European Commission Technical Assistance Information Exchange Unit TAIEX

European Commission, Technical Assistance Information Exchange Unit (TAIEX), DG Enlargement in co-operation with the Union of Chambers and Commodity Exchanges of Turkey Seminar on Financial Services Ankara, 1 March 2005 Securities: main elements of the EU Directives Dr. jur. Dimitris Tsibanoulis Legal Advisor, Bank of Greece 1

EU Securities Directives ensure the development of a single securities market for both new issues and trading of securities These Directives regulate the initial and on-going conditions for service providers (investment firms), establish requirements for the issuance of securities (both as regards public offers of securities and requirements for securities to be listed on a stock exchange) and co-ordinate the conditions applicable to investment funds. 2

Investment services providers: Banks and Investment firms The conditions for the setting-up of investment firms and their on-going business are similar to those for banks, and provide for a level playing field between non-bank investment firms and banks providing investment services. 3

Provision of Investment Services Directive 93/22/EEC on investment services in the securities field Directive 2004/39/EC on markets in financial instruments, amending Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC and repealing Directive 93/22/EEC; Directive 93/6/EEC of 15 March 1993 on capital adequacy of investment firms and credit institutions [amended by Directive 98/31/EC and Directive 98/33/EC of 22 June 1998] 4

Objective of Directive 93/22/EEC Liberalisation of the access to stock-exchange membership and financial markets in host Member States for investment firms authorised to provide the services concerned in their home Member States. The Directive provides for: harmonisation of essential standards; mutual recognition by the national supervisory authorities of the controls applied in the country in which the head office is situated; coordination of the work of supervisory authorities by the home country. 5

Provision of Investment Services (cont. ) The competent authorities in each Member State must ensure that: - the investment firm has sufficient initial financial resources for the proposed activities; - the persons directing the business have sufficient professional integrity and experience; - holders of qualifying participations are suitable persons. 6

Directive 2004/39/EC on markets in financial instruments (Mifi. D) It is a crucial part of the Financial Services Action Plan. The Directive allows investment firms, banks and exchanges to provide their services across borders on the basis of their home country authorisation. It brings closer into line national rules on the provision of investment services and the operation of exchanges, with the ultimate aim of creating a single European "securities rule book". It benefits investors, issuers and market participants by promoting efficient and competitive markets, notably by allowing banks and other investment institutions to compete fairly with stock exchanges. 7

Directive 2004/39/EC on markets in financial instruments (Mifi. D) "Investment firm" means any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis; "Market operator" means a person or persons who manages and/or operates the business of a regulated market. The market operator may be the regulated market itself; 8

Directive 2004/39/EC on markets in financial instruments (Mifi. D) "Regulated market" means a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments - in the system and in accordance with its non-discretionary rules - in a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly and in accordance with the provisions of Title III; 9

Directive 2004/39/EC on markets in financial instruments (Mifi. D) "Multilateral trading facility (MTF)" means a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments - in the system and in accordance with non-discretionary rules in a way that results in a contract in accordance with the provisions of Title II; 10

AUTHORISATION AND OPERATING CONDITIONS FOR INVESTMENT FIRMS Requirements for authorisation Persons who effectively direct the business Shareholders and members with qualifying holdings Membership of an authorised Investor Compensation Scheme Initial capital endowment Organisational requirements 11

Capital Adequacy of Investment Firms and Credit Institutions Directive 93/6/EEC on capital adequacy of investment firms and credit institutions OBJECTIVE To achieve equality of treatment between credit institutions and investment firms by harmonizing capital requirements. CONTENTS Investment firms which hold clients' money and/or securities and which receive, transmit and/or execute investors' orders for financial instruments and/or manage portfolios of investments in financial instruments must have initial capital of EURO 125 000. All other investment firms must have initial capital of EURO 730 000. In order to guarantee the ongoing financial soundness of such firms, capital requirements are laid down to cover the market risks to which they are exposed. 12

Regulatory capital Proposal presented by the Commission for DIRECTIVES OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL Re-casting Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions and Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit institutions. 13

AUTHORISATION AND OPERATING CONDITIONS FOR INVESTMENT FIRMS Regular review by the competent authorities of compliance with the conditions for initial authorisation (Art. 16). General obligation of the competent authorities in respect of on-going supervision (Art. 17). Avoidance of conflicts of interest (Art. 18) 14

AUTHORISATION AND OPERATING CONDITIONS FOR INVESTMENT FIRMS Provisions to ensure investor protection Conduct of business obligations when providing investment services to clients (Art. 19) All information, including marketing communications, addressed by the investment firm to clients or potential clients shall be fair, clear and not misleading. Marketing communications shall be clearly identifiable as such. 15

Conduct of business obligations (cont. ) Appropriate information shall be provided in a comprehensible form to clients or potential clients about: - the investment firm and its services, - financial instruments and proposed investment strategies; this should include appropriate guidance on and warnings of the risks associated with investments in those instruments or in respect of particular investment strategies, - execution venues, and - costs and associated charges so that they are reasonably able to understand the nature and risks of the investment service and of the specific type of financial instrument that is being offered and, consequently, to take investment decisions on an informed basis. This information may be provided in a standardised format. 16

