CONFIDENTIAL DAFFE/MAI(97) 1/REV2

VII. FINANCIAL SERVICES⁽¹⁾

PRUDENTIAL MEASURES

1. The proposed Article applies to measures taken with respect to financial services. Given the

coverage of the MAI, the Article will apply to measures affecting investors and their investments in the

financial services area and not all aspects of international trade in financial services. The Expert Group

No.5 considered that there was no need to make this point explicit in the proposed Article.

2. The proposed text recognises the right of a Party to take prudential measures which do not

conform with National Treatment, MFN and the other provisions of the Agreement, provided that the

measures are not used as a means of avoiding Party's commitments and obligations. One delegation

suggested that a requirement that prudential measures be not more restrictive than necessary to meet the

prudential objective might be included in the proposed Article.

3. One delegation asked whether restrictions on transfers taken in connection with orders or

judgements related to civil, administrative and criminal proceedings, etc. would be covered by paragraph I

of the proposed article, subject to the anti-abuse provision of paragraph 2. This question may be related to

paragraph 4.6 in the "Transfers" Article.

4. In paragraph I of the proposed Article, the Expert Group opted for the term "enterprise". This

term was understood to be broader than "institution" which is generally only an entity expressly authorised

to do business and regulated or supervised under the law of the party in whose territory it is located.

5. Except for one delegation (Australia), EG5 took the view that the exercise of a Party's right to

make prudential measures which do not conform with the provisions of the Agreement should in principle

be subject to the dispute settlement mechanism of the MAI. Most delegations were of the view that

financial services expertise should be required for any arbitration panel for disputes on issues relevant to

financial services.

6. EG5 felt it would be desirable that the Agreement define certain terms including the term

"measure".

AUTHORISATlON PROCEDURES

1. Most EGS delegations recommended adoption of the draft text on authorization procedures.

2. It was suggested that provisions on authorization procedures may have a broader application than

financial services.

3. A few delegations felt that no such provisions are necessary as they considered that the

provisions would not add to the basic obligations of the agreement.

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TRANSPARENCY

1. The Expert Group No. 5 recommended that, in addition to the general Transparency provisions

of the MAI, such specific text for financial services be adopted.

2. The Group also considered a provision proposed by one delegation calling for advance re

notification, to the extent practicable, to all interested persons of any measure of general application that re

the Contracting Party proposes to adopt which may affect the operation of the agreement, in order to allow

an opportunity for such persons to comment on the measure. The text reads as follows:

"Each Contracting Party shall, to the extent practicable, provide in advance to all interested

persons any measure of general application that the Contracting Party proposes to adopt which

may affect the operation of the Agreement, in order to allow an opportunity for such persons to

comment on the measure. Such measure shall be provided:

a) by means of of ficial publication;

b) in other written form; or

c) in such other form as permits an interested person to make informed comments on the

proposed measure."

While delegations agree to the value of prior consultation, a majority of delegations expressed concerns

that the above proposed provision may be unduly burdensome, and would not be practical.

INFORMA TION TRANSFER AND DATA PROCESSING

1. The Expert Group No. 5 recommended adoption of the draft text on information transfer and data

processing⁽²⁾.

2. The Group considered that this text may have a broader application than financial services and

invited the Negotiating Group to consider this possibility.

3. It is the Group's common understanding that such provisions do not prejudice in any way the

right of Contracting Parties to take prudential measures as provided by the prudential carve-out article

[DAFFE/MAI(97)1, page I 1].

4. The European Commission provided comments (circulated after the March meeting as

DAFFE/MAI/EG5/RD(97) 10) on the reasons why the term "privacy" in paragraph 2 b) should be adopted,

instead of the term "personal privacy" used in the GATS. Some delegations wanted to review this aspect

of the text further.

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MEMBERSHIP OF SELF-REGULATORY BODIES AND ASSOCIATIONS

1. The Expert Group No. 5 recommended adoption of the proposed text.

2. It is the Expert Group's common understanding that these provisions do not prevent self-

regulatory bodies and associations, including deposit insurance institutions, from applying the

requirements of the relevant rules and regulations for access to membership as long these requirements are

consistent with the provisions of this Agreement.

