Summary Record of the 24th Meeting of the European Securities Committee / Alternates 18 October 2004 (ESC 43/2004)

Rue de la Loi 200, B-1049 Bruxelles / Wetstraat 200, B-1049 Brussel - Belgium. Telephone: [phone].

Office: C 107 - 3/71. Telephone: direct line (32-2) 295.05.25. Fax: [phone].

http://europa. eu. int/comm/internal_market/

E-mail: maria. *****@***eu. int

EUROPEAN COMMISSION

Internal Market DG

FINANCIAL MARKETS

Summary Record of the 24th Meeting

of the European Securities Committee / Alternates

18 October 2004 (ESC 43/2004)

The meeting was chaired by Nathalie de Basaldua, Head of Unit of Securities Markets in DG Internal Market; David Wright, who is the designated Chairman of the ESC at delegates level had to attend a high level conference on corporate governance in the Hague on the same day.

1. ADOPTION OF AGENDA

The draft agenda was adopted. The Chairperson announced that the Commission would

provide information on the adoption of IAS 39 and discuss a letter they had received

from CESR asking for an extension of the deadline for delivering their advice concerning

Article 21 of the Markets in Financial Instruments Directive (MiFID) under item 12 (Any

other business).

2. PROGRESS ON UCITS PRIORITIES/ TRANSPOSITION OF THE UCITS

RECOMMENDATIONS/ MANDATE ON ELIGIBLE ASSETS

Under this point the Commission services provided information on three issues:

2.1 Questionnaires on the implementation of the Recommendations on Simplified

Prospectus and Derivatives of 27 April 2004

The Commission services recalled that implementation of these recommendations has

been identified by the ESC in its July meeting as a priority area for action in the field of

UCITS. According to these Recommendations, Member States were asked to report on

measures taken to implement the Recommendations by the end of September 2004 and to

report their first experiences by 28 February 2005 To facilitate information gathering on

the steps taken by Member States, the Commission has prepared two sets of

questionnaires (one for each Recommendation) which were addressed to the ESC

Members and CESR respectively.

The questionnaires circulated to the ESC Members cover mainly factual elements (e. g.

measures taken by Member States up to this stage further to the Recommendations,

timeframe for future measures etc). These questionnaires will, moreover, facilitate the

process of information gathering by providing a common format for the transmission of

the relevant information. ESC Members may send comments on the questionnaires to the

Commission before the 30 October. Then, ESC Members will have to respond to the

questionnaires by 30 November 2004.

The questionnaires addressed to CESR are more detailed: A more detailed survey

regarding the technical details which are the remit of regulators is necessary; these

Recommendations are also related to the day-to-day supervisory work. The concrete

deadlines for furnishing the relevant information will be fixed in a cooperative way

taking into account the work-load of CESR Expert Group on investment management.

CESR welcomed the questionnaires send to them by the Commission and informed

delegations that they have already circulated them to their Members.

2. 2. Level 2 mandate on eligible assets

The mandate was circulated to ESC-Members for information shortly before the ESC

meeting. The Commission services informed delegations that some changes had been

introduced to the mandate following comments formulated by the Member States (e. g.

removal of certain issues of lesser priority, less prescriptive presentation, focus on

existing problematic cases, reformulation and clarification of certain questions,

clarification of the scope of items that can be considered as forming part of the

definitions and, thus, be subject to comitology etc.).

Concerning the request formulated by one delegation – and supported by some more

delegations – to circulate to the ESC delegations the legal opinion of the Commission’s

Legal Service concerning the scope of comitology powers granted to the Commission

under the UCITS Directive, the Commission services explained this document is

confidential; nevertheless an extensive response articulating the Commission’s position

had been sent to delegations – reflecting the main arguments included in the opinion of

the Commission’s Legal Service. The Commission services explained why the opinion of

the Legal Service should remain confidential: They consider that this requirement is not

in line with Regulation n° 1049/2001 concerning access to documents: According to

Article 4§ 3 of this Regulation the Commission is entitled to refuse access to a document,

drawn up by an institution for internal use, which relates to a matter where the decision

has not been taken by the institution, if disclosure of the document would seriously

undermine the institution's decision-making process. In the present case, the Commission

services consider that circulating a note that the Legal Service drafted to help DG

MARKT to draft the CESR mandate would affect the Commission’s right to take

legislative initiative at a later stage. Nevertheless, the Commission services have tried to

be as helpful as possible by sending the explanatory letter mentioned above.

