ANNEX 1: DEFINITIONS AND SCOPE OF INVESTMENT SERVICES DIRECTIVE:
General comment: The following material is put forward as a basis for discussions on possible high level principles for “regulated markets”. The services of DG Internal
Market have sought to be as extensive as possible in identifying issues related to the implementation of core principles. Some aspects of these provisions may be more
suitably addressed in implementing measures, or supervisory convergence processes. The services of DG Internal Market would welcome any comments or suggestions
as to the appropriate boundary between matters to be addressed in primary legislation and alternative means of ensuring uniform and legally binding implementation of
these principles in respect of the proposals set out in this annex.
Core services:1
Definition
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Activity
Comment
Mediation (and arranging) of client orders:
New definition:
Arrangements (regardless of the degree of automation) which:
This definition seeks to clarify regulatory treatment of entities providing a range or services in the area of
facilitation of order matching including:
– Mediate client orders to authorised investment firms for
execution; and/or
 Order routing/arranging (pure reception/transmission);
– Facilitate the posting, communication or identification of  Introducing brokers;
trading interests by clients;
Without giving rise to any transaction to which the arranger is
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 Bulletin boards and other passive vehicles for identifying other side to trades;
An investment firm is authorised to carry out any or all of the following activities except under any conditions expressly foreseen by the Directive. A firm carrying out any of these activities must be
authorised as an investment firm in accordance with the relevant provisions of this Directive and relevant provisions of other Directives (CAD, ICSD, insider dealing/market abuse) as specified in this
Directive. The authorisation issued by the competent authority will clearly specify which of the different activities which the investment firm has been authorised to carry out at the time of last
notification/authorisation. The investment firm will only be entitled to provide those services for which it has received authorisation from its home authority in the EU.
party as agent or principal (needed to distinguish from Regardless of level of automation of system. These activities are treated in unclear manner in current ISD
“execution-only” or other types of broker), or involving any (inclusion of routing and transmission as core service, to be interpreted in conjunction with recital 13,
undertaking to secure performance of client orders.
exclusion under 2(2)g).
This new function will be an investment firm subject to CBR as modified to take account of limited investor
protection dimension, and fact that client will still require services of broker/dealer to secure execution of
transactions (the latter shall continue to owe duties of care to the client). Providers of these services shall
not manage accounts on behalf of clients and related protections of ISD/ICSD will not apply.
To what extent should these entities be functionally and commercially independent of authorised firms to
whom they route orders or direct clients? Will it be sufficient that these entities disclose any inducements
received from or relationships with other authorised intermediaries. Where arrangers or facilitators have
strong commercial or financial links with other authorised firms, how should they be distinguished from tied
agents which solicit business or collect orders on behalf of the affiliated party (activities of tied agents are
addressed by draft Art. 14 annex 2).
The arranger/router cannot itself directly execute transactions on regulated market as these entities will
not benefit from right of remote membership of “regulated markets” – restricted to brokers and dealers as
under existing Directive.
Consideration could also be given to the appropriate treatment of these entities for capital adequacy
purposes in view of particular risk profile (limited position or credit risk).
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Execution of orders on behalf of a third party :
Clarification of existing definition:
Acting as an agent on behalf of clients so as to secure the
execution of instructions issued by clients in respect of financial
instruments.
The definition includes the possibility that the broker matches orders of clients against each other. Ordermatching by brokers can be differentiated from organised markets (see below) by absence of formalised
rules and systems for systematic and non-discretionary matching of client orders. Brokers providing ordermatching services remain subject to investment firm regime including CBR.
[This definition shall cover situations where execution of client
orders is achieved through transmission of orders to appropriate This definition does not itself address the matter of “execution only” brokerage. Such services are to be
execution venues and/or through matching against distinguished from hand-holding brokerage in terms of manner in which conduct of business protections
countervailing orders of other clients where such internal order- are imposed (notably with regard to “suitability”). It is proposed to address the matter of “execution only”
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matching is performed in accordance with the relevant brokerage in the provision (annex 2) relating to conduct of business rules.
provisions of annex 2.]
Existing definition
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Dealer: Any person engaged in business of buying and selling
securities for own account.
