March 8, 2005 MODEL SCHEDULE OF WTO COMMITMENTS FOR INVESTMENT BANKING, TRADING, AND ASSET MANAGEMENT Explanatory Memorandum I. INTRODUCTION Internationally active securities companies are working together to pursue new market opening commitments in the current round of negotiations among member countries ( Members ) of the World Trade Organization ( WTO ). We seek to build on the framework that was established by the General Agreement on Trade in Services ( GATS ), including the Annex on Financial Services, the Financial Services Agreement, and the Understanding on Commitments in Financial Services ( Understanding ) to reduce trade barriers in the financial services sector. To that end, we have developed a Model Schedule of WTO commitments that would open markets for trading, underwriting, advisory, and asset management services. In general terms, securities companies face two types of trade barriers created by government regulation. The first consists of barriers that on their face restrict the ability of foreign securities companies to enter a market, such as quotas on the number of licenses granted, caps on foreign ownership of domestic companies and discriminatory restrictions on the type of securities that foreign companies may trade or underwrite. The second type includes barriers that do not on their face restrict the ability of foreign securities companies to enter a market, but nonetheless impede the delivery of service by those companies. An example of this type of barrier is a domestic regulatory regime that does not provide exemptions from authorization requirements 1 for foreign companies engaged in cross-border transactions where the client is not solicited, the customer is a qualified investor, or a locally authorized company serves as an intermediary, even though such exemptions have become standard practice in a number of countries. This type of market access barrier can be viewed as a deviation from regulatory best practice. The Model Schedule addresses both types of barriers. 2 With respect to the first type, the Schedule requires Members to broaden their basic commitments under GATS, thereby reducing or eliminating (i) restrictions based on quantitative factors or the economic need for the service, (ii) restrictions on corporate form, (iii) caps on foreign ownership of domestic companies, and (iv) measures that discriminate against foreign as compared to domestic companies. With respect to the second type, the Model Schedule includes commitments that go beyond the basic obligations of the GATS in order to facilitate greater market access for foreign companies. The adoption of the Model Schedule by Members would serve two main objectives. First, it would bind the most favorable current market access conditions. Where a Member s existing domestic regulation is consistent with the Model Schedule, the Model Schedule would 1 In this memorandum, authorization means any measure that requires a financial service supplier to obtain a license from or otherwise receive the approval of the competent authority or self-regulatory organization of the WTO Member in order to supply the relevant financial service, but does not include measures requiring such supplier to notify the Member that it has begun to provide services in the territory of the Member. 2 An explanation of how to read the Model Schedule is attached as Annex A.
require the Member to upgrade its WTO commitments but would not require the Member to change its domestic law. By building up the Member s WTO commitments to the (better) treatment that the Member actually accords, the Model Schedule would provide securities companies a more secure and internationally enforceable basis for their market access. Second, the Model Schedule would reduce existing trade barriers. Where a Member s current regulation is more restrictive than the Model Schedule, the adoption of the Model Schedule would require a Member to amend its domestic laws and regulations to provide greater market access to foreign companies, thereby creating immediate and tangible commercial opportunities. II. COMMITMENTS IN THE MODEL SCHEDULE A. GENERAL NOTE ON SCHEDULING The Model Schedule begins with a General Note on Scheduling, which sets forth two principles that Members should follow when scheduling their commitments in the securities related subsectors. This section of the Schedule would not be legally binding on the Members. The first note applies where a Member chooses not to adopt a provision of the Model Schedule. In these circumstances, a Member should make commitments that reflect the level of market access provided under domestic law, or, failing that, commit not to reduce the level of access enjoyed by foreign companies that are currently providing services in that market. The second note stipulates that the Model Schedule should not be a ceiling on a Member s GATS commitments, i.e., if a Member s domestic law is more liberal than the Model Schedule, that Member should schedule its GATS commitments to reflect its domestic law. B. HEADNOTES: COMMITMENTS APPLICABLE TO ALL SUBSECTORS The headnotes of the Model Schedule are legally binding obligations that apply to all of the subsectors contained in the Schedule. For ease of reference, the headnotes are explained, as necessary, in the Model