Deutsche Börse Group Response to the European Commission s Green Paper on Financial Services Policy (2005-2010) COM (2005) 177
1 A. Introduction Deutsche Börse Group welcomes the opportunity to respond to the European Commission s consultation on the Green Paper on Financial Services Policy (2005-2010) 1 and we look forward to participating in the further consultation process led by the European Commission. Deutsche Börse operates the Frankfurt Stock Exchange, which, via Xetra, can be accessed by members from all over Europe and beyond. In addition, Deutsche Börse, via its Swiss-German subsidiary Eurex, operates the world s largest global derivatives exchange. Through its 100 percent subsidiary Clearstream, Deutsche Börse is also a leading European provider of post-trade services for customers internationally. Deutsche Börse with its wide business scope and international presence has a direct interest in promoting further progress in European financial market integration. B. General Remarks The European Commission has achieved considerable progress towards the formation of an integrated regulatory framework for financial services in the European Union. We welcome the Commission s effort to give market participants a chance to be actively involved in its reflection on market integration going forward. As in the past, Deutsche Börse is a strong supporter of financial market integration and will try to contribute this process in the future. We believe that more work remains to be done given the persistence of different national corporate law and tax systems, or established market practices. Member States are now in the process of transposing these rules into national law. As the recently published financial integration monitor 2 has made clear: coherent national implementation is key now. We therefore strongly support the Commission to give first priority to ensuring that the directives are consistently transposed into national law and subsequently enforced accordingly. This will demand important efforts on the part of national legislators and regulators as well as market participants. We therefore agree with the Commission that new legislative projects should only be started if a need for them has been specifically and clearly proven by sound cost-benefit analysis. Only through such process overregulation can be avoided. 1 The European Commission, Green Paper on Financial Service Policy (2005-2010), COM (2005) 177, 2 May 2005. 2 The European Commission, Commission Staff working document, Financial Integration Monitor 2005, SEC (2005) 927, 8 July 2005.
2 C. Specific Comments 1. Commission s financial services policy and key political orientation The Commission would be interested to hear from stakeholders: - whether they agree with the overall objectives for the Commission s policy over the next 5 years; - whether they agree with the key political orientation described above. Deutsche Börse basically welcomes and supports the objectives for the Commission s policy for the next five years as stated in its Green Paper. In particular, we attach special importance to the focus on implementation and consolidation of legislation. Ensuring the effective transposition of European rules and enforcement by supervisory authorities should be given priority over new legislative initiatives. In general, we would like to point out that there are considerable ex ante adjustment costs for national supervisors and market participants concentrated over the period 2005-2007 for implementation. The problems regarding the technical adjustments and the costs involved call for a focus on implementation over the next years. In that context, the Commission should also look at the effect of the sunset clauses and revision clauses in Financial Service Action Pan 3 (FSAP) legislation. This will induce renewed discussion on texts starting in 2007 already. We also wonder whether some of the reviews are not happening too early, before the markets have had time to gain relevant experience with the application of the new legislation in practice. Overall we welcome the Commission s approach of better regulation as the guiding principle for the post-fsap approach and agenda. We encourage the Commission to find ways of filling this principle with life in practice. This could mean publication and intensive discussion of regulatory impact assessments. 2. Better Regulation, transposition, enforcement and continuous evaluation The Commission would be interested to hear from stakeholders: - whether they agree with the priority measures identified; and - which additional measures should be taken to foster consistent application and enforcement of European legislation. Deutsche Börse also supports the clear intention of the European Commission to use the "better regulation" principles for future legislative process. This procedure requires intensive cooperation of the involved parties, especially those companies affected by possible legislative actions. 3 The European Commission, Implementing the frame work for financial markets: Action Plan, COM (1999) 232, 11 May 1999.
3 A pro-active regulatory policy aiming for the qualitative improvement of regulation is needed in the European Union and in each of its member states. An excessive burden by European and national regulation must be avoided. The most important element of a better regulation is the use of impact assessments. We think that impact assessments are a useful tool to enhance the quality of the political decision-making process. Impact assessments could contribute to a more targeted approach to achieve a balanced new legislation. A regulatory policy, which aligns itself consistently to the fact that law measures should be applied only if there is evidence for their necessity, will enhance the quality of regulation. It is an important step to prevent unintentional side effects of the financial market regulation, as for instance the impairment of the competitive ability of European financial service providers. However, an impact assessment is not a panacea by itself, which could halt a flow of burdensome regulation. The use of an impact assessment is restricted by a variety of methodological shortcomings, notably by the fact that quantifications in the field of financial market legislation are difficult to ascertain. Qualitative aspects such as financial market stability, or investor and consumer confidence are difficult to gauge in a satisfying manner. Against this background, the real value of an impact assessment lies in the process of quantifying costs and benefits of a proposed legislation rather than its concrete results. Impact assessments constitute an add-on to the political decision-making process and contribute to set this process on a more objective basis. They cannot serve as a substitute for a diligent political judgment. We recommend that the implementation of regulatory impact assessments should follow four overarching principles: Neutrality It is important to maintain neutrality during implementation processes in order to assure the objectivity of the impact assessment. The afore mentioned methodological difficulties in measuring the quantitative and qualitative consequences of legislation could otherwise entail the risk that impact studies are used in order to block or promote certain measures. In our opinion, it seems desirable and practicable to create an agency within the Commission as a neutral instance specialised in the evaluation of impact assessments. This agency should be independent of the DG (Internal Market), which submits the legislative proposal. Timeliness Regulatory impact assessments should be launched at a very early phase of the legislative process. For practical reasons, it would seem advisable to decouple the publication and discussion of impact assessments from the final legislative proposal. Instead, an impact assessment may be commissioned already for drafting the early stages of fact finding, i.e. communications. The goal at this stage should be to get a better understanding of the market structure and its dynamics and test a variety of concrete regulatory options.