4
Underwriting and placement services to support offer of Clarification of existing definition:
securities, with or without guarantee.
The proposed definition is broader than current definition. It encompasses a wider range of services to
support primary market issue of securities, involving varying degrees of commitment on the part of service
provider to assume any unsubscribed element of issue. This activity comprises 2 dimensions:
– Support to issuer in respect of issuance on primary markets (issuer-facing obligations): provisions
relating to this dimension of the activity are included in proposals on public offer of prospectus, single
passport for issuer. ISD provisions are of limited relevance (except for linkage to CAD);
– Investor-facing activities: the firm providing underwriting or placing services may wish to sell securities
to end-investors on its own account or as part of offer to market. This activity should be treated as any
other sale of securities and be fully subject to investor protection rules under the CBR provision.
Particularly relevant in this context will be disclosure of conflicts of interest.
It is not intended to cover ancillary activities such as advertising which are not directly related to arranging
subscription to issue or placing of securities with investors.
In light of this broader definition, the existing inclusion of “services related to underwriting” as a non-core
service is deleted.
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Individual portfolio management:
Existing definition:
Managing, on a discretionary basis, of portfolios of financial
instruments in accordance with mandates given by investors on
a client-by client basis.
The definition is slighted amended to clarify that the criterion of “discretion” relates to the exercise of
management of investment decisions on behalf of the client.
Individual portfolio management does not necessarily require that the service provider holds assets or
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funds on behalf of the individual. Some MS exclude this possibility. In these circumstances, the portfolio
manager must be delegated responsibility to take decisions regarding assets held on account with a
custodian. Holding assets/funds is not a defining characteristic of individual portfolio management.
Some asset managers have requested that ISD passport be extended to cover asset management for
UCITS – however, the activity of managing collective investment schemes is the subject of separate
legislation. Management of UCITS are currently explicitly excluded from scope of ISD.
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Independent investment advice:
New definition:
Independent investment advice is a service paid by the client
which consists in providing for an investor advice relating to one
or more financial instruments, aimed at furnishing the client with
personal recommendations.
Investment advice is to be distinguished from brokerage services and individual portfolio management in
that the service is confined to provision of personalised recommendations and the service provider takes
no further steps to obtain execution of the recommended investment(s). It follows that this service cannot
be cumulated with other core-services which involve the service provider acting as an agent to obtain
execution of the order.
[2. An independent investment advisor is an authorised entity
whose main business is the provision of independent and
objective personalised recommendations to individual clients in
respect of one or more financial instruments.]
The definition is confined to “independent” investment advice. Based on proposal of the FESCO WG on
investor protection, it is proposed that independent advice require that the service be paid for by the client.
This is intended to avoid activities of the service provider being funded partly or largely through
inducements/commissions; and thereby limit the risk that the quality of investment advice is compromised
by considerations of self-interest on the part of the advisor.
An alternative approach (option 2) might to manage conflict of interests by requiring stringent disclosure of
any relationships with authorised intermediaries whose services or products are recommended by the
advisor. Is the language “commercially independent/objective recommendations/advice” sufficiently clear
in expressing the idea that the advisor should not be influenced by any considerations of own material gain
when recommending investments?
Need for commercial independence suggests that the service of “independent advice” could only be
provided by institutions providing other core services (e.g. placement/underwriting, dealing) where there is
extremely stringent functional separation to limit conflicts of interest. This separation should be such as to
ensure an arms-length relationship between advisory arm and department executing orders (or producing
general financial analysis). Tied advisors or other entities whose sole purpose is to represent or solicit
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business on behalf of particular investment service providers are excluded from this definition.
CBR requirements need to be tailored to this service (declaration of all soft dollar commissions and
relationships with issuers, intermediaries placing instruments, other CBR obligations will be required).
It should be the case that provision of personalised recommendations in financial instruments should be
the main business of the firm. Investment advice provided on an incidental basis by other entities (tax or
legal advisors) should not fall within the scope of the definition or be subject to ISD obligations. Comments
are welcome on the criteria that could be used to distinguish “main business” from incidental activities for
the purposes of this definition.
Non-core/ancillary services:2
Def.