Schedule in italicized type. The explanations are not themselves legally binding. Following the headnotes, the Model Schedule includes commitments in several securities-related subsectors, including trading, asset management, and underwriting. Each subsector is defined in the same way as it is defined in the Annex on Financial Services to the GATS. C. MARKET ACCESS A number of important and growing markets maintain barriers to the supply of securitiesrelated services of the first type mentioned above i.e., quantitative restrictions and restrictions on choice of corporate form. The Model Schedule includes robust commitments for Market Access that would remove such restrictions for all the covered subsectors. For example, these commitments would address domestic laws and regulations that: 1) prohibit foreign securities companies from establishing wholly-owned affiliates; 2) impose quotas on the number of broker-dealer licenses that the government will issue; 3) impose quotas on the number of branches that securities companies can establish; 4) restrict securities companies choice of corporate form; and 2
5) require the establishment of a commercial presence in order to provide financial advisory services. D. NATIONAL TREATMENT A country that adopts the Model Schedule would agree not to impose laws or regulations that discriminate against foreign securities companies, as compared to domestic companies, based on their foreign ownership. The Model Schedule includes robust commitments to accord national treatment, which would require Members to eliminate, inter alia, measures that: 1) limit membership in local exchanges and settlement and clearing systems to domestically owned or controlled companies; 2) restrict the ability of a foreign securities company to trade or underwrite particular types of securities or trade securities denominated in the local currency; 3) lengthen the approval processes to obtain licenses and impose stricter scrutiny and enforcement procedures on foreign securities companies; 4) impose discriminatory capital requirements on a foreign securities company in order to establish a commercial presence; and 5) impose discriminatory notification and/or authorization requirements on a foreign securities company to participate in the issuance of securities, and discriminatory disclosure and reporting requirements on a foreign securities company providing financial advisory services. E. ADDITIONAL COMMITMENTS 1. Trading The trading subsector is defined as trading for own account or for the account of customers, whether on an exchange, in an over-the-counter market or otherwise, the following: (A) money-market instruments (including cheques, bills, certificates of deposits); (B) foreign exchange; (C) derivative products including, but not limited to, futures and options; (D) exchange rate and interest rate instruments, including products such as swaps, forward rate agreements; (E) transferable securities; and (F) other negotiable instruments and financial assets, including bullion. The commitments in the Model Schedule apply to all of these trading activities with respect to each of these financial instruments. Under the Additional Commitments for trading subsector, foreign securities companies would not be subject to domestic authorization requirements and would not be required to establish a commercial presence when they are: 1) trading with any client where the securities company did not solicit the client; 2) trading with a qualified investor; or 3) trading with any client when an authorized securities company intermediates the transaction. 3
The Additional Commitments for the trading subsector also require Members to permit foreign securities companies to trade all the instruments listed in the trading subsector (see (A)- (F) in the definition above). 2. Underwriting The underwriting subsector is defined as participation in issues of all kinds of securities, including underwriting and placement as agent (whether publicly or privately) and provision of services related to such issues. The commitments in the Model Schedule apply to all of these underwriting activities with respect to all kinds of securities. Under the Additional Commitments in the Model Schedule for the underwriting subsector, foreign securities companies would not be subject to authorization requirements when they underwrite issues for placement, whether public or private, outside the domestic market. Additionally, foreign companies would be exempt from authorization when they underwrite a security for domestic placement if: (i) the foreign company does not advertise or market the security domestically; (ii) the buyer is a qualified investor; or (iii) a locally authorized company intermediates the sale. Further, a security offered and sold would not have to be registered, 3 supported by offering documents, or subject to any other notification or filing requirements if the security is offered and sold to qualified investors or there is no active advertising or marketing of the security. 