Conduct of business obligations (cont. ) Obligation to execute orders on terms most favourable to the client (Art. 21) Client order handling rules (Art. 22) Obligations of investment firms when appointing tied agents (Art. 23) 17

OPERATING CONDITIONS FOR INVESTMENT FIRMS Market transparency and integrity Obligation to uphold integrity of markets, report transactions and maintain records (Art. 25) Post-trade disclosure by investment firms (Art. 28) Pre-trade transparency requirements for MTFs (Art. 29) Post-trade transparency requirements for MTFs (Art. 30) 18

Directive 2004/39/EC on markets in financial instruments (Mifi. D) RIGHTS OF INVESTMENT FIRMS Freedom to provide investment services and activities (Art. 31) Establishment of a branch (Art. 32) Access to regulated markets (Art. 33) Access to central counterparty, clearing and settlement facilities and right to designate settlement system (Art. 34) 19

List of Services and Activities coming within the Scope of Directive 2004/39/EC Section A Investment services and activities (1) Reception and transmission of orders in relation to one or more financial instruments. (2) Execution of orders on behalf of clients. (3) Dealing on own account. (4) Portfolio management. (5) Investment advice. (6) Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis. (7) Placing of financial instruments without a firm commitment basis (8) Operation of Multilateral Trading Facilities. 20

List of Services and Activities coming within the Scope of Directive 2004/39/EC (cont. ) Section B Ancillary services (1) Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management; (2) Granting credits or loans to an investor to allow him to carry out a transaction in one or more financial instruments, where the firm granting the credit or loan is involved in the transaction; (3) Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings; (4) Foreign exchange services where these are connected to the provision of investment services; (5) Investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments; (6) Services related to underwriting. (7) Investment services and activities as well as ancillary services of the type included under Section A or B of Annex 1 related to the underlying of the derivatives included under Section C - 5, 6, 7 and 10 - where these are connected to the provision of investment or ancillary services. 21

List of Financial Instruments coming within the Scope of Directive 2004/39/EC Section C Financial Instruments (1) Transferable securities; (2) Money-market instruments; (3) Units in collective investment undertakings; (4) Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash; (5) Options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event); 22

List of Financial Instruments coming within the Scope of Directive 2004/39/EC (cont. ) (6) Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market and/or an MTF; (7) Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in C. 6 and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls; (8) Derivative instruments for the transfer of credit risk; (9) Financial contracts for differences. 23

List of Financial Instruments coming within the Scope of Directive 2004/39/EC (cont. ) (10) Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Section, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognised clearing houses or are subject to regular margin calls. 24

Directive 2004/39/EC on markets in financial instruments (Mifi. D) REGULATED MARKETS Authorisation (Art. 36) Requirements for the management of the regulated market (Art. 37) Requirements relating to persons exercising significant influence over the management of the regulated market (Art. 38) Organisational requirements (Art. 39) 25

Directive 2004/39/EC on markets in financial instruments (Mifi. D) – Regulated Markets Admission of financial instruments to trading (Art. 40) Suspension and removal of instruments from trading (Art. 41) Access to the regulated market (Art. 42) Monitoring of compliance with the rules of the regulated market and with other legal obligations (Art. 43) Pre-trade and post-trade transparency requirements for regulated markets (Art. 44 -45) 26

Investor Compensation Schemes Directive 97/9/EC OBJECTIVE To protect investors following the failure of an investment firm. The compensation scheme operates where: -the competent authorities have determined that in their view an investment firm appears, for the time being, to be unable to meet its obligations arising out of investors' claims and has no early prospect of being able to do so; or - a judicial authority has made a ruling which has the effect of suspending investors' ability to make claims against an investment firm. 27

Investor Compensation Schemes (cont. ) Cover must be provided for claims arising out of an investment firm's inability to: - repay money owed to or belonging to investors and held on their behalf in connection with investment business; or - return to investors any instruments belonging to them and held, administered or managed on their behalf in connection with investment business The Directive sets a Community minimum level of compensation per investor of EURO 20 000, while at the same time authorising Member States to provide for a higher level of compensation if they so wish. An investor's claim must be met within a maximum of three months of the establishment of the eligibility and the amount of the claim. Obligations are laid down regarding information that must be supplied to investors. 28

Conditions for the Admission of Securities to Official Stock Exchange Listing Directive 2001/34/EC of the European Parliament and of the Council on the admission of securities to official stock exchange listings and on information to be published on those securities OBJECTIVE: The Directive aims to codify existing measures concerning the conditions for the admission of securities to official stock exchange listing and the financial information that listed companies must make available to investors. The existing measures are: coordinating the conditions for the admission of securities to official stock-exchange listing; information to be published on a regular basis by companies the shares of which have been admitted to official stock-exchange listing; information to be published when a major holding in a listed company is acquired or disposed of. 29

