26 March 2003

FESE Position on ISD

The Federation of European Security Exchanges (FESE) issued a position paper on the forthcoming Investment Services Directive. FESE agrees on the need of a revision as the former directive that took into account market structures of the mid-1980s and markets have changed considerably over the past decade, and its implementation throughout the Union was patchy.

Pre-Trade Transparency
The quality of European financial markets and of their price-formation process should be the ultimate goal of the ISD reform, also in the light of the increasing global competition, especially between European and US markets.

FESE strongly recommends to maintain pre-trade transparency as a principle in the ISD, but not as a tool. The European legislator therefore should address the issue on an adequately general level and abstain from any prescription for tools to achieve pre-trade transparency.

On level I, that activity by investment firms - that do not qualify as MTFs - should be clearly defined that triggers pre-trade disclosure. Only little specification should be made on to the modalities of such disclosure.

Some implementation measures should be foreseen on level II, but most notably, intensive work by CESR and its Members on level III should be used to create appropriate implementation on the national level. National legislators and regulators might also be given the possibility to fine-tune national provisions.

Post-Trade Disclosure
The Federation sees a potential quality problem if post-trade data of an internalising investment firm are collected and published solely “through a proprietary arrangement”.

Such publication, if completely unmonitored, could pose a threat to overall market quality. FESE recommends that such data should be published through a channel that has certain surveillance capacity and powers.

Best Execution
The proposed Best Execution policy has to be clarified. Any effort to develop a European approach towards defining and achieving Best Execution has to acknowledge that this concept may indeed have different meanings and implications in different market models, but also in different market segments.

For many FESE Member Exchanges, this calls for leaving sufficient room for comitology on level II and below. FESE recommends further work on this issue and calls for flexible level I principles and implementation measures on levels II and III.

Access to Regulated Markets
The ISD as drafted restricts access to Regulated Markets and to MTFs to specific categories of (legal) persons by forbidding Regulated Markets and MTFs to grant membership or access to entities other than “eligible counterparties”.

FESE recommends in any case to totally separate any definition of “eligible counterparty” for conduct of business purposes from a definition of potential members/participants in a Regulated Market. Such access provisions have to be open, non-discriminatory, competitionneutral, flexible, and open in particular to institutions from outside the EU.

Commodity Derivatives Markets
FESE recommends undertaking a special effort to provide commodities derivatives markets, their participants and their market operators with a regulatory framework

Consideration also has to be given to the special interdependency between commodity derivatives markets and the underlying non-financial markets. FESE strongly recommends phrasing any definition for commodity derivatives in an open way and regrets that the reduced application of Lamfalussy procedures.

FESE has prepared a separate detailed document on specific issues in the ISD Draft relating to Commodity Derivatives Markets.

Full paper
Commodity Derivatives and the ISD Proposals – Specific Comments

© FESE