3. Most delegations supported the following interpretative note proposed by one delegation:

"Contracting Parties may meet their obligations on access to clearing systems for branches of

financial services enterprises by providing indirect access, for example, through an enterprise

incorporated in the territory of the Contracting Party concerned."

4.A few delegations wanted to review further the proposed interpretative note because they

considered that it would impose a lesser standard than in the WTO. One delegation suggested adding to

the interpretative note: "provided that such access provides equal opportunities".

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CONFIDENTIAL DAFFE/Nf Al(97) 1 /REV2

PAYMENTS AND CLEARING SYSTEMS/LENDER OF LAST RESORT

1. The Expert Group No.5 noted that these issues were related to the role of monetary authorities

and agreed to consider further the proposed text.

2. Most delegations supported the following interpretative note proposed by one delegation:

"Contracting Parties may meet their obligations on access to clearing systems for branches of

financial services enterprises by providing indirect access, for example, through an enterprise

incorporated in the territory of the Contracting Party concerned."

3. A few delegations wanted to review further the proposed interpretative note because they

considered that it would impose a lesser standard than in the WTO. One delegation suggested adding to

the interpretative note: "provided that such access provides equal opportunities".

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CONFIDENTIAL DAFFE/MAI(97) 1/REV2

DISPUTE SETTLEMENT⁽³⁾

DETERMINATION OF CERTAIN FINANCIAL SERVICES ISSUES IN INVESTOR TO

STATE PROCEEDINGS

1. Delegations considered whether the MAI should provide for a special procedure, in investor to

state proceedings, to determine whether certain financial services measures (specifically, prudential

measures, temporary safeguards and actions taken by a monetary authority) are consistent with the MAI.

2. Some delegations believe that the decision of a Contracting Party to invoke prudential measures,

and perhaps some other kinds of measures, should not be subject to the dispute settlement provisions of

the MAI.

3. Some delegations believe that an investor to state panel should be free to decide all financial

services issues. These delegations are concerned that a special provision dealing with certain financial

services matters could lead to a call for special provisions in other areas.

4. The majority of delegations believe that MAI Parties should have a voice in the question of

whether a prudential measure, and perhaps a temporary safeguard or action by a monetary authority, is

consistent with the MAI. These delegations hold the view that there must be a balance between the interest

of an investor in pursuing its remedies under the MAI and the need for stability in financial markets.

COMPOSITION OF DISPUTE SETTLEMENT PANELS IN FINANCIAL SER VICES DISPUTES

1. Delegations agree that panellists in state to state and investor to state proceedings should have

the necessary expertise relevant to prudential issues and other financial services issues when the dispute

involves such an issue.

2. A majority of delegations believe that the MAI should contain a provision that requires or

encourages Parties to appoint financial services experts as panelists in such disputes.

3. However, some delegations believe that the current dispute settlement provisions on

appointments to panels, which would enable a disputing Party to appoint a financial expert to a panel if it

so desired, are adequate. These delegations are concerned that a special provision on appointment of

financial services experts might lead to calls for such provisions with respect to other areas of expertise.

4. While the Group has not reached agreement on the principle of a specific provision on

appointment of financial services experts, and have not had an opportunity to discuss text in detail, two

proposals for a provision have been put forward for consideration.

5. Under the first proposal, the MAI would contain a provision modelled after a provision in the

GATS Annex on Financial Services.

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DEFINITION OF FINANCIAL SERVICES

1. The recommended definition of financial services is the same as that used in the OATS.

2. One EG5 delegation asked whether transfer of credit risks (for instance, credit swaps) and the

provision of stored value cards were considered as financial services. EG5 understood the proposed list of

financial services as an open-ended one. Therefore, it was considered that, unless otherwise specified, the

services in question should be regarded as financial services.

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OTHER ISSUES

NEW FINANCIAL SERVICES

1. Several EG5 delegations considered that owing to the rapid pace of innovation in the financial

services sector, it is important to ensure that an investor in the host country can introduce a new service to

that market and that, as there are not adequate points of comparison, relying on the National Treatment

principle alone could effectively exclude a foreign-owned establishment from introducing new financial

services. Therefore these delegations favoured the preparation of specific text.

