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28 february 2003

Revision of the Investment Services Directive (ISD) : enhance transparency

The European Commission on 19 November 2002 adopted draft legislation intended to replace the 1993 Investment Services Directive (ISD). The objective is to organise the access to the various market venues while integrating innovations.


There is currently in Europe two main equity market models : the order driven market in France and Continental Europe, and the quote driven market, mainly in the UK. In the recent years, new equity order execution systems appeared, in addition to regulated markets. These new markets are taken into account in the reform introduced by the European Commission.

This new framework is a matter of cardinal importance for the financial intermediaries as well as for investors and corporate issuers.

Identical rules

The French Banking Federation (FBF) wishes a fair competition, which is the main safeguard for investors protection and for corporate financing. FBF is therefore in favour of an open competition between the various order execution venues which developed in Europe : regulated markets, multi trading facilities (MTFs) which are alternative trading systems set up by financial intermediaries, and internalisation of orders by investment firms. This framework should be based on a number of rules, notably as regard to transparency, which ensure investors protection without creating distortions in competition.

Within this objective, FBF approves the mesures adopted by the European Commission as regard to :

- The pre-trade transparency requirements for MTFs ;

- The rule by which limit orders should be transmitted to a regulated market or an MTF when they cannot be immediately executed through internalisation ;

- The bid and ask quote disclosure obligation for a minimum order size applicable to the investment firms which match their clients orders against their own book ;

- The formal approval from a client of the internalisation of orders offered by an investment firm.

FBF considers however that these measures should be strengthened on the following points :

- Limit orders : a financial intermediary should only be able to internalise up-front a limit order when there is, at the same time, in the market, no other available investor order which could be matched in the same conditions against the order received.

- Request for a clarification and simplification of best execution rules, in order to focus them on three criteria : price, speed of execution and security.

In addition, the requirements to explore all possible execution venues should be simplified.

ISD timetable

The draft ISD has been discussed for around two years and should be adopted in the course of 2004 for a national transposition in the EU member states by 2006.

Significant steps have been achieved during 4th quarter of 2002 and several other key steps will be achieved from March to July 2003, within the European Council and the European Parliament :

- The ISD proposal is currently being discussed at the Council level by representatives of member states ;

- The European Parliament Rapporteur (Mrs Theresa Villiers, British Conservative, European Popular Party) will present her draft report early March 2003, for a presentation at the Economic and Monetary Affairs Committee (EMAC) on March 17, 2003.

Amendments to the ISD and to Mrs Villiers's report will be discussed in April and May 2003.

The vote in EMAC should take place in June 2003 and the vote in Plenary session (first reading) is expected early July 2003.

The Commission and the Council would like the ISD finally approved by Spring of 2004, before the June 2004 European Parliament elections and the new Commission expected during Summer of 2004.

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