The delegations which consider that the draft mandate goes beyond the comitology

powers provided for in the UCITS Directive repeated their concerns during the meeting.

Some of them said that they are not convinced by the letter circulated by the

Commission; however, they will wait for the results of the reflection by CESR and for

the final decision that the Commission will take.

The ECB expressed its interest in the work carried out by CESR and its willingness to

contribute to the CESR level 2 work; for instance with respect to money market

instruments the ECB contribution could be very useful since the ECB has developed

specific projects in that field (e. g. STEP).

CESR responded that they are willing to work closely with the ECB. CESR pointed out

that the Commission should identify what is legally possible for level 2. Concerning the

timetable, given the enormous pressure they’re facing because of the various mandates

granted recently by the Commission, they urged the Commission to stick to the 12-month

rule in order to allow extensive consultations.

2. 3. . Presentation of a draft consultation paper on transitional provisions by CESR

The Commission services informed ESC delegations that, in the CESR Chairmen

meeting of 14-15/10/04, the CESR Chairmen reached a compromise on a document on

transitional provisions to be submitted to public consultation by agreeing that a deadline

of 1.5.06 should be granted, within which period the UCITS I management company

should be converted into UCITS III.

One delegation asked a question concerning the nature of the measures adopted by

CESR. The Commission services responded that these measures form part of a level 3

mechanism which will help Member States to progressively move towards more

conformity with the level 1 legal requirements in UCITS III. CESR added that, in their

view, transitional measures of this type are typical level 3 work; thus, they could not

form part of any legislative text but should, instead, be incorporated in common

guidelines agreed upon by the supervisors.

3. REVIEW OF THE LAMFALUSSY PROCESS

The Commission services outlined the background to the review of the Lamfalussy

process and the way in which the Commission sees it progressing:

The idea of a review of the Lamfalussy process originates from the Lamfalussy report

itself. The Stockholm European Council Resolution of 23 March 2001 confirmed that

such a review should take place in 2004.

The Lamfalussy review will be discussed by the Financial Services Committee (FSC) on

28 October. The ECOFIN Council will adopt conclusions later this year. The European

Parliament will separately produce an own initiative report on the Post-FSAP agenda. At

the same time, the Inter-Institutional Monitoring Group is currently finalising its third

report, which will be published most probably next month.

The Commission will produce a paper for the FSC outlining its views. A document

based on this paper will be submitted to public consultation before the ECOFIN Council.

The preliminary conclusion drawn by the Commission is that significant progress has

been made. The Lamfalussy process has been fully implemented on schedule and it is

now being extended to banking, insurance and occupational pensions. The open and

transparent way in which work on delivering the Lamfalussy measures has been pursued

has resulted in an improvement in the quality of legislation and an acceleration of the

legislative process; and it has encouraged regulatory and supervisory convergence within

Europe. So the Commission will argue that the Lamfalussy process should continue.

Nevertheless further improvements are needed:

- Consultative processes will need to be further developed to ensure they take fully into

account better regulation principles and that the consumer’s point of view is sufficiently

taken into consideration.

- Transposition deadlines need to be looked at so that there is sufficient time for

implementation and for market participants to adjust to the new rules.

