1 August 2011
REINVIGORATING OPEN TRADE IN FINANCIAL SERVICES
I.
INTRODUCTION
1.
Global work on economic recovery and regulatory reform1 is well underway. Likewise,
there is new momentum in bilateral, regional and multilateral trade negotiations. Against this
backdrop, it is important to reinvigorate efforts to open trade in financial services as an essential
component of economic recovery and as a driver of increased trade and investment flows.
Financial services liberalization in conjunction with global efforts toward consistent regulation
will advance the G20‟s economic recovery and reform agenda.
2.
G20 leaders have highlighted the critical role vibrant financial markets play in providing
the credit and capital essential for economic growth, especially in developing countries.
Financial services firms operating in a sound regulatory environment help companies manage
risk, raise debt and equity, carry out acquisitions or sales, and help individuals mobilize their
savings and plan and invest for the future. Capital markets facilitate economic growth and
development by substantially broadening the range of vehicles for savings and investment and
lowering the cost of capital for businesses and entrepreneurs.
3.
Notwithstanding these benefits, some regulatory reform efforts and trade policy
discussions suggest that a need for “de-globalization” or “dis-integration” of financial markets is
the right conclusion to draw from the financial crisis. This is sometimes driven by the perception
that open markets in financial services were a contributor to the crisis.
4.
According to the WTO, this is not the lesson to be drawn from the crisis. In a Secretariat
Note that analyzed the financial crisis, the WTO concluded that “none of the root causes of the
financial crisis can be attributed to services trade liberalization as provided for in the GATS,
namely granting market access and national treatment” and “the crisis [also] cannot be attributed
to the involvement of foreign financial institutions . . . .”2
1 Attached as Annex 1 is a summary of key measures to strengthen financial institutions, enhance supervision,
mitigate risk and address „too big to fail‟
2
See Council for Trade in Services and Committee on Trade in Financial Services,
Financial Services: Background
Note by the Secretariat, S/C/W/312, S/FIN/W/73, February 3, 2010, para. 96 (“WTO Financial Services Secretariat
Note”).
5.
The proper response to the crisis is not financial protectionism and shutting down global
markets through balkanized regulatory regimes,3 but reinvigorated support for open markets.4
The expansion of trade in financial services and with it, financial deepening, will contribute to
economic growth and recovery.5
6.
The G20 leaders have agreed with this approach. At the Toronto Summit they declared:
[F]inancial sectors in some emerging economies need to be developed further so
that they can provide the depth and breadth of services required to promote and
sustain high rates of economic growth and development. It is important that
financial reforms in advanced economies take into account any adverse effects on
financial flows to emerging and developing economies. Vigilance is also needed
to ensure open capital markets and avoid financial protectionism.6
7.
This paper sets forth some principles that should inform negotiations on trade in financial
services, whether in bilateral or regional FTAs or in the Doha Round.
II.
BENEFITS OF OPEN FINANCIAL SERVICES MARKETS
8.
Liberalization of financial services is central to advancing economic growth in developed
and developing countries, as economists have empirically demonstrated.7 As financial markets
develop, they create long-term economic growth, stronger, more competitive financial
institutions, and a more stable financial system.
9.
Indeed, the World Bank has estimated the value of further liberalizing trade in financial
services for developing countries at $300 billion.8
10.
Diversified financial services markets enhance economic growth and financial stability
by developing new avenues for investing savings and funding entrepreneurial activity beyond the
banking sector. As Managing Director of the Monetary Authority of Singapore, Heng Swee
Keat, observed:
[The] bigger challenge lies less in having more stringent regulations, but more in
development and innovation of financial services to complement . . . economic
3 Unharmonized regulatory regimes may result in unnecessary restrictions on the cross-border financial services
business or require global financial institutions to enter into transactions in a fragmented way. This in turn impedes
centralized, global risk management and reduces the potential for loss absorbency.
4 For example, Malaysia has responded to the financial crisis by implementing a broad liberalization package aimed
at improving access to both the conventional and Islamic financial sectors.
See WTO Financial Services Secretariat
Note at para. 117, n. 83.
5
See WTO Financial Services Secretariat Note at para. 69.