3. Asset Management The asset management subsector is defined as asset management, such as cash or portfolio management, all forms of collective investment management, pension fund management, custodial, depository, and trust services. The commitments in the Model Schedule apply to all of these management activities. A Member that has fully adopted the Additional Commitments for the asset management subsector would be required to: 1) permit foreign securities companies to supply asset management services crossborder without being authorized or establishing a commercial presence if: (i) the foreign securities company does not advertise or market to persons in that Member (ii) the client is a qualified investor, or (iii) a locally authorized securities company intermediates the transaction and supervises any solicitation; 2) permit interests in foreign collective investment vehicles to be supplied cross-border without being registered, establishing a commercial presence, or providing offering documents, if they are offered and sold only to qualified investors or the foreign vehicle is not advertised or marketed in the Member (other than to qualified investors); 3) allow foreign collective investment vehicles to be eligible to be registered and sold to 3 In this memorandum, registration in respect of securities or collective investment schemes includes any measure that requires a security or collective investment scheme to be enrolled with or approved by the Member or any selfregulatory body in the Member in order for the security or interest in the collective investment scheme to be offered and sold to persons in the territory of the Member. 4
the public; and 4) tax foreign collective investment vehicles at the same levels as domestic collective investment vehicles and provide for equivalent tax reporting requirements. 4. Financial Advisory Services The financial advisory services subsector is defined as advisory, intermediation, and other auxiliary financial services on, inter alia, the following subsectors: (i) trading for own account and for account of customers; (ii) underwriting and placement as agent (whether public or private); (iii) asset management; (iv) settlement and clearing services for financial assets; and (v) provision and transfer of financial information. Financial advisory services also include credit reference and analysis, investment and portfolio research and advice, advice on acquisitions and on corporate restructuring and strategy. The commitments in the Model Schedule apply to all of these advisory activities in all of the financial services subsectors listed above. Under the Additional Commitments for financial advisory services in the Model Schedule, foreign securities companies would not be subject to domestic authorization requirements when they provide financial advisory services on a cross-border basis and (i) the foreign securities company does not advertise or market to persons in that Member, (ii) the client is a qualified investor, or (iii) a locally authorized securities company intermediates the transaction and supervises any solicitation. Foreign securities companies would also be allowed to provide advisory services on all of the financial services subsectors listed in the Model Schedule. 5. Other Subsectors a. Lending and Guarantees The lending subsector is defined as lending of all types, including consumer credit, mortgage credit, factoring and financing of commercial transactions, and the guarantees subsector includes both guarantees and commitments. The Additional Commitments in the lending and guarantee subsectors would permit foreign securities companies to make loans and issue guarantees to entities for business purposes without establishing a commercial presence or obtaining authorization. In addition, a foreign securities company would be allowed to make loans to finance trades and lend securities, without establishing a commercial presence or receiving authorization, if the foreign company does not actively market the service, the borrower is a qualified investor, or a locally authorized company intermediates the transaction and supervises any solicitation. b. Settlement and Clearing Services This settlement and clearing subsector is defined as settlement and clearing services for financial assets, including securities, derivative products, and other negotiable instruments. The Additional Commitment in this subsector requires Members to ensure that foreign securities companies have non-discriminatory access to centralized payment, clearing, settlement, and depository systems. This obligation applies whether the systems are operated by public or private entities and whether the foreign securities company has a local presence. This Commitment is based on but is broader than the commitment in the Understanding in that it 5
includes access to private as well as public entities, and applies regardless of whether the foreign securities company has established a commercial presence. c. Provision and Transfer of Financial Information The final subsector covered by the Model Schedule is the provision and transfer of financial information, and financial data processing and related software by suppliers of other financial services. The Additional Commitment in this subsector precludes Members from restricting transfers of information or equipment, or the processing of financial information. This Commitment is substantially similar to the language in the Understanding on transfers of information. 6