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Activity
Commentary
Custodianship: safekeeping, administration of securities and other financial Clarification of existing definition:
instruments on behalf of clients as well as related services such as
cash/collateral management and settlement across accounts held with the It is proposed to maintain current categorisation of custodianship as a non-core service. This
business line involves functions and related risks which differ from the core provisions of the
custodian.
ISD investment firm regime (registration of securities interests, suitable protection for client
assets and funds). Apart from the organisational requirements for investment firms, including
the requirement for separate identification of client funds and assets (the mere identification of
assets may not be sufficiently onerous a requirement when it comes to provision of custodian
services), the ISD framework is not adapted to these activities.
Custodians frequently offer internalised securities settlement arrangements between accounts
2
A firm which provides only one or other of the non-core services enumerated in the ISD may not be authorised as an investment firm within the meaning of the ISD. Once authorised to provide any of
the core services, an investment firm enjoys the right to provide any of the non-core services listed in the ISD without being subject to any additional requirements. The initial or subsequent
authorisations approved by the authority of country of establishment should clearly specify the core and non-core services which the investment firm is authorised to provide. On this basis, the
investment firm is authorised to provide those services for which it is authorised (but not any other) through free provision of services or branch operations in other MS.
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held within the organisation. The possibility for settlement across accounts held by the same
organisation is explicitly recognised under this definition. This effectively amounts to a
passport for provisions of securities settlement by investment firms or banks. The inclusion of
the right to provide these services as a non-core service is without prejudice to the need for
further harmonisation in this area.
The alternative would be to limit strictly custodianship to safekeeping of assets/funds and
account administration, and to exclude settlement from the scope of the passport. This is not
advisable in view of existence of ICSDs and national CSDs which provide settlement services
for international clients, and the entry into force of ECD which will allow provision of settlement
services by a custodian on the basis of law applied in its country of origin (a passport based
on harmonised rules will no longer be necessary – although it may be desirable from
prudential/supervisory perspective – for the settlement of client accounts on cross-border
basis).
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Securities lending or borrowing (and/or repurchase/reverse repurchase Addition: seeks to recognise possibility for authorised intermediaries holding assets on behalf
transactions) which, when undertaken using assets held on behalf of clients, of clients to engage in securities lending/borrowing (tirage sur la masse) – subject to the
shall only be undertaken subject to the express consent of the latter.
express consent of the beneficial owner of the assets. This last safeguard is replicated in
provisions relating to organisational requirements for investment firms.
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Foreign exchange services
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Granting credits or loans to an investor to allow him to carry out investments Retain – slight change to ensure that extension of credit is limited to traditional
in financial instruments where the firm or credit is an agent to the brokers/dealers which have a fiduciary obligation to and ongoing relationship with the investor.
transaction.
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Advice to undertakings on capital structure, industrial strategy and related Retain:
matters and advice and service relating to mergers and the purchase of
undertakings.
Retain subject to slight modification: Have deleted previous stipulation that forex services
should be linked to provision of core services.
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Financial instruments:
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Financial instruments include transferable securities and derivative Clarification of existing definition:
instruments and combinations of them where transferable securities and
The proposed largely resembles current list of instruments in section B, annex to ISD. Some
derivative instruments are defined as follows:
clarification of treatment of specific types of transferable security (e.g. depositary receipts,
warrants). The most notable development with regard to the existing itemised list is the
Transferable securities:
inclusion of commodity derivatives within the scope of the definition (while excluding
(1)
Shares or certificates or depositary receipts in respect of shares;
commodities).