4 Should it be necessary, an additional impact assessment could be initiated in the context of the publication of a possible draft directive. Consultation Impact assessments should be accompanied in view of the methodological difficulties, by comprehensive consultations with all relevant groups including market participants. Transparency Fourth, the implementation of the impacts assessments should be as transparent as possible. In particular the assumptions and the details of the calculation processes should be made public. As long as no data protection laws or professional secrets are affected, the respective studies should be published. Thereby, the market participants would have the opportunity to examine the results of the impact assessments. It is also necessary to present how the quantification process was accomplished and how the possible data uncertainties and problems were dealt with. The elaboration of these principles should take place in close cooperation with the concerned market participants and the stakeholders. The Impact Assessment Guidelines 4 submitted by the European Commission in June 2005, provide a good starting point for this. The overarching principles of the implementation of regulatory impact assessments should be compiled in an impact assessment-codex, in which the approaches and techniques to handle uncertain data and the role of the consultation process are outlined. Such codex would encourage the legislators and market participants affected by the regulation, to accept the impact assessment methods as objective. 3. Consolidation of financial services legislation over the 2005-2010 period The Commission would be interested to hear from stakeholders: - whether they agree with the identified measures where the Commission might decide to take no action, or if there are other concrete areas where the Commission should not bring forward proposals presently in the pipeline or, indeed, areas where the Commission should consider withdrawing; - their assessment if the existing regulatory and supervisory framework is sufficient to tackle the supervisory challenges in the year ahead, what gaps and how these can be filed most effectively; - what are the objectives, sectors to be covered and the priority areas in regulatory and cooperative activities on a global scale. As a starting point, we would like to emphasise that the European Commission should commit itself to acting only where European initiatives bring clear economic benefits to industry, markets and consumers. Furthermore, we would appreciate the realisation of potential synergies and by reducing overlaps with the competition and consumer policy. 4 The European Commission, Impact Assessment Guidelines, SEC (2005) 791, 15 June 2005.
5 In practice it should be ensured that the rules are consistent. In that context, we see a strong need to ensure that the leeway for discretion in the transposition of EU legal initiatives into national law is limited in order to avoid regulatory arbitrage. Clearing and settlement Deutsche Börse sees no need for a special directive in the post-trade area (clearing and settlement) at this point of time. Instead, we very much support the ongoing work of various experts groups initiated by the European Commission like CESAME, Legal Certainty Group, or the Fiscal Compliance Group/FISCO to remove barriers on cross-border transactions of securities within the EU wherever possible on a self-regulatory basis. The overall aim of these activities is to arrive at market-driven solutions, which has always been the favoured approach for Deutsche Börse. We therefore strongly welcome the fact that the Commission has embarked on a detailed impact assessment for post-trade services regulation. Such an impact assessment would need to be published and open for discussion prior the start of the legislative process given the complexity of the issue and ongoing work on definition. We support the Commission s continuing effort for open consultation and ongoing dialogue with market player in this area. Should the Commission consider legislative action to be required, a fully functional approach would need to underpin all measures in order to protect the competitive level-playing field. We believe it is competition and not regulation in e.g. the international debt market that has helped create a huge and efficient market. It did not need a directive or other regulatory interference to bring together the world s financial intermediaries creating a liquidity pool for Eurobonds being served by the two International Central Securities Depositories (ICSDs). In this respect, we fully support the Kauppi Report 5 on clearing and settlement. The report clearly states that there is direct competition between all service providers. Furthermore, this report demands a functional approach to legislation, regulating services rather than entities in order to assure a level playing field between different types of service providers, which from our perspective is a much more sensible way to look at this subject. It should be clear that regulation is not neutral to competition but this is exactly the challenge for regulators: making sure that when they change the rules of the game a level playing field is preserved among all market participants. Hague Securities Convention The Hague Securities Convention, dealing with conflict of law issues, aims at harmonising the choice of law on securities regarding the applicable law for transfer of title and the creation of security interest. According to the Convention, only the law of the account agreement between the account holder and the respective custodian determines the applicable law for proprietary aspects. In contrast to this approach, in Germany and 5 P6_TA-PROV(2005)0301, Clearing and settlement in the EU, Committee on Economic and Monetary Affairs, PE 353.491, European Parliament resolution on clearing and settlement in the European Union (2004/2185(INI)).