- The role of Level 3 and its relation to the other levels should be articulated more

clearly. The structures and powers of national regulators should be further examined –

with the objective of facilitating and encouraging further medium-term convergence

among them – though, ultimately, this is a matter for the Member States to decide. The

mediation role envisaged by CESR could become an effective way of enhancing

day-to-day cooperation, but it should be seen as complementary to the Commission’s

enforcement procedures, rather than as a substitute for them; and it should not be

considered an instance of appeal before a case reaches the ECJ.

- Priority should be given to the enforcement of all recently adopted FSAP Directives;

Level 4 should be strengthened through clear, practical arrangements, such as those that

have been discussed within the ESC.

- Over the medium term, the possibility of bringing together the existing securities rules

in a common and consistent set of European rules through codification should be

explored.

- The Commission should intensify the regulatory dialogue with third countries, in

particular the United States, to ensure upstream convergence of regulatory principles as

much as possible.

- The mandate of the Inter-institutional Monitoring Group should be expanded to cover

banking, insurance and occupational pensions. New members should be nominated, and

the Group’s working methods should be revisited and agreed between all three

Institutions. The Group should present an annual report to the Institutions.

- Sufficient resources should be allocated to all activities envisaged.

Delegations and CESR have in general a positive opinion concerning the first results

achieved through the Lamfalussy process; nevertheless, while acceleration of the

legislative process through comitology is a proven fact, flexibility still needs to be

proven. Delegations underlined the importance of evaluating the Lamfalussy process

against its original objectives. Some delegations drew the Commission’s attention to the

fact that the exercise launched at this stage can only allow for preliminary conclusions:

only the Market Abuse Directive (MAD) has entered into force at this stage; a more

thorough evaluation will be needed once all Directives start producing their effects. The

debate should be also fed with conclusions drawn from the banking and insurance sector:

though the respective level 2 and level 3 committees in the banking an insurance sector

will learn a lot from the ESC and CESR they will certainly develop a life of their own. In

this context, the suggestion was made that a light touch approach is followed focussing

on practical working arrangements, on clarifying the roles of the different actors in the

process and introducing elements of cost-benefit analysis etc.

A number of delegations agreed that input from consumers and end-users is very

important.

Certain delegations consider that more clarification concerning the various levels of the

Lamfalussy process is needed; there must be sufficient guarantees that issues are treated

at the appropriate level: what should be included in level 1 and 2 should not form part of

level 3. The ECB added that the review should also focus on the balance between level 1

and level 2. The same also applies with respect to the distinction between level 3 and 4;

control of transposition of EU law should be exercised at level 4 by the Commission and

not at level 3 by CESR. The importance of enforcement and level 4 was particularly

highlighted.

Some delegations, though in favour of increased transparency, expressed their worries

concerning the level of detail included in the documents submitted for consultation and

the lack of expertise in the various national administrations. Similarly, with regard to the

degree of detail to be included in EU legislation, CESR shared delegations’ experience in

the context of preparing advice for level 2 implementing legislation: this has been done

up to now on a case by case basis; both CESR and the Commission should continue with

this approach. The distinction between political issues, to be included at level 1 and

technical questions, which should form part of level 2 cannot be approached in an

absolute global way.

Both the Commission and CESR agreed that there is a fatigue with consultations and

with ongoing legislative process. However, the Commission highlighted that all actors in

the process, i. e. the Commission, CESR and the Member States have to live with this

intensive working pace if we want to meet the challenges we have set ourselves.

Delegations pointed out that allocation of resources should be evaluated according to the

time schedule set for delivering results; prioritisation is essential in that respect.

Concerning the CESR priorities for the next year, the CESR Secretary General pointed

out that their focus is moving to supervision.

On the extension of IIMG mandate the ECB suggested that this should not imply a

simple mechanical extension to banking and insurance but also include wider issues such

as supervision and financial stability – which require more and more a common approach

throughout the entire financial services sector. CESR added that the new scope of the

mandate of the IIMG should also be reflected in its composition.

