Securities markets  
Juan Maria Arteagoitia


The existing Community legislation in the securities markets field basically represents a development of the right of establishment and the right to provide services enshrined in the Treaty of Rome. This legal framework allows for the creation of a transparent and fair unified market in which intermediaries can carry out a wide range of investment activities in other Member States as easily as in their own, and in which issuers can raise capital on a community-wide basis as well as list their securities easily in the Stock Exchanges of the different Member States. All this allows investors to have at their disposal, all over the Community, a wide range of competing financial products, intermediaries, and markets to choose from.

An important feature of this legal framework is that the supervision of the intermediaries and issuers is performed by the competent authorities of the Member States. In addition, the corresponding directives envisage a close co-operation between such authorities, particularly in relation to the exchange of information which is protected by obligations of professional secrecy.

Finally, it is important to bear in mind that a well-run single market in the securities markets field would not be possible without the previous liberalisation of capital movements. This liberalisation which has taken place progressively is already a reality.


The relevant piece of Community legislation related to these two freedoms, in the case of investment firms, is the so-called Investment Services Directive (ISD). This directive, which is, to a certain extent, the mirror-image of the Second Banking Coordination Directive, has been adopted by the Council of Ministers on 10 May 1993 and published in the Community's Official Journal L 141 on 11 June 1993. It will become mandatory on 1 January 1996.

According to the ISD non-bank investment firms will need to be authorised only in the Member State where they have their registered office (the "home Member State"). That authorisation ("European passport") will then allow the firm to undertake the relevant investment activities not only in its home Member State, but also in all other Member States, either through branches or on a cross-border basis. The existing firms whose current authorisation is equivalent to that required by the ISD do not need to obtain fresh authorisation.

The types of investment business that will require authorisation are order collecting, execution of orders on an agency basis, dealing, portfolio management and underwriting, where these activities relate to securities or securities-related instruments.

A category of "non-core" services is also envisaged. These are services which, although not themselves requiring an authorisation, can be provided by the investment firm in all Member States, as long as they are mentioned specifically in the authorisation. These "non-core" services include investment advice, advice on mergers and acquisitions, safekeeping and administration of securities and foreign exchange facilities.

The ISD introduces the concept of the "regulated market". The conditions to be satisfied to obtain regulated market status are that the directive's transparency rules must be complied with, and that membership must be opened up both to banks and to non-banks.

The rules of transparency require that figures, calculated following a somewhat complicated formula, be made available to investors concerning the price and volume of trades which have taken place on the market.

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 and for another group until the end of 1999. The first group includes France, Belgium, Denmark and Italy and the second group includes Spain, Greece and Portugal. Membership is on the basis that there must be full compliance with the membership rules of the regulated market; settlement will be in accordance with rules applicable in the territory of that market.

Where the regulated market operates without a physical floor, investment firms and banks situated in other Member States must be allowed to have access to membership on an electronic basis, using a terminal situated in their own territory, linked up to the market in the other Member State.

Finally, the ISD lays down a certain number of conduct of business principles, which Member States are required to implement in their domestic legislation. These principles deal with the relationship between the investment firm and its client, and are essentially aimed at fair dealing and ensuring that investors are not invited to acquire investments that are unsuitable to their needs.


An important necessary condition for investment firms to be given the European passport under ISD is that the firm has adequate start-up capital for the type of investment business that it intends to engage in. The minimum levels of start up capital are laid down in a directive which supplements ISD, known as the Capital Adequacy directive (CAD).

This directive was adopted by the Council of Ministers on 15 March 1993. It has been published together with the ISD and will also enter into force on 1 January 1996. In addition to fixing the minimum amounts of start-up capital this directive also lays down rules relating to the capital to be provided by investment firms in respect of what is broadly called "market risk". This is the risk to which dealing in securities exposes an investment firm, resulting from open positions.

An important feature of the CAD is that its scope is not limited to non-bank investment firms. Under the Second Banking Co-ordination Directive banks are able to carry out securities-related activities in addition to their core banking business. This means that banks and non-banks can be in direct competition with each other, a trend that is likely to increase because of the liberalising effect of both the Second Banking Co-ordination Directive and ISD.

CAD therefore includes both banks and non-banks in its scope and provides for very similar treatment of the securities business of both types of player. In the case of banks this is done by making a distinction between the banks' "trading book" and the rest of their business i.e. their long term investment portfolio and loans portfolio.

The CAD takes the trading part of the bank's business and applies to it broadly similar rules as those applying to the securities business of non-bank investment firms, both as regards the definition of regulatory capital and rules relating to the measurement of risks. In this way a broadly similar competitive environment will be created for the securities business of both banks and non-banks.

CAD has been drafted with considerable care to take account of the fact that the risk arising from open securities positions can be reduced by hedging techniques. This is facilitated by using the so-called "building block approach" which distinguishes between specific risk attributable to individual issuers and general risk arising from the possibility of an overall change in interest rates. The general interest rate risk arising from long and short positions can be cancelled out, resulting in a lower amount of capital being needed, possibly in respect of specific risk only.


The term UCITS stands for "Undertakings for Collective Investment in Transferable Securities". This label was created to be used at Community level to represent a variety of funds which invest their participants money in transferable securities and which take different legal forms in different Member States (Unit Trusts in the UK, SICAV in France, etc).

On 20 December 1985 a directive on UCITS was adopted by the Council of Ministers. It entered into force for most Member States on 1 October 1989. According to this directive all UCITS have to be authorized by the Member State in which they are situated (the home Member State) before they can pursue their activities; that single authorization ("European passport") will be valid for all other Member States. The authorization covers the management company, if applicable, the fund rules and the choice of depository company. All this allows smaller and less sophisticated investors to have access to professional investment management all over the Community.