6 other EU member states, the applicable law refers traditionally to the place where the securities are located at the time of transfer (lex rei sitae). Therefore, although harmonisation in this area is generally welcomed, such an initiative should bring clear benefits to all market participants, especially regarding the compatibility with existing substantive EU legislation and investor protection rules. Deutsche Börse therefore welcomes the impact assessment undertaken by the EU Commission on order to help member states take a decision on its ratification and to assess potential follow-up measures needed at a European level. European Financial Supervision In general, we support the reflections of the European Commission about a strategy for the further harmonisation of financial supervision, especially in the securities markets area. An efficient and effective supervision of financial institutions is a key element to improve growth and integration of European financial markets. We think the appointment of a fully empowered lead supervisor for each financial institution is considered to be a realistic way to achieve this goal, as explained in a recent European financial services roundtable paper. 6 At the same time, we need to keep in mind that the establishment of a centralised European securities supervisory system is a long term project. For the time being it is essential that the current framework in the EU already improves the available opportunities for a successful cooperation of supervisors of companies that are active in various member states. 7 We see space for improvement, especially with respect to cross-border activities. It could indeed come as a relief for some institutions if these services were supervised only by one lead supervisor. Such a streamlining of regulatory responsibilities could involve significant synergies both on the side of authority and the regulated entity in all financial sectors. Therefore, we would support endeavours to improve the existing framework through increased cooperation. We wonder whether introducing an opt-in lead supervisor for cross-border financial services at the discretion of market participants is feasible. A concept of a lead supervisor is introduced in practice through the EU implementation of Basel II rules. We would encourage the Commission to evaluate whether an opt-in solution can be introduced in other fields for market players operating in many European members states and wishing to centralise supervision. However, in many cases, closeness to clients in supervisory arrangements is a competitive advantage and should thus not be relinquished too rapidly. 6 European Financial service Round Table (efr), On the lead supervisor model and the future of financial supervision in the EU. Follow-up recommendations of the efr. June 2005, p. 4. 7 Existing Memoranda of Understanding (e.g. the cooperation between the German and the Luxembourg supervisory authority (BaFin and CSSF) for Clearstream International with respect to Clearstream Banking) basically demonstrates that, even without any legal or institutional changes at the EU level, regulatory cooperation can be made to work.
7 Cross-border consolidation We support the ongoing effort of the European institutions to reduce barriers to cross-border consolidation and in particular the Commission s renewed focus on this field with its consultations and competition enquiries. The Commission should indeed ensure a reduction and eventually abolition of all discriminatory rules within the EU. This is an important step for assuring and improving the international competitiveness of the European financial services industry. Players can only generate sufficient economies of scale if they can also merge across borders and function on a daily basis as smoothly as possible with activities in several EU member states. In practice, many issues will only be solved through the reduction of legal and fiscal barriers to integration, which in turn is a worthwhile but difficult and long-winded task. External dimension While the Commission has achieved significant progress in their negotiations with the US, there are still a number of open issues, among them the admission of trading screens and the recognition of international accounting standards. We would appreciate the Commission giving continued priority to these remaining open issues despite the lack of progress especially as concerns the trading screens issue. The extension of bilateral dialogue to other countries should be seen in the context of multilateral dialogue within the World Trading Organisation (WTO) where financial services are finally reaching the top of the agenda. 4. Possible, targeted new initiatives The Commission would be interested to hear from stakeholders: - whether they agree with the new identif ied priority areas; - what are the (dis)advantages of the various models for cross-border provision of services, whether there is a business case for border provision of services, whether there is a business case for developing a 26th regime, and which business lines might benefit; - how to enable consumers to deal more effectively with financial products and whether this means more professional and independent advice, improved education or financial literacy training are needed; - whether they agree with the issues identified in the above list retail products, or if they would suggest other areas where additional action at EU level could be beneficial. Asset Management Services We welcome any initiative which further stimulates product innovation and the EU-wide distribution of new products. An extension of the definition of Undertakings for Collective Investment in Transferable Securities (UCITS) should help the competitiveness of EU financial markets and give investors access to a broader, more competitive and innovative range of products while assuring minimum regulatory standards.
8 Deutsche Börse would welcome a revision of the UCITS Directive in the way of the mutual recognition concept as laid down in the Prospectus directive to ensure that the approval of a fund in its home member state should have full recognition in all host countries, without the need for any additional registration process. We think that the scope of an EU legislative framework should be extended to cover new asset classes in which funds are allowed to invest. Examples to be considered are for example derivatives, real estate or non-listed securities. We would prefer a rapid extension of the product definition to a lengthy overhaul of the directive in order to include harmonisation of the distribution channel. This would deliver results more quickly and does not prevent further, more fundamental measures in a second step. We hope that you have found these comments useful and remain at your disposal for further discussion. If you have any further questions please do not hesitate to contact: Dr. Stefan Mai or Henriette Peucker Deutsche Börse Group Market Policy Section Phone: +49-69-211-13980