(2)
Bonds or other debt securities whether or not convertible into Financial instruments are not defined by whether they are admitted to trading on a regulated
shares;
market. One practical consequence of this is that investment services relating to financial
instruments which are not traded on regulated markets may nevertheless be provided on a
(3)
Securities normally dealt in on the money market (CDs, euro- cross-border basis by authorised investment firms.
commercial paper);
The inclusion of commodity derivatives implies that investment services related to these
(4)
Units in collective investment schemes (under Dir. 85/611) or units instruments, including specialist commodity derivatives intermediation, can henceforth be
of other collective investment schemes;
provided by investment firms subject to ISD authorisation without the product in question
being necessarily traded on a regulated market.3 One implication is that specialist dealers in,
(5)
Warrants or similar securities entitling the holder to acquire any of commodity derivatives which heretofore did not qualify as “investment firms” for ISD/CAD will
above securities or any basket of such securities or to receive a now fall within scope of regime.
cash amount determined by reference to a future price or value of
any such security or basket (or: Any other security normally dealt in Organised markets or segments of organised markets dealing in commodity derivatives could
giving the right to acquire the instruments referred to in the henceforth fall within the definition of “organised market” depending on how they are
preceding sub-paragraphs and related indices);
organised/constituted. The question of whether organised trading in commodity derivatives
(note: same approach will be applied in respect of financial derivatives) should be in some or
Derivative instruments:
all cases be subject to the “regulated market” regime must be assessed with regard to the
nature of the individual derivative contract and the underlying commodity markets. Commodity
(1)
Options and futures contracts in respect of securities or derivative contracts are often more complex in design, and more susceptible to settlement
3
Specialist commodities traders will continue to be excluded from definition of investment services under list of exclusion and related rights and obligations under the ISD: will this exclusion be
meaningful if hedging or physical forward business in commodities qualifies as an ISD instrument for which traders/dealers require ISD-type authorisation?.
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commodities including equivalent cash-settled instruments;
complications (because of illiquidity in underlying market) than plain vanilla financial
derivatives. In view of these considerations, it is impossible to make an a priori case that
(2)
Any other instruments the value of which is determined by commodity derivatives should be admissible for trading on “regulated markets”. However, it
reference to prices of securities or commodities, interest rates or would also be unwarranted to exclude such a possibility. It is therefore proposed that such
yields, foreign exchange rates or other indices or measures.
instruments only be admissible trading on a “regulated market” where the operator of the
market has satisfied itself that a “proper market” exists. Given lack of common legal
Clarification as to whether any instrument or class of instruments falls within understanding as to application of concept of “proper market”, assessment would need to be
this definition could be provided through decision of the European performed on a product-by-product basis.
Commission subject to regulatory committee.
It is proposed that clarification be provided as to whether a financial instruments or class of
financial instrument falls within the scope of this definition be provided by Commission
decisions adopted under a comitology procedure. However, it is not proposed that this
procedure be used to amend this definition which constitutes an important parameter in
determining the scope of the ISD.
Regulatory classifications: organised, regulated and “unregulated” markets:
No.
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Definition
Commentary
Organised market:
New definition:
An organised market is characterised by a set of formalised and nondiscretionary rules, procedures or processes which match (or register for
matching) multiple buy and sell interests in financial instruments on a
continuous or periodical basis so as to allow the conclusion of transactions,
the prices of which are determined by the interaction of trading interests on
that system [and which are not derived from other trading arrangements].
The definition seeks to limit set of organised markets to systems that provide a guaranteed
venue for matching multiple interests and which play an active role in price discovery.
Definition of organised markets must be juxtaposed with definitions of core investment
services when considering regulatory classification of any particular system. The cumulative
criteria which are proposed as a basis for distinguishing organised markets from order
mediators, bulletin boards, broker-run matching systems or automated single dealer systems
are:
Only the matching of multiple orders within the scope of the relevant rules
and procedures of the organised markets, and business which is directly – Formalised and non-discretionary rules, procedures for matching orders: an order will be
related to or derived from this, falls within the definition of “organised
processed according to pre-established (pre-vetted) and transparent rules relating to
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markets”.
priority, parity and precedence. Matching systems run by brokers can only match within
system if countervailing order is received and if other restrictions on matching (best
execution) are fulfilled. Dealer system will only match where this is in interests of both
client and dealer.
The national competent authority shall be responsible for assessing whether
an entity which provides order-matching facilities falls within the scope of
this definition, or conversely is eligible for authorisation as a duly supervised
investment firm. A national competent authority may invite opinions from the – Matching orders .. resulting in transactions being concluded on the system and according
European Commission or national competent authorities meeting within the
to the rules of the system. Systems which merely allow systems to other side to a trade
framework of the Committee of European Securities Regulators.
and leave 2 counterparties free to finalise and settle transaction are not covered.