2. Three delegations supported the introduction in the MAI of specific provisions concerning new

financial services. The Group considered two options for text:

Option I

" A Contracting Party shall permit financial services enterprises of any other Contracting Party

established in its territory to offer any new financial services."

Option 2

"A Contracting Party shall permit a financial services enterprise established in its territory that is

an investment of an investor of any other Contracting Party to offer in its territory any financial

service that is not offered in the territory of the Contracting Party but which is offered in the

territory of another Contracting Party. A Contracting Party may determine the institutional and

juridical form through which the service may be provided and may require authorization for the

provision of the service. Where such authorization is required, a decision shall be made within a

reasonable time and the authorization may only be refused for prudential reasons".

3.Most delegations questioned the need for specific provision and preferred to rely on the National

Treatment provision of the MAI, possibly accompanied by an interpretative note.

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"ACQUIRED RIGHTS"

l. EG5 considered suggestions made by one delegation that there may need to be provisions

concerning the "acquired rights" of foreign financial services enterprises established in a Contracting Party

[see DAFFE/MAI/EGS/RD(96)1].

2. Some delegations considered that it was unclear what the concept of "acquired rights" referred

to. The European Commission provided comments on this matter (circulated after the March meeting as

DAFFEIMAI/EG5/RD(97)9). Delegations wished to give further consideration to these comments. Some

delegations considered that this matter is linked to "standstill" and should be addressed in the general

framework of the Agreement.

3. Other delegations considered that the inclusion of provisions on "acquired rights" could create

distortions in the treatment of investors depending on the date of their respective establishment. Those

delegations considered that a Contracting Party should have the ability to apply new regulations to al'

financial institutions operating on its territory so long as these regulations are consistent with the

provisions of the Agreement.

RIGHT OF INITIAL ESTABLISHMENT, EQUALITY OF COMPETITIVE OPPORTUNITY AND

APPLICATION OF NATIONAL TREATMENT IN SUB-NATIONAL UNITS OF GOVERNMENT

1. One EG5 delegation made proposals for text in these areas [DAFFE/MAI/EG5/RD(96)1] A few

other delegations expressed support for the proposal on right of initial establishment and equality of

competitive opportunity.

2. Most delegations did not support adoption of text in these areas. They considered that these

issues go beyond financial services issues and have been addressed or are under consideration within the

broader framework of the Agreement. A few delegations considered that specific market access disciplines

for financial services should be developed in the MAI.

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CONFIDENTIAL DAE:E7E/MAI(97)1/REV2

RESTRICTIONS BASED ON DOTATION CAPITAL OF BRANCHES OF FINANCIAL SERVICES

ENTERPRISES

1.One EG5 delegation proposed the following text:

"Some countries still require branches of foreign banks to maintain dotation capital. To the

extent that dotation capital requirements are imposed on branches of banks of another

Contracting Party, any operational restrictions based on capital applicable to branch offices shall

not be based on such dotation capital. Rather, Contracting Parties shall base such operational

restrictions on the world-wide consolidated capital of the parent bank."

Detailed comments explaining the rationale for this proposal are contained in paragraph 31 of the Aide-

Memoire in DAFFE/MAI/EG5/M(97)1.

2. While two other delegations supported this proposal, several delegations considered that the

measures referred to in the above text were justifiable on prudential grounds and should be permitted

under the MAI. Some delegations considered that the issue should preferably be dealt with on a bilateral

basis (between national supervisory authorities).

3. Delegations agreed that any such measures should not discriminate between branches of non-

resident financial institutions and domestic financial institutions.

"INDIRECT INVESTMENT"

1. One EG5 delegation expressed concern that the extension of the protection of the MAI to indirect

investment may not be appropriate for the financial services sector for prudential reasons, particularly in

instances where there is a lack of appropriate co-operation arrangements with the supervisory authorities of

non-MAI countries [DAFFE/MAI/EG5/RD(97)7].

2. A number of delegations wanted to consider the matter further. Other delegations considered that

the MAI provided safeguards to adequately address these concerns, including the prudential carve-out, the

proposed denial-of-benefits clause, and possible specific provisions for financial services in the dispute

settlement process (see below).

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1. This Commentary reflects comments made in EG5 and informal consultations on financial matters at expert level.

2. Korea reserved its position.

3. Comments made during the informal consultations on financial matters on 14-15 April.