some corrections. For instance, the definition of systematic internalisation goes far beyond the scope of the Directive and tends to be a catch-all. In the first indent it has an obvious problem of logic by using the explanandum as an explanans. The wording the use of a business model seems to be applicable to nearly everything. This is not acceptable. To use the business model could mean for example to use the internalisation system of another investment firm, i. e. to bring the client orders to that venue with the consequence of having the obligations of an internaliser which could not be meant. Another point is that OTC-trade should be outside the scope of systematic internalisation which is clearly stated in recital 53. The text on page 61 refers to this recital without any consequence for the definition. The second indent has no meaning at all in our view because there are always some guiding principles and rules for every business in an investment firm. Question 8.2.: Should the criteria be fulfilled collectively or used separately? The (improved) criteria should be fulfilled cumulatively otherwise there is no clear picture.

4 4 Question 8.3.: Should CESR set criteria for the term frequent? If so, do consultees support the setting of numeric criteria or do they believe that a more flexible approach would be useful? What should these criteria be? As mentioned above under 8.1 we prefer a qualitative manner of definition instead of catching figures which must necessarily oscillate. Question 8.4.: Do you agree with the proposed obligation to disclose the intention to cease systematic internalisation? Should CESR propose more detailed proposals on this and if so, what should be the appropriate notice period? It must be possible to stop internalisation in a share and to get rid of the obligations. There should be a notice period of maybe some days to inform the market of the decision. Question 8.5.: Should liquidity be measured on an EU-wide or national basis? Liquidity of shares is a worldwide phenomenon. Therefore only an EU-wide approach could be appropriate. Question 8.6.: Do consultees have a preference in favour of setting pre-determined criteria or using a proxy approach? There are empirical ways to measure the liquidity of a share, but this may be very costly. For this reason we have a preference for using a proxy approach.

5 5 Question 8.7.: Regarding the different criteria described above, do consultees agree with the analysis of each of them, and are there other methods which should be evaluated? No comment. Question 8.8.: Is it possible and/or appropriate to use for the purposes of article 27 a combination of absolute and relative criteria to define shares as liquid? No comment. Question 8.9.: Do consultees consider the proposed figures (i.e. 480 trades per day and 95% of total trading) as appropriate? If not, and where no figures are suggested what are the appropriate figures in your opinion? See answer to 8.3. Question 8.10.: Do consultees agree with the analysis of the relative merits and drawbacks of using proxies such as indices? Yes, we agree. Question 8.11.: Which criteria would best accommodate the needs of different markets within the EU?

6 6 No comment. Question 9.1: Do you agree with CESR s approach of proposing a unified block regime for the relevant provisions in the Directive or do you see reasons why a differentiation between Art.27 MiFID on the one hand and Art.29, 30, 44, 45 MiFID on the other hand would be advisable? A unified block regime seems to be the intention of the Directive as well as a practical necessity to prevent confusion in the market with regard to this very important definition for the trade. Question 9.2: Would you consider a large number of SMS classes, each comprising a relatively small bandwidth of arithmetic average value of orders executed, as problematic for systematic internalisers? For practical reasons it would be better to have a small number of SMS classes. Question 9.3.: In your opinion, would it be more appropriate to fix the SMS as monetary value or convert it into number of shares? SMS should be expressed as a value, not as a number of shares, because the number of shares fluctuates with corporate events (such as splits) without affecting the market capitalization, and because the value of a given number of shares is very volatile.

7 7 Question 9.4.: Do you consider subsequent annual revisions of the grouping of shares as sufficient or would you prefer them to be more frequent? Should CESR make more concrete proposals on revision? In particular, should the time of revisions be fixed at level 2? It is an empirical subject to test whether there should be shorter revision periods as a year. Question 9.5.: Do you support the determination of an initial SMS by grouping the share into a class, once a newly issued share is traded for three months, or do you consider it reasonable to fix an initial SMS from the first day of trading of a share by using a proxy based on peer stocks? There could be a proxy approach for an IPO. Question 9.6.: Do you consider a two week period from publication as sufficient for systematic internalisers to adapt to new SMSs? No comment. Question 9.7.: Do you agree on the proposal on publication of the classification of shares? Would you prefer the establishment of a single contact point (at level2)? There should be a single information point about the classification of shares.