6 G20 Toronto Summit, “Toronto Summit Declaration,” June 2010, para. 13, available at
http://www.g20.utoronto.ca/2010/to-communique.html.
7
See, e.g., WILLIAM R. CLINE, FINANCIAL GLOBALIZATION, ECONOMIC GROWTH, AND THE CRISIS OF 2007-09, pp.
33, 141-42 (Peterson Institute 2010) (analyzing 80 studies of financial liberalization and concluding that “the great
preponderance of empirical evidence is on the side of a positive growth effect of openness.”).
8 World Bank,
Global Economic Prospects and the Developing Countries at p. 172, Table 6.3 (2002).
2
development. Savings rates in Asia are high, but these have to be efficiently
intermediated to support productive investments. In most parts of Asia, the
banking system dominates the intermediation channel. Developing a stronger
second channel through the capital markets, venture funds and private equity to
support a range of entrepreneurial activities can raise the efficiency and resilience
of the system. This will also provide a wider range of asset classes to meet the
investment needs of a rising middle class.9
11.
The development of financial markets is assisted by the presence of foreign suppliers of
capital markets-related services, whether through commercial presence or the delivery of
services cross-border. Experience demonstrates that foreign suppliers enhance competition and
bring to a market additional capital, technology, products and expertise. Each of these factors can
reduce the cost of financial services, and thereby improve the competitiveness of domestic
companies that use these services.
III.
OPEN TRADE IN FINANCIAL SERVICES IS FULLY COMPATIBLE WITH
SOUND REGULATION OF FINANCIAL MARKETS
12.
The most persistent and unjustified concern about opening trade in financial services is
that it equates liberalization with deregulation. This is not the case. Trade in financial services
focuses on questions of market access and nondiscriminatory treatment, not the prudential
conditions that apply in the market in question. Opening markets to foreign competitors can be
done without prejudice to regulatory standards. Liberalizing trade in financial services is about
open markets, clear rules and fair competition, not deregulation.
13.
Indeed, sound regulation is essential to healthy, open, and competitive markets. A key
aspect of liberalization is designing regulations that protect investors, promote fair, efficient, and
transparent markets and reduce systemic risk. Individuals and companies seeking to invest or
raise funds will not rely on the financial markets unless they have confidence that those markets
are well regulated.
14.
Financial services regulations typically include:
Standards that a supplier must meet in order to be authorized or licensed to do business in
a market, such as standards that address capital adequacy and liquidity, the supplier‟s
knowledge, resources, skills, and risk management procedures (“
authorization
requirements”);
Rules of conduct for a supplier doing business in a market, including rules relating to
disclosure of information (including risk warnings) to customers, disclosure of
information about the supplier, execution of orders, and the protection of customer assets
(“
conduct of business rules”); and
Rules relating to fraud, insider dealing, and market manipulation (“
market abuse rules”).
9 Keynote Address by Heng Swee Keat, Managing Director, Monetary Authority of Singapore at the Paris
EUROPLACE International Financial Forum, “Next State: Policy Challenges in Asia,” October 26, 2009, paras. 16-
17, available at
http://www.mas.gov.sg/news_room/statements/2009/Speech_by_Mr_Heng_Swee_Keat_for_Paris_Europlace_confe
rence_on_26_October_2009.html.
3
15.
An effective regulatory regime will maximize access for suppliers and consumers without
undermining key regulatory objectives. As the International Organization of Securities
Commissions (“IOSCO”) has noted, a regulator often conducts a:
[cost-benefit] analysis to facilitate an understanding of the financial and other
costs of the proposed regulation to the intermediary as compared to the benefits
the regulation is expected to produce for investors and other market participants.10
16.
Each country‟s commitments to broaden market access would continue to be subject to
exceptions for prudential measures and for measures taken to safeguard the balance of
payments. These exceptions provide additional latitude necessary for regulatory reform efforts.
Concerns about regulatory capacity can be addressed by making commitments subject to a
reasonable phase-in period, consistent with increasing regulatory capabilities.
17.
In fact, the WTO Secretariat has confirmed that in responding to the financial crisis,
market access commitments on financial services did not hinder Members‟ flexibility to make
the regulatory choices they deemed necessary to stabilize their economies.11 Most countries
maintained, rather than contracted, market access and implemented new policies for the limited
purpose of closing regulatory loopholes and temporarily supporting financial institutions.12
IV.