The Commission agreed that this exercise is a preliminary and partial evaluation and that

it will focus on providing clarification of roles and setting a series of practical

arrangements. On the exercise of enforcement powers, the Commission responded that

this is the Commission’s responsibility. However, in order to become aware of

infringements the Commission has to rely on those who are close to the markets,

including regulators. Concerning the level of detail in EU legislation, the Commission

agrees with CESR that there is no general rule; the Commission wants level 1 and 2 to

constitute an ensemble which is capable of functioning. With respect to broadening the

scope of the mandate of the IIMG, and adapting its composition, the Commission

services said that they will take all comments expressed into consideration.

The issue of whether a separate level 3 committee for conglomerates is necessary was

raised by reference to a letter sent recently by the 3 level 3 Committees Chairmen to the

Commission concerning this topic. CESR repeated their position – which is also the

position of the other two level 3 Committees - that there is no need for a special level 3

Committee for Conglomerates; a steering group among the 3 level 3 Committees would

be sufficient.

4. LEVEL 4 OF THE LAMFALUSSY PROCESS

First, the Chairperson asked delegations whether they had comments on document

ESC/41/2004 which summarises the conclusions drawn in the previous ESC meeting on

6

22 September. No delegation raised fundamental concerns on the content of this

document.

Secondly, she moved to the issue of the implementation of the MAD. She pointed out

that the transposition deadline of this first Lamfalussy directive has passed: The

Directive including the three implementing directives should have been implemented in

all Member States on 12.10. 2004. Document ESC/42/2004 summarises the state of play

of the transposition of the Directive according to information received in the last

transposition workshop on 1 October 2004. The paper outlines, that, so far, no Member

State has completely transposed the market abuse regime at level 1 and level 2. Only a

few Member States are likely to be able to complete transposition within November,

while some others aim to have completed by the end of the year. A considerable number

of Member States seem unlikely to be able to finalise transposition until summer 2005.

The Commission services urged delegations to transpose and notify implementing

legislation as rapidly as possible. They also reiterated their offer for technical assistance

to Member States to facilitate transposition. Nevertheless, they drew their attention to the

fact that in case of non-implementation the Commission has a mechanism which allows

for a quasi-automatic commencement of infringement proceedings. DG MARKT was

also considering producing a “scoreboard” to increase peer pressure upon Member

States.

The Chairperson then invited delegations to provide updated information on the

transposition process in their countries. The majority of delegations who took the floor

announced that their Member States will have adopted implementing legislation and

further secondary executing measures by end 2004. Another important group delegations

hope that implementation will have been completed by the first quarter 2005. Some

delegations remained silent, whereas only one delegation announced that they have

finished with transposition.

One delegation formulated the request that the Commission, when launching the

comitology process for the adoption of level 2 legislation, should take into consideration

the timing of Parliamentary sessions in the Member States – and adapt accordingly the

timetable of the ESC. The Chairperson explained that the Commission is not in a position

to be aware of internal situations; however, national concerns could be discussed in the

context of the negotiation of the transposition deadlines. One delegation pointed out that

more realistic deadlines should be set in the future; they added that similar problems to

those arising in the context of the Markets in financial Instruments Directive (MiFID)

might arise also in the context of the MAD, i. e. firms might not have enough time to put

in place various organisational requirements within the transposition deadline. However,

no other delegation shares these concerns.

One delegation, supported by a few other delegations, suggested that a point should be

included in the next ECOFIN conclusions referring to progress made by Member States

in that field. However; some other delegations did not agree with this idea as it would be

bad for their image to disclose publicly their bad performances. At the end, it was

clarified that the practical arrangements agreed among ESC members and not the

Member States’ performance concerning implementation of the Market Abuse Directive

should form part of the ECOFIN conclusions.

The Chairperson informed delegations that an updated version of the implementation

table will be circulated; given the importance of the issue this point will be discussed and

be on the agenda of the ESC at least for the next couple of months.