In order to reflect experience with the suitability with this definition, and – Multiple buy and sell interests on both sides of market: here system is matching trades
changes in market or supervisory practice, this definition will be subject to
against a single counterparty position. A distinguishing feature of organised market is that
clarification and amendment on the basis of Commission decisions subject
a broad spectrum of trading interests at all potential prices be factored into the priceto regulatory committee.
discovery process. The interpositioning of a designated central counterparty as riskless
principal for buy and sell orders which are matched by the system should not disqualify it
from being classified as “organised market”.
– Continuous or periodic basis: irrespective of the different trading configurations of markets,
they all offer a permanent venue at which there is regular activity related to the matching of
securities admitted to trading (this element of definition should not be interpreted as
meaning that “organised markets” offer a guarantee that all orders will necessarily be
matched).
– Prices for securities traded on the system must reflect the interplaction of supply and
demand for that security on the system. Systems which lift their prices from primary/
reference markets are excluded (e.g. price-crossing systems which take prices from other
trading venues).
Liquidity and volume of trading have not been used as criteria for determining significance for
price-discovery, due to difficulties in identifying and enforcing trigger-points for “significance”
against the backdrop of fragmented or widespread parallel trading of individual instruments.
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Regulated market:
New definition:
9
A “regulated market” shall be considered to be an organised market which The purpose of this definition is to define the scope of common EU requirements for “regulated
admits to trading:
markets” to those systems that provide for organised trading in instruments which meet
stringent requirements regarding the quality and constitution of the instruments admitted to
– Publicly offered transferable securities which comply with initial or trading so as to offer guarantees as to fair and orderly trading conditions on that market place,
ongoing disclosure or other statutory requirements regarding the and to protect the interest of the wider investing public.
constitution of the security and conditions to guarantee proper market;
Instruments eligible for admission to trading on a regulated market include transferable
– Derivative instruments based on these securities, for which there exists a securities which comply with initial and ongoing disclosure and other statutory requirements as
“proper market”;
set down in EU law (as currently under review), organised trading in derivatives based on
these securities, and derivative instruments based on rates, indices and commodities.
– Derivative instruments based on rates, indices or commodities for which
Article 29, annex 3 is a central provision of the proposed Directive in that it establishes the
there exists a “proper market”.
conditions which must be respected by instruments which are admitted to trading on a
Once admitted to trading on a “regulated market” such instruments would regulated market. In terms of publicly offered securities, conditions are largely based on
not be eligible for trading on other “organised markets” which are ,not schedules A and B of Directive 79/279. Consideration must also be given to treatment of debt
authorised as “regulated markets”.
issued by sovereign bodies for which no conditions governing constitution of bond or
properness of market currently exist under EU law. For derivative instruments, it is more
Any organised market which provides for trading of these instruments must difficult to effectively define requirements relating to the design of the product and any
seek authorisation as a “regulated market” from the competent authority of obligations of the issuer of the contract, or to the qualities of the underlying market. There are
the country in which it established, in accordance with the provisions of no established provisions under EU law governing the constitution of futures and options
annex 3. This authority will be responsible for examining and approving the contracts based on securities, rates and indices and commodity derivatives. It is therefore
rules of operation of the market, and the implementation of the related proposed to leave the responsibility to the market operator to verify that a “proper market”
provisions of this Directive.
exists in the instruments concerned. The competent authority should also be required to verify
(periodically/continuously) that the products admitted to trading comply with the principles set
Any activities undertaken by the operator of a regulated market which are out in art. 29, annex 3.
not directly related to the matching and confirmation of orders shall be
functionally separated from the business of the “organised market”.4
A market which provides for trading in these instruments would be obliged to obtain
4
Activities consisting of the core business of organisation and management of markets and directly related activities could be prescribed as comprising inter alia:
– creation and organisation of organised trading systems;
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The designation “regulated market” is strictly limited to the authorised set of
rules, procedures and processes which underpin the organised trading in
financial instruments and directly related activities The designation of
“regulated market” does not extend to any other activities undertaken by the
market operator by virtue of its management of a regulated market which are
not directly linked to the rules, procedures and processes which have been
authorised as a “regulated market”.
authorisation as a “regulated market” so as to ensure that all markets providing organised
trading in these instruments comply with common set of harmonised principles designed to
preserve transparency and integrity of the market.