CAPITAL MARKETS LIBERALIZATION
18.
A single capital markets transaction today often includes more than one kind of financial
activity and may involve all four “modes” of supply. For example, an underwriting of debt
securities may require in-person meetings (including due diligence) with management of the
issuer, as well as electronic and telephonic exchanges of information. In addition, the issuer may
enter into a derivatives contract with the underwriter to hedge an interest rate risk. As a result, in
order to most sensibly integrate their consumers with global financial markets and to secure the
benefits of capital-markets liberalization, countries will need to make commitments with respect
to all capital markets-related activities and in all four modes of supply.
V.
CROSS BORDER ACCESS (MODE 1)
19.
Countries should permit suppliers and consumers of capital markets-related services to
transact business on a cross-border basis, and such suppliers and their services should be entitled
to national treatment.
20.
Countries should facilitate cross-border access by exempting foreign suppliers under
certain circumstances from authorization requirements (described at paragraph 14 above). As
described in the IOSCO Report, many Members currently do offer such exemptions, taking into
account one or more of the following factors:
10 Technical Committee of the International Organization of Securities Commissions, “Regulation of Remote Cross-
Border Financial Intermediaries,” February 2004, p. 4, available at
http://www.iosco.org/library/pubdocs/pdf/
IOSCOPD162.pdf (“IOSCO Report”).
11
See WTO Financial Services Secretariat Note at para. 117.
12
See WTO Financial Services Secretariat Note at para. 117.
4
• whether the investor is sophisticated (as defined in local law), thereby
recognizing that the securities laws need not protect sophisticated investors in
certain circumstances;
• whether the foreign supplier is well regulated in its home jurisdiction (i.e.,
unilateral or mutual recognition of other regulators);
• whether the foreign supplier solicits customers, or actively markets its services,
in the local jurisdiction; and
• whether the securities transaction is “intermediated by” (i.e., conducted through)
a locally authorized supplier.13
21.
As recognized in the IOSCO Report, the regulation of cross-border suppliers is based on
“considerations relating to the goals of investor protection, efficient capital markets, and the
appropriate balance between these two.”14 Even when such suppliers are exempted from
authorization requirements, the provision of the services typically would remain subject to the
conduct of business and market conduct rules described above that are aimed at investor
protection and safety and soundness concerns.
VI.
CONSUMERS WHO TRAVEL ABROAD (MODE 2)
22.
Countries should allow their consumers to obtain any capital markets-related service
when they travel outside their home territories. Many countries already permit their consumers to
do so, based on a balancing of the goals of investor protection and efficient capital markets as
referred to in the IOSCO Report.
VII.
COMMERCIAL PRESENCE (MODE 3)
23.
Countries should permit foreign suppliers of capital markets-related services to establish
a new commercial presence or acquire an existing commercial presence in their territories. Such
suppliers should be able to choose their corporate form (e.g., a 100%-owned subsidiary, a branch
or a joint venture) and be treated no less favorably than domestic suppliers (i.e., national
treatment). Countries are of course free to regulate financial products offered by foreign
suppliers on the same terms as apply to those offered by domestic suppliers.
VIII. THE MOVEMENT OF PERSONS (MODE 4)
24.
Countries should permit temporary entry into their territories for persons who supply
capital markets-related services to work with clients or to staff a commercial presence.
IX.
REFLECT EXISTING FAVORABLE MARKET ACCESS CONDITIONS IN
COMMITMENTS
25.
Many countries currently provide market access that is consistent with some or all of the
recommendations described above. In most cases, however, this level of access is not reflected in
their international commitments. Countries – both developed and developing – should at a
13
See IOSCO Report at pp. 5-9.
14
IOSCO Report at p. 1.
5
minimum ensure that their commitments reflect the level of market access afforded under their
domestic laws. This will afford the legal certainty and predictability that stimulate economic
activity.
X.
TRANSPARENT REGULATION
26.