5. PREVENTING AND COMBATTING CORPORATE FINANCIAL MALPRACTICE

The Commission services informed delegations of the adoption of the Communication on

preventing and combating corporate financial malpractice on 27 September. They

recalled briefly the discussions that took place between the Commission and the

European Parliament at the beginning of the year and gave a short presentation on the

Communication. They drew delegations’ attention to the fact that given that many

companies use complex and opaque structures, like off-shore centres, input from various

Commission services has been put together to cover a wide range of policy issues.

Concerning the policy framework they explained the content of the 4 lines of Defence the

Commission proposes in its Communication:

- Concerning the first line of defence they made the link with action announced in the

Commission’s Action plan on Company Law and Corporate Governance.

- Concerning the second line of defence, they drew delegations’ attention to the role of

auditors, while considering also other third parties – such as banks – when they provide

advice to companies.

- Concerning the 3rd line of defence they expressed the view that not only companies but

also transactions are becoming extremely complex and need adequate supervisory

structures. Particular importance is given to auditors’ oversight. The forthcoming 8th

Company law Directive will cover a significant number of those issues. They stressed the

importance of promoting transparency and the exchange of information in tax matters at

EU and international level, including with offshore centres.

- Concerning the 4th line of defence they stressed the importance of [sharing experience

and best practice as well as information including off-shore centres ] in the context of

law enforcement.

The request was formulated by delegations not to link any future action taken in this

direction specifically with the Parmalat case; to this end, the ESC agenda in the future

should reproduce the title of the Communication instead of the title “Parmalat followup”.

The majority of delegations agreed with the general background and justification

provided in the document: for instance they agree with the approach not to focus on

concrete cases like Parmalat and Enron; similar facts like the ones surrounding these two

scandals might be present in other cases.

Furthermore, a number of delegations consider that fiscal enforcement and law

enforcement in general (for instance criminal law issues) should not be covered in the

Communication; the Communication should simply recall that these aspects should be

borne in mind. This exercise should be limited to aspects which are exclusively relevant

to financial markets – and to the competences of regulators and financial services

authorities; other aspects should be dealt with in different fora. It was also highlighted

that account should be taken of positive results reached with respect to offshore centres

by other international organisations, such as the IMF. On the other hand, one delegation

agreed with the wide scope of the Communication covering also tax aspects, since in this

case opaque structures were used to commit both corporate/financial and tax

malpractices.

One delegation suggested that emphasis should be given to the efficiency of supervision;

benchmarks should be established to measure effectiveness. It was also highlighted that

with respect to cross border aspects, the existing legal framework provides for certain

arrangements which shouldn’t be ignored. An analysis of the bond market should be

carried out as rapidly as possible – in conjunction with action foreseen in the context of

the MiFID. One delegation pointed out that internal controls should be reinforced; to this

end there is a need to establish not only rules for collective responsibility but also of

individual responsibility of the board members.

The Commission services responded that they consider that it is essential to give a

comprehensive picture of what the Commission think is necessary for preventing and

combating financial malpractice; thus it was useful to cover in the Communication issues

that go beyond the remit of the ESC. Moreover, they explained that the Communication

did not cover tax law enforcement, but only administrative cooperation and exchange of

information in order to increase transparency within the EU. It is useful in that context

that different authorities cooperate and support each other’s efforts. The Commission

also considers it necessary to promote these principles in relation to third countries and

offshore centres. CESR expressed the concern that if authorities in the securities sector

are asked to cooperate with tax authorities they will consider that information they

supply may be used for tax purposes. Thus, there is a risk that will refrain from providing

useful information and hamper cooperation in the context of the MAD.

Concerning best practice with respect to supervision, the Commission services pointed

out that there are various benchmarking exercises in the pipeline. On off-shore centres

they agreed that there is work carried out by the IMF, nevertheless also the

EFC/Financial Stability Table has included offshore centres in its agenda and is currently

trying to determine how important this issue is; this implies that European Institutions

still have a role to play. On collective responsibility, they commented that this is

currently the situation in the majority of the Member States – and, thus, should be

confirmed at EU-level - while Member states should ensure appropriate liability rules.