Instruments which do not fall within the proposed scope could be freely traded on other
“organised markets” outside the scope of the rights and obligations of the ISD. Once an
instrument is admitted to trading on a “regulated market”, it would no longer be eligible for
trading on organised markets which are not authorised as “regulated markets” (this is without
prejudice to the right of appropriately authorised investment firms to offer order-matching
services or undertake un-organised OTC trading in respect of such instruments). This
stipulation is aimed at avoiding the erosion of liquidity , transparency and overall priceformation in respect of an instrument admitted to trading on a regulated market by allowing its
parallel trading on markets which are not subject to comparable standards of transparency,
fairness and orderliness.5
On this basis, the competent authority may authorise the markets as a “regulated market”
– operations of systems, processeses and controls governing the admission of financial instruments to trading on the market, and market participants;
– preparation, operation , maintenance and marketing of software, hardware and electronic networks for trading, order transmission and data transmission systems;
– processing, distribution and marketing of data concerning financial instruments traded in the markets they manage and data relating to the markets;
– creation and operation of systems for checking and correction of trades in financial instruments for transmission of the related balances to clearing and settlement providers;
– promotion of the market’s image;
– creation and operation of systems to guarantee transactions carried out in markets through the establishment of guarantee funds.
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This requirement could be equated with a variation on “concentration rule” in that it restricts the formalised interaction of supply and demand for eligible instruments to “regulated markets”. It differs from
concentration rule of art. 14(3) ISD in that purpose is not to promote “best execution” of an individual transaction by an individual (retail) investor to performance on a” regulated market. It is rather,
aimed at preserving overall liquidity and transparency and the interests of the wider investing public once an instrument is held out as being traded on a “regulated market”.
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subject to compliance with the requirements set out in this Directive.
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Procedure for EU recognition as a “regulated market”:
New provision:
The competent authority which authorises a “regulated market” shall advise
the European Commission of this fact. It shall forward a copy of the rules of
the “regulated market”, and a copy of a compliance programme drawn up to
ensure that the “market” remains in compliance with its obligations under this
Directive.
This provision leaves basic responsibility for assessing compliance with requirements for
recognition as a “regulated market” to the national competent authority. However, in view of
the collective EU interest in ensuring that “regulated markets” comply fully with their
obligations, it is proposed to strengthen the possibility for contestation of such authorisation
where there are properly motivated grounds for believing that the market does not meet the
requirements of the directive.
The competent authority shall monitor compliance of the market with its
requirements, including the enforcement of strict controls regarding the This collective interest will be heightened in the future as a result of:
admission of instruments to trading, on an ongoing basis.
– Increased parallel trading of nationally issued securities on the regulated markets
The European Commission shall make available a regularly updated list of
of other Member States;
“regulated markets” based on the information provided to it by national
competent authorities. The European Commission shall, on the basis of – Possible conferral of new freedoms on “regulated markets” under the revised SD
discussions with the Committee of European Securities Regulators, have the
which could further increase extent to which domestic securities are admitted to
possibility of seeking further information or clarification from the Member
trading on markets authorised in partner countries.
State concerned. The European Commission shall, subject to properly
motivated decision, have the possibility of withholding EU recognition of a In view of this, it is proposed that authorisation of a “regulated market” be subject to the
“regulated market” notified to it by a national competent authority.
possibility of ex post collective review to be performed by a combination of the CESR and
European Commission.
Other definitions for purposes of Directive:
Definition
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Investment firm:
Commentary
Keep current text relating to the treatment of natural persons.
any legal person whose regular occupation or business consists of the
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provision of investment services in respect of financial instruments (see
above).
17
Credit institutions:
An undertaking whose business is to receive deposits or other repayable
funds from the public and to grant credits for its own account.