Prospectus for Public Offerings of Securities Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC A prospectus is a disclosure document containing essential financial and non-financial information that an issuer makes available to potential investors when it issues securities (shares, bonds, derivatives, etc. ) to raise capital and/or when it wants its securities admitted to trading on stock markets. 30

Prospectus for Public Offerings of Securities (cont. ) OBJECTIVES: - To improve the quality of information provided to investors by companies wishing to raise capital in the European Union (EU). - To increase the harmonisation of rules governing the drafting and content of prospectuses. - To introduce a single authorisation system for prospectuses which may be used in all EU Member States (a "single passport for issuers"). 31

Prospectus for Public Offerings of Securities (cont. ) Prospectuses may serve as "single passports" for issuers of securities wishing to offer their securities in more than one Member State. As a result of the modernisation of Community rules on content and distribution, prospectuses should contain better-quality information that is more easily accessible, e. g. via the Internet. The principle of automatic mutual recognition means that companies will no longer have to ask each Member State for regulatory approval of their prospectus for potential investors. This ensures better-quality information that is available on the Internet in several languages. 32

Prospectus for Public Offerings of Securities (cont. ) With effect from 1 July 2005, Directive 2003/71 will repeal Directive 89/298/EEC and so replace the previous mutual recognition system, which was partial and complex since it did not meet the objective of providing a single passport. It is one of the key elements of the Financial Services Action Plan, which advocates the establishment of an integrated financial services market by 2003. 33

Transparency Directive 2004/109/EC The Directive on transparency requirements revises and replaces provisions of Directive 2001/34/EC. The goal is to upgrade the information available to investors, thus helping them to allocate their funds on the basis of a more informed assessment. The Directive aims to ensure that investors receive interim management statements from those share issuers who do not publish quarterly reports, and half– yearly financial reports from issuers of new bonds. In addition, all securities issuers will have to provide annual financial reports within four months after the end of the financial year. The Directive is also expected to improve dissemination of information on issuers. 34

Transparency Directive 2004/109/EC Implementing measures (level 2) COMMISSION REGULATION (EC) No 809/2004 of 29 April 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements 35

Market Abuse Directive 2003/6/EC on insider dealing and market manipulation OBJECTIVE To strengthen the integrity of financial markets by limiting opportunities for insider dealing and market manipulation, to define common standards to increase investor confidence and to strengthen cooperation between the appropriate national authorities within the European Union. There are two main categories of market abuse: insider dealing and market manipulation. 36

Market Abuse – Directive 2003/6/EC The definition of what constitutes market abuse is a general one and is flexible enough to last as long as possible. Market abuse may arise in circumstances where investors have been unreasonably disadvantaged, directly or indirectly, by others who: - have used information which is not publicly available (insider trading); - have distorted the price-setting mechanism of financial instruments; - have disseminated false or misleading information. This type of conduct can undermine the general principle that all investors must be placed on an equal footing. 37

Market Abuse – Directive 2003/6/EC COMMISSION DIRECTIVE 2003/124/EC of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards the definition and public disclosure of inside information and the definition of market manipulation Commission Directive 2004/72/EC of 29 April 2004 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards accepted market practices, the definition of inside information in relation to derivatives on commodities, the drawing up of lists of insiders, the notification of managers' transactions and the notification of suspicious transactions 38

Market Abuse – Directive 2003/6/EC COMMISSION REGULATION (EC) No 2273/2003 of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards exemptions for buy-back programmes and stabilisation of financial instruments 39

Collective Investment Undertakings (UCITS) Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) amended by: Directive 88/220/EEC; Directive 95/26/EC; Directive 2001/107/EC; Directive 2001/108/EC. 40

Collective Investment Undertakings (UCITS) OBJECTIVE To achieve approximation at Community level of the conditions of competition between UCITS and to give unit-holders more uniform and more effective protection. CONTENTS UCITS are undertakings whose sole object is the collective investment in transferable securities of capital raised from the public and the units of which are, at the request of the holders, repurchased or redeemed out of the undertaking’s assets. 41

Collective Investment Undertakings (UCITS) (cont. ) UCITS must be authorised by the Member State in which they are situated. The authorisation is valid for all Member States. Requirement to publish a prospectus, regular reports, and information on the sale price of units. Designation of authorities responsible for authorisation and supervision in each Member State. 42

Collective Investment Undertakings (UCITS) (cont. ) Directive 2001/108/EC widens the scope of Directive 85/611/EEC to include collective investment undertakings which invest in financial instruments other than transferable securities, such as money market instruments, bank deposits, options and standardised financial-futures contracts, and units of other collective investment undertakings. 43

Collective Investment Undertakings (UCITS) (cont. ) Directive 2001/107/EEC introduces harmonised rules on market access and conditions for conducting business, together with prudential requirements on management companies. It sets up a "European passport" system, whereby a management company authorised to provide its services in one Member State may do so throughout the single market without having to apply for a new authorisation. 44