The directive, which also specifies the investment-borrowing policy and the minimum amount of information to be supplied to unit holders, only covers undertakings engaged in the collective investment of capital applying the principle of risk-spreading and making these investments exclusively in transferable securities. Their units must be sold by means of offers to the public in the Community and must be repurchased, at the holders' request, at the expense of their assets. Their registered offices must be situated in a Member State.

Irrespective of the Member States in which they market their units, all UCITS will be subject only to the legislation and supervision of the Member State of origin; if they market their units in another member State, that Member State will only be entitled to require that the rules governing the marketing of such units on its territory are observed and to carry out such supervision as is necessary to ensure that they are observed.

In order to update the directive, on 9 February 1993, the Commission has proposed an amendment to it. Basically, it consists of an extension of the scope of the directive to also include money market funds and units of other UCITS.


Securities markets would not be attractive for potential investors unless such markets are perceived by them as fair. In this regard an important directive to promote investor confidence by combating insider trading was adopted by the Council of Ministers on 13 November 1989. It entered into force on 1 June 1992.

The Directive lays down the basic rule that any person who has a defined relationship to a company (director/shareholder/employee) may not take advantage of inside information he possesses as a result of that relationship to buy or sell securities. These persons are sometimes referred to as "internal" insiders. The rule against trading also applies to a person possessing inside information as a result of his duties, which would for example cover a civil servant. Insiders at second hand, the so-called "tippees", are also covered by the Directive. These persons can be thought of as "external" insiders. In the case of legal persons it is the natural person or persons who take part in the relevant decisions who are subject to the Directive's prohibitions.

As regards the type of securities covered by the Directive, it refers to shares and bonds, whether issued by governments or private companies, and derivative products such as options and financial futures, where any of these instruments are admitted to trading on an organized market.

In relation to sanctions it is up to the Member States to determine the penalties for infringement of the Directive's rules. However, such penalties should be in any case sufficiently severe to constitute a deterrent.

Finally, the Directive introduces a co-operation procedure between supervisory authorities in the various Member States. Such co-operation would be vital in case of cross-border transactions where the insider is in one Member State and the transaction is executed in the market of another Member State.


The listing area was the first to be harmonized at Community level in the securities markets field. The three main stock exchanges directives were adopted in 1979, 1980 and 1982.

A directive of 5 March 1979 co-ordinates the conditions for the admission of securities to official stock exchange quotation in Member States. It sets out a list of conditions which issuers have to meet on admission to official stock exchange quotation, such as minimum size, minimum period of existence and distribution of securities among the public. It also imposes continuing obligations on issuers, e.g. a rule requiring them to publish without delay any major new developments likely to have a substantial effect on the price of their securities.

A directive of 17 March 1980 co-ordinates the information to be disclosed by issuers when their securities are admitted to official stock exchange listing. In particular it requires that a prospectus be published to enable investors to make an informed assessment of the assets and liabilities, financial position, profits and losses, and prospects of the issuer and of the rights attaching to the securities.

A directive of 15 February 1982 requires listed companies to publish half-yearly reports giving turnover and profit figures of the first six months of the company's financial year.

On 22 June 1987 a directive completing that of 1980 was adopted. It introduces the mechanism of mutual recognition of stock exchange listing prospectus. On 12 December 1988 a directive supplementing that of 1979 was adopted. It stipulates the timing and the information to be published when major holdings in listed companies are acquired or disposed of.

On the other hand, public offers of securities were not harmonised until 17 April 1989 when a directive in that area was adopted. It basically requires that a prospectus, containing a minimum amount of information, be published before the securities are offered to the public. It also contains the mechanism of mutual recognition of prospectuses. The directive was completed on 23 April 1990 when another directive was adopted recognising, in certain circumstances, public-offer prospectuses as stock exchange listing prospectuses.


The directive of 1979 does not allow for mutual recognition of admission to official stock exchanges. As a result, multi-listing in the Community is considered by most issuers to be a cumbersome and expensive procedure. In order to solve this problem the Commission introduced on 23 December 1992 a proposal for a directive to simplify the cross-border listing requirements of the securities of those companies of high quality, large size and international standing, listed in the Community for at least three years and showing a good record of compliance with EC listing directives. These companies, which are the most likely candidates to look for cross-border listing, would be able, if the proposal is adopted, to be listed in other Member States without publishing a new listing prospectus. In its place a simplified set of documents would be made available to investors in host Member States.

The directive would also facilitate the implementation of the EUROLIST project. EUROLIST, which is promoted by the Federation of European Stock Exchanges, aims at providing deeper and more liquid markets for those European companies of large size, high-quality and international standing by listing their shares in at least six Member States.

Notwithstanding the fact that the proposal for a directive would facilitate the launching of EUROLIST, it is important to bear in mind that the proposal and EUROLIST are different things, independent of each other, and not conceived as alternatives.


Community legislation in the securities markets field, as in any other field, is an ongoing concern. A continuous effort is carried out to adapt existing regulations and to propose new ones to cater for the new market needs and realities.

Apart from the amendments already mentioned to the UCITS and Listing Prospectus directives, other initiatives are under consideration. This is the case in particular of a proposal to set-up a Securities Committee (equivalent to the existing Banking Advisory Committee and Insurance Committee) and other possible proposals to harmonize investor compensation schemes and to adjust the ISD to the lessons learned from the BCCI case.