Regulation must be transparent: both suppliers and consumers of capital markets-related
services must know what the rules are and have confidence that the rules will be applied
consistently and fairly. Although there are different ways to achieve this goal, in general,
regulators should: (i) propose regulations in draft form and provide interested parties the
opportunity to comment on such draft regulations, where practicable; (ii) make publicly available
the requirements that suppliers must meet in order to supply a service; and (iii) enforce laws and
regulations according to fair and transparent criteria.
XI.
PROCESSING OF FINANCIAL DATA
27.
Countries should permit financial institutions freely to transfer information outside of the
local jurisdiction for processing. They should also permit financial institutions to perform certain
functions, such as trade and transaction processing, in their home jurisdiction rather than require
that those activities be conducted by a local affiliate.
XII.
INVESTMENT PROTECTIONS
28.
Where bilateral or regional trade agreements include investment chapters, it is important
that they include meaningful protections for investors in financial services institutions, including
non-discrimination, fair and equitable treatment, free transfers of profits and capital, prompt,
adequate, and effective compensation for any expropriation, and the ability to use international
arbitration to resolve disputes. Robust investment protections can encourage billions of dollars of
investment.
The organizations that have produced and endorsed this paper represent the shared interests of
financial services firms operating in markets across the global economy. They share a
commitment to stable, competitive and sustainable financial markets that support economic
growth and benefit society.
6
Annex 1: The changing regulatory landscape in financial services: key measures to strengthen financial institutions, enhance supervision, mitigate risk and address ‘too
big to fail’
New regulatory
New leverage and
Prohibition of
Greater alignment of
New approaches to
Reform of
Greater oversight of
New measures to
capital requirements liquidity rules to
‘proprietary
pay and long term
supervision of
derivatives markets
credit rating agencies ensure financial
intended to buffer
make firms better
trading’ by
risk management to
systemic risk as
directed towards
and certain fund
services firms can
firms against losses
able to weather
investment banks
ensure remuneration
well as prudential
increasing
managers
fail without
instability
does not encourage
conduct
transparency and
systemic risk, or
excessive risk-taking.
use of exchanges.
taxpayer support
New Basel III
New ratios for
In the US, under the
Financial Stability
Much greater
Reform in both EU
Greater supervision of
US and EU
standards will impose
leverage and liquidity „Volcker Rule‟
Board guidelines,
awareness of need to
and US to ensure,
rating agencies and
regulators all
higher regulatory
in Basel III intended
trading done solely
translated into new
understand systemic
where practicable
greater transparency of requiring
capital ratios on
to help guard against
for the short term
European guidelines
risk at a global level,
and appropriate,
rating agency
development of
financial institutions.
excessive gearing
financial gain of an
through CRDIII and
driven by FSB and
greater
methodology and
„living wills‟ for
and ensure that
investment bank will
that proscribe large
IMF.
standardisation of
evidence base.
financial firms,
Additional measures
institutions can raise
be prohibited.
upfront cash bonuses
derivative contracts,
ensuring regulators
under consideration
capital quickly.
to market practitioners
Creation the
greater use of central
New rules on the
understand their
for „Systemically
responsible for
European Systemic
clearing and greater
regulatory oversight of counterparty risk and
Important Financial
material risk.
Risk Board in the EU
transparency to
private equity and
can resolve them
Institutions‟ and in
and the Financial
regulators and
hedge funds and their
quickly and without
the US, enhanced
US regulators are
Stability Oversight
markets on what is
managers in the EU
systemic instability.
prudential standards
considering similar
Council in US, to
being traded.
and US
for certain institutions
moves.
monitor and report to
Widespread
specifically provided
governments on
consideration of
for in Dodd Frank.
General industry shift
potential systemic
forms of „contingent‟
to much greater
risk.
debt, convertible into
New tougher
remuneration in
equity if a financial
definitions of Tier 1
equity, deferred
Shift in prudential
firm finds itself in
capital, essentially
remuneration and
culture away from
trouble.
limiting core
clawback against
micro focus on
regulatory capital to
performance failure.
individual firms to
In the US, the
common equity.
parallel
creation of an orderly
understanding of
liquidation regime to
counterparty and
handle the resolution
network risk.
of failed firms.
New regular stress
tests to determine the
strength of
institutions.