17 June 2002

ESBG Position Paper on ISD

One of the main issues raised by the Commission in the document is how to regulate the current “multi venue order-execution environment”. Nowadays, securities orders are no longer concentrated on traditional stock exchanges. New possibilities for orders to be executed by financial institutions internally are increasingly surfacing and competing with “classical stock exchanges”. This phenomenon is usually referred to as “internalisation”.

Given savings banks’ traditional focus on retail investors, the ESBG is particularly concerned about the fact that an optimal level of investor protection should be guaranteed when orders are executed through “internalisation”. The only way in which an investor can benefit from an alternative order execution is if he is provided with a price, which is set by a liquid main-stream stock exchange and which he can used as a reference price (benchmark). Without this, it will be impossible for the investor to pass its orders or to check whether his order was executed in the best possible way.

The ESBG therefore does not favour the Commission proposal to authorise intermediaries to carry out the “systematic internalisation” of large volumes of orders. A massive internalisation could deprive the regulated markets of enough liquidity to have a considerable negative impact on the quality of prices. This liquidity would not be restored by an increase in transparency measures. As a consequence of “systematic internalisation”, prices determined on regulated markets would not serve as reference any longer. This situation not only contradicts the idea of regulated markets as central and liquid platforms for securities trading, it is also not particularly conducive to the protection of investors’ interests.

As to the business practices for investor protection proposed by the Commission, the technical implementation measures (Level 2 of the Lamfalussy procedure) should be adopted only after a cost-benefit analysis is undertaken. Inefficient regulatory requirements, which do not contribute to enhance investor protection, should be avoided. These would lead to an unnecessary increase in the cost of conducting securities transactions with retail investors. “Extensive consultations with all market players, including industry representatives, have proven successful so far,” pointed out Mr Chris De Noose, Chairman of the ESBG Management Committee and added “we look forward to continuing participating in this process”.

ESBG Position Paper on ISD

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