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Professional investor
New definition:
For the purposes of the provisions of this Directive relating to the protection The proposed list of professional investor will be used exclusively in relation to application of
of investors, and in particular provision on conduct of business rules, the the principles relating to conduct of business. The itemised list of professional investors could
following investors shall be considered as “professional”:
be referenced or appended to that provision.
1. Professional and institutional investors, including:
The rationale for this list is to define the scope of application of the base-line “conduct of
business” regime. As set out in COM(2000)722, this regime should apply only to those who
– Investment firms and credit institutions as defined in this Directive are in need of high level of protection (retail investors). Professional investors, by virtue of
(excluding firms licensed to deal on own account, investment their expertise and experience, are deemed capable of undertaking investment decisions
transactions with whom shall not be considered as falling within the subject to a streamlined set of investor protection requirements when dealing with investment
scope of Art. 13 annex 2);
firms.
– Financial institutions as defined in Art. 1(5) of Directive 2000/12 (and/or The Commission has sought to establish a straightforward binary split between professionals
financial conglomerates under new proposal);
and retail investors so as to provide immediate clarity for supervisors, firms and investors as to
the category to which a client will be assigned for the purposes of statutory CBR protections.
– Insurance undertakings;
The proposed definition seeks to avoid the creation of intermediate categories whose ultimate
treatment would be ascertained subject to additional checks or formalities. The Commission
– Collective investment undertakings;
however welcomes any comment on this rationale, and suggestions for improved
methodology. It will also have regard to any further work by FESCO in this regard.
– Pension and retirement funds.
The proposed list is based on the list established for the purposes of the Investment
– Other professional and institutional investors authorised under national Compensation Scheme Directive (97/9). The list of exempted investors under the ICSD was
law.
established on the basis of “need for protection” of client funds/assets in the event of default
by the investment firm. It is highly likely that the same type of investor that will benefit from
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2. Supranational institutions, government and central administrative protection under the ICSD will also require full protection under the CBR regime. It is doubly
authorities (what treatment for provincial, regional, local and municipal appropriate as one of the implications of being treated as “professional investor” may be that
authorities?).
the investor cedes any rights acquired under the ICSD, depending on national implementation
of the ICSD. Irrelevant entries, or those inconsistent with the concept of acting on a
3. Other firms in the same group (as the firm offering the investment professional basis, from ICSD annex have been deleted.
service).
For the purposes of this Directive, it is proposed that a professional investor is a natural or
4. Companies, governed by the law of a Member State, whose securities are legal person who is authorised to provide investment or other financial services in accordance
offered to the public.
with European or national law, or who otherwise actively participates in activity on organised
markets for financial instruments as part of its regular business – either for the purposes of
All other investors shall be deemed to be retail investors acting outside their portfolio or treasury management or raising of finance.
trade or profession, and shall benefit from the full set of investor protection
requirements as set out in the relevant provisions of this Directive.
In drawing a boundary between professional and retail investors, a decision must be made
concerning the allocation of corporate investors to one or other category. Large corporates
Investors which are assigned to the professional or retail category on the may be sufficiently experienced and adept to be able to operate under a CBR regime which
basis for this definition shall have the right to request, for the purposes of the offers them less protection in terms of “suitability” and “best execution”. However, this
private contract between the two parties, that the investment firm treat them presumption cannot be made for many or most small corporates. The proposed categorisation
in another category for the purposes of conduct of business protection. The excludes all corporate investors which have not issued securities to public and all private
practical modalities for the operation of this mechanism shall be set out by individuals regardless of level expertise. This criterion is useful as crude indicator of
the Commission on the basis of decisions agreed in accordance with the companies possessing direct experience of financial markets. An alternative criterion for
procedure established under a comitology procedure.
distinguishing expert corporates from corporates needing full CBR protection might be based
on the existence of a treasury function of a certain size.
The interests of investors which feel that they are inappropriately classified for the purposes of
conduct of business protection are catered for by the provision of a mechanism which allows
investors to request the investment firm to offer them more/less stringent conduct of business
protection. However, such an opting-up/down mechanism would be relevant only for the
purposes of private contract law between the parties and could not over-ride the initial
categorisation for any public law purposes.
