No 2 (February 96/Février 96/Februar 96)

The entry into force on 1 January 1996 of the Investment Services Directive (ISD) ⁽¹⁾ heralds the completion of the for the three major financial services (banking, insurance and investment services). The ISD creates a "European Passport" for non-bank investment firms to carry out in all Member States a wide range of investment business (i.e. order collecting, execution of orders on an agency basis, dealing, portfolio management and underwriting) as well as certain additional services (such as investment advice, advice on mergers and acquisitions, safekeeping and administration of securities and foreign exchange transactions) if mentioned specifically in the authorisation.

The European passport will mean that restrictive legislation in Member States preventing cross frontier branching and freedom of services will have to be dismantled. The ISD will also open up stock exchange member-ship in all Member States to all types of investment firm, whether bank or non-bank entities. The third objective of the ISD, which is likely to have the more immediate impact, is to allow regulated markets with-out physical trading floor in one Member State to provide terminals to investment firms and banks in other Member States, thereby allowing them to be members of the markets on a remote electronic basis. This means that, for example, a French investment firm could be a member of the Amsterdam stock exchange and trade on it, without having any physicalpresence there. This will greatly facilitate competition between different MemberStates' markets. The type of instruments covered in the scope of the Directive include securities, financial futures, options, forward rate agreements ("FRAs") and interest rate and exchange rate swaps. Commodities and commodity derivative products are not covered.

Authorisation requirements:
To carry out investment business, the necessary conditions include:
- the directors of the firm must be "of sufficiently good repute" and possess adequate experience;
- the investment firm must be a legal person or, if a natural person, must provide a certain number of additional safeguards (e.g. the solvency not only of the firm but also of its owners must be monitored);
- at least two persons should be involved in decision making process (sole traders can be authorised providing "appropriate arrangements" ensure that the same result will be achieved);
- the head office must be located in the same Member State as the registered office;

A firm which has an existing authorisation which is equivalent to ISD requirements can use this authorisation for the purpose of the Directive. Firms which are not so authorised may continue to carry on business after 1 January 1996 but they must obtain authorisation no later than one year after that date.

Initial capital requirements
These requirements are set out in the Capital Adequacy Directive (CAD) ⁽²⁾ and are fixed at different levels depending on the nature of the business proposed to be done:
- a full service firm which deals for its own account or accepts underwriting commitments has to have 730,000 ECUs;
- if a firm's activities are limited to order collecting, agency broking or portfolio management and the firm holds clients' money or securities, the level is reduced to 125,000 ECUs;
- where a firm's activities are limited to order collecting, agency broking or port-folio management and the firm does not hold clients' money or securities, the level is fur-ther reduced to 50,000 ECUs.

There is a "grandfathering clause" which allows existing capital levels to continue until a change of ownership occurs. A certain number of specific exemptions are for example envisaged for professional persons such as lawyers and accountants who provide an investment service in an incidental manner to their usual professional activity or commodity dealers who provide investment services under ISD merely as an ancillary activity to their commodity business.

Ongoing capital requirements
The home Member State authorities will be responsible for ensuring that CAD rules relating to risk related capital are respected. This will result in the cost of regulatory capital being reduced to the minimum, because long positions in one geographical location can be offset by short positions in ano-ther, the overall position being looked at by the home Member State supervisors. The CAD's scope is not limited to non-bank investment firms, but includes banks as well.

Rules relating to structure and organisation
The rules relating to the structure and organisation of investment firms (including banks) require in particular that arrangements should be made by the investment firm for the safekeeping of money and securities belonging to customers, so that in the event of failure or bankruptcy of the investment firm the ownership rights of the cus-tomers are protected. The investment firm must also be structured in such a way that clients are not prejudiced by conflicts of interest which can arise where an investment firm is a multiple service firm engaging, for example, in broking, dealing and corporate management. One way of implementing this requirement is to create separate departments within the firm for each type of activity, with barriers on exchange of information between them. A further rule requires the investment firm to keep adequate records of executed trades, and in addition it must report trades to the supervisors in its home Member State.

Consequences of being a regulated market
The ISD introduces the concept of the "regulated market". Both traditional stock exchanges and financial futures and option markets can be regulated markets. Regulated markets can attract orders from investors even where Member States apply a concentration rule. Six Member States - i.e. Belgium, France, Italy, Spain, Portugal and Greece - intend to continue a concentration requirement, or in other words orders given by investors within their territories must by law be carried out on official markets. The ISD allows this provided that the carrying out of the transaction is not restricted to the territory of the Member State where the order is taken. This means that orders from investors in a Member State applying concentration can be sent for execution to the regulated market of a Member State not applying concentration. It has also been provided that all investors, whether private or institutional, must be allowed to "opt out" of the concentration regime altogether if they so wish and have their transactions executed off-market.

Membership of regulated markets
As regards membership, regulated markets in all Member States will have to accept both banks and non-banks as members. Investment firms, whether banks or non-banks will be able to choose between indirect access to membership through a subsidiary company, or direct access by means of a branch. Direct access by banks is however subject to a transitional period for one group of Member States until the end of 1996 (France, Belgium, Denmark and Italy) and for another group until the end of 1999 (Spain, Greece and Portugal).

Implementation
The ISD is fully implemented (but transposition measures are still being examined by Commission services) in Ireland, Sweden, Italy, the Netherlands and UK and a framework law has been adopted in Belgium. Full implementation is expected during the first half of 1996 in France, Belgium, Denmark, Luxembourg, Austria, Portugal and Finland. Full implementation is not expected until late 1996 in Germany, Greece and Spain.

The CAD is fully implemented (transposition measures still being examined) in Spain, UK and Sweden; partially implemented in Belgium and the Netherlands and draft legislation exists in Greece, Denmark and Austria.

La directive sur les services d'investissements, qui offre une sorte de "passeport européen" aux sociétés d'in-vestissements leur permettant de fournir des services à travers toute la Communauté, est entrée en vigueur le 1er janvier 1996. Cette directive ouvre également la possibilité aux sociétés d'investissements, qu'il s'agisse d'établissements bancaires ou non, de pouvoir être cotées en bourse dans tous les Etats membres.

Die Richtlinie über Wertpapierdienstleistungen, die Wertpapierfirmen eine Art "europäischen Paß" bietet, der ihnen die Erbringung von Dienstleistungen im gesamten Gebiet der Gemeinschaft ermöglicht, ist zum 1.Januar1996 in Kraft getreten. Den Wertpapierfirmen steht außerdem unabhängig davon, ob es sich um Banken oder andere Einrichtungen handelt, in allen Mitgliedstaaten der Gang zur Börse offen.

⁽²⁾ Directive 93/6/EEC of 15 March 1993, EC Official Journal N.L141 of 11/06/1993

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