8 8 Question Do Consultees consider that there might be specific regulatory issues and specific provisions needed where a systematic internaliser is the trading venue with the largest turnover in a particular share falling within the scope of Article 27? We see no legal basis for this in the MiFID. Question 10.2: Do consultees agree that the availability of quotes during 100 % of normal trading hours of the firm is reasonable and workable requirement for on a continuous basis? Yes. Question 10.3: Do consultees think that publication of quotes solely on the firm s own website meets the easily accessible -test? There should be an overall concept of pre trade- as well as post tradeinformation for investment firms, exchanges and MTFs which should follow comparable lines for the sake of a consistent concept of information transparency. The answer to this question depends on this concept because the way to publish the internalising quotes should fit into this overall concept of transparency. Up to now we cannot see the concept which CESR follows in this respect. One option to solve the problem is to leave it to the market of information providers. Special obligations for internalisers would be superfluous then. Question 10.4.: Do you agree with the proposed general criteria for determining when a price or prices reflect market conditions or do you think that more specific criteria should be added? In the latter case; which criteria do you think should be added?

9 9 We agree. Question 10.5: Do you prefer either of the criteria defining exceptional market conditions, and should those criteria be supplemented by an open list of exceptional market conditions? It does not seem to be possible to enumerate all exceptional market circumstances in a complete list. Therefore some orientation at other venues should be necessary, i. e. at regulated markets. Question 10.6.: Are there exceptional market circumstances where a systematic internaliser should be able to withdraw its quotes even though a trading suspension has not been called by the regulated market In the latter case, which market conditions should be added to an open list? See above answer to Question 10.7.: Do you agree that the proposed approach to the updating of quotes is acceptable or would you prefer more specific criteria? In the latter case, which criteria could be added? We agree on the advice.

10 10 Question 11.1: Do consultees agree that it is unnecessary for CESR to provide additional advice in respect of the handling of client orders where a systematic internaliser publishes multiple quotes? In the case of an order of a size between 2 quotes it is obvious that the internaliser will choose the better price for him without rules preventing him from doing so. The outcome of this is that the client has to be aware of this guiding principle. It will be necessary to observe the market practice in future in this respect. Question 11.2.: Would there be any benefit to CESR making more detailed recommendations concerning how a firm should set the number and/or volume of orders that represents the norm? If so, what form should they take? We cannot see the value of additional advice of CESR to internalising systems in this respect. Question 11.3: Do consultees agree with the definition of a transaction where execution in several securities is part of one transaction? In particular, is there a need to specify a minimum number of securities and if so, what should the number be? The figure of 10 securities to meet the needs of classification as a portfolio transaction seems to be too high. Question 11.4.: Do consultees agree with the approach to "orders subject to conditions other than current market price"?

11 11 Yes. Question 11.5: Should the size be based on a EU-wide criteria or would national approaches be preferred? An EU-wide approach should be used. Question 11.6: Do consultees prefer having a fixed threshold for all shares, or should the size be linked to the grouping of shares (and subsequently to the SMS of each class) or to some other factor? If so, which? For practical reasons one figure seems to be preferable. Question 11.7: If a threshold is set, how should it reflect the different sizes around the EU, i.e. should it be the highest retail size, the lowest or something in between? The threshold should mark the borderline between retail and institutional business and could be answered by CESR because of the data which the investment firms are obliged to deliver to the national supervisors. Yours sincerely Federal Association of German Cooperative Banks/ Bundesverband der Deutschen Volksbanken und Raiffeisenbanken e.v. by proxy (Dr. Klaus Möller) (Dr. Diedrich Lange)