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Securities settlement:
New definition:
A set or processes or procedures by which the transfer of securities between This a functional definition rather than institutions which may be authorised to provide these
14
institutions and/or clearing/central counterparties takes place either free-of services.
payment or against payment.
20
Clearing:
New definition:
A set of processes and/or procedures through which financial institutions Functional definition. Need a definition of clearing as distinct from central counterparty
agree to exchange payment instructions or other financial obligations (e.g. functionalities to avoid confusion.
securities). The institutions settle for items exchanged at a designated time
based on the rules and procedures of the entity performing the clearing
function.
21
Central clearing Counterparty:
New definition:
An arrangement which legally interposes itself between the parties to a Functional definition in first paragraph which focuses on the process of legal novation which is
transaction in a financial instrument so as to become the riskless the defining characteristic of CCPs. No reference to netting which is not a functionality
principal/counterparty to both sides of the transaction.
universally undertaken by CCPs.
A central counterparty shall operate all necessary arrangements and
processes (as required by the relevant competent authorities) which allow it
to assume legal counterparty responsibility, which operate safeguards to
limit current and potential future exposure to credit or market risk arising
from all contracts to which it becomes counterparty.
2nd paragraph defines CCP in terms of types of general protections that it must put in place to
ring-fence it from credit, legal or market risk. The main body of ISD II will not provide additional
content on safeguards that CCP must operate – the harmonisation stops here. Reference to
relevant competent authorities in parentheses may generate more heat than light (use of
plural reflects the fact that both systemic supervisors and market supervisors – in that order have an interest in supervision of these entities).
Exemptions from scope of ISD (current Art. 2.2):6
6
Firms falling under more than one exempt category are also excluded from authorisation as investment firms (would allow deletion of 2(1)(e).)
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Exclusion – current or proposed
Comment & proposal
22
Insurance undertakings:
Insurance legislation contains prohibitions on investment firms undertaking other financial
business. Unless this has been removed, exclusion should be retained.
23
Firms providing services exclusively for parent undertakings:
Retain existing text
24
Persons providing incidental investment services:
Retain existing text
25
Firms that provide investment services in respect of employee participation Retain existing text: separate framework for investment policy and management structures
schemes.
of occupational pension fund proposals exists: do not wish to create confusion by
simultaneously subjecting those entities to reg./supervision under ISD
26
Members of the European System of Central Banks and other national Reflect new institutional structure for monetary policy
bodies performing similar functions and other public bodies charged with
intervening in management of the public debt.
27
Firms which do not hold client funds or securities, can only undertake Remove from list of excluded activities:
reception and transmission of orders in transferable securities and UCITs,
only transmit orders to authorised financial institutions, activities of which are Independent order-routers and mediators are now covered by new core service definition.
governed at national level by rules or code of ethics. Art. 2.2(g)
Tied agents representing or acting on behalf of authorised investment firms are covered by
new provision in the revised ISD. The inclusion of a specific provision on these entities does
not imply that such entities qualify as “investment firms”.
28
Collective investment undertakings whether coordinated or not at Retain in view of progress towards specific harmonising framework for UCITS.
Community level and the depositaries and managers of such undertakings.
29
Persons whose main business is trading in commodities amongst selves or Retain exemption from investment firm regime – does not mean that such services are
with producers or professional users and who provide investment services denied possibility of trading cross-border – they can do so subject to Treaty principles as
only for such producers and professional users to the extent necessary for implemented through ECD.
their main business.
Commodities are excluded from list of financial instruments – exemption merely confirms legal
16
situation. will this exemption be meaningful if hedging or physical forward business in
commodities qualifies as an ISD instrument for which traders/dealers require ISD-type
authorisation?
30
Firms that provide investment services consisting exclusively in dealing for
their own account on financial futures or options markets or which deal for
the accounts of other members of those markets or make prices for them
and which are guaranteed by clearing members of the same markets.
Responsibility for ensuring the performance of contracts entered into by
such firms must be assumed by clearing members of the same markets.
Retain existing exclusion for “locals” – specialised market participants remain a feature of
main EU exchanges or markets. In view of their specialised functions and activities limited
directly to participation in the market concerned, their status does not need to be regulated
under ISD.
17