ANNEX A HOW TO READ THE MODEL SCHEDULE GATS is the WTO agreement that governs trade in services. Although some GATS obligations apply to all service sectors, the most important market-opening obligations apply only to those service sectors in which a Member agrees to make specific commitments. Each Member records its specific commitments in a schedule of commitments. Using the attached Model Schedule as an example, a Member would make a specific commitment in a securitiesrelated subsector by listing that subsector, such as asset management, in column one of its schedule, which is titled Subsectors. 4 Within each subsector, a Member schedules specific commitments according to four modes of supply : (1) cross-border supply a service is supplied within the territory of one Member from the territory of another, for instance by delivery of financial advice through telecommunications or mail; (2) consumption abroad a service is delivered outside the territory of the Member to a service consumer of the Member, for example, when the client of a securities company travels to the country where that company is located to receive services; (3) commercial presence a service is delivered within a Member s territory through the commercial presence of the supplier, such as a wholly-owned local subsidiary, branch or representative office; and (4) presence of natural persons a service is delivered within a Member s territory by persons working for a securities company of another Member. A Member may make different commitments within a given subsector depending on how the service is supplied. A. MARKET ACCESS Under GATS, for each subsector that a Member lists in column one, it is prohibited from imposing any of the following six types of measures on the supply of services in that subsector, unless it expressly reserves the right to do so by providing such a limitation in column two, Limitations on Market Access : a) limitations on the number of service suppliers whether in the form of numerical quotas, monopolies, exclusive service suppliers or the requirements of an economic needs test; b) limitations on the total value of service transactions or assets in the form of numerical quotas or the requirement of an economic needs test; c) limitations on the total number of service operations or on the total quantity of service output expressed in terms of designated numerical units in the form of quotas or the requirement of an economic needs test; d) limitations on the total number of natural persons that may be employed in a particular service sector or that a service supplier may employ and who are necessary 4 The absence of a service sector or subsector in a GATS schedule does not prohibit a foreign supplier from providing that service; a foreign supplier may still be permitted to provide such services under domestic law. Rather, the Member has not made any internationally binding commitments in that sector or subsector. A-1
for, and directly related to, the supply of a specific service in the form of numerical quotas or the requirement of an economic needs test; e) measures which restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service; and f) limitations on the participation of foreign capital in terms of maximum percentage limit on foreign shareholding or the total value of individual or aggregate foreign investment. Therefore, if a Member makes a specific commitment in a subsector and chooses not to reserve the right to impose any of the six prohibited measures listed above for a particular mode of supply, then it would insert the word none in column two next to that mode of supply. If a Member chooses to reserve the right to impose one or more of the six prohibited measures for a particular mode of supply, then it would refer to the existing measure in column two under the relevant mode of supply or would insert the word unbound to indicate that it would be free to impose any of the six measures. B. NATIONAL TREATMENT Similarly, for each subsector in which a Member makes a specific commitment, the Member cannot discriminate against foreign services and service suppliers as compared to domestic services and service suppliers in that subsector unless the Member expressly reserves the right to do so in column three, Limitations on National Treatment. As with Market Access, the word none under a particular mode of supply in column three signifies that a Member has not taken any limitations on the National Treatment obligation in that subsector and mode. The word unbound indicates that the Member reserves the right to introduce or maintain any measure that violates national treatment in that subsector and mode. And, a Member may commit in general to accord National Treatment but exempt certain measures by describing those measures in column three of its schedule. C. ADDITIONAL COMMITMENTS In the fourth column, Additional Commitments, Members may schedule affirmative commitments that further increase access for foreign services suppliers and which are not covered by the Market Access or National Treatment obligations of the GATS. These Additional Commitments may include limited exemptions from or modifications to domestic regulations that do not discriminate on their face but that disproportionately burden foreign suppliers. The Model Schedule includes Additional Commitments in each of the covered subsectors. A-2