6. STUDY ON THE INVESTOR COMPENSATION SCHEME DIRECTIVE

The Commission services provided an overview of the background concerning the study

of the practical functioning of national Investor compensation schemes (ICS): The

Commission launched the study in 2003. The main objectives of the study are to describe

and evaluate the operation of national investor compensation schemes which established

in accordance with the Investor Compensation Scheme Directive (Directive 97/9/EEC -

ICSD).

The study comprises the 4 following elements:

- a detailed description/inventory of the investor compensation schemes officially

recognised by national authorities for each of the EU-25 member states;

- an analysis of the performance of national schemes to date (strengths and weaknesses)

- an assessment of the “resilience” of national schemes (i. e. the capacity of national

schemes to withstand claims arising from high volume, low-intensity events and their

ability to absorb high-intensity events arising from a failure of investment firms with

large number of clients)

- and finally, an evaluation of the coverage of principal types of loss event for retail

investors.

The Chairperson gave the floor to the consultants, OXERA (Oxford Economic Research

Associates) responsible for carrying out this study who made a presentation focussing on

the main policy issues set out in the Directive and their main policy finding, their

research methodology, presentation of case studies, explanation of the risks covered by

the Directive and compensation limits.

After this presentation, the Commission services announced that they will send their

comments on the draft presented by OXERA. OXERA have to complete the final report

by end of January 2005. On the basis of the Final Report, the Commission services will

asses whether further actions at EU level are needed. Indeed, the ESC will, in any case,

be informed in due course on this.

Following a question by one delegation, OXERA explained that in any case where there

are other mechanisms in place providing safeguards for investors (e. g., investor

protection and conduct of business rules in the context of the MiFID or capital

requirements for investment firms in the Capital Adequacy Directive), these mechanisms

should be used in the first place; the compensation mechanisms in the ISCSD should be

seen as a last resort. Concerning the scope of the study the consultants explained that,

according to the option granted by the Directive, most of the compensation schemes

exclude non-retail investors from compensation. Concerning funding of these

compensation schemes, the Commission services pointed out that the Directive does not

prescribe any particular modalities for their funding; Member States are free to determine

the ways in which the compensation schemes are to be financed. Nevertheless, state

funding of compensation schemes might raise conflicts from a competition perspective.

Following a question by one delegation, OXERA; the Investor compensation Scheme

Directive should be seen as a last resort. Concerning the scope of the study the

consultants explained that they focus on retail investors. Concerning funding of these

compensation schemes, the Commission services explained that there is no provision in

the Directive prescribing particular modalities for their funding; their resources should

not be necessarily funded by the public budget. However, if private companies finance

their activity there might be negative effects on competition.

7. EU-US DIALOGUE

Information was provided by the Commission about Alexander Schaub’s, Director

General DG MARKT, visit to the US (3rd–5th October) and the next steps in the EU-US

Dialogue, including an up-date on delisting.

Alex Schaub visited the US on 3-5 October 2004, mainly to take part in the Europlace

Conference in New York on 4th October and in the Eurofi/European Institute conference

in Washington on 5th October. He also had meetings, inter alia, with the FASB, the

NYSE, the SEC, Fed and the Treasury.

There was a high degree of satisfaction on US side with the Dialogue as such and the

progress in this area and a commitment to move forward. The New York Stock Exchange

expressed interest in cooperating with us on issues of mutual concern, particularly on

accounting standards and delisting/deregistration. The visit was dominated by the issue

of accounting standards, in particular to explain to the US EU policy regarding IAS 39.

Commissioner Campos of the SEC indicated that European companies could at some

point be allowed to publish their accounts in the US under IAS/IFRS rather than having

to convert them to US GAAP, even if the two sets of accounting standards were not fully

convergent. This is a signal in the right direction; the Commission needs to continue to

work on this and to agree a practical solution with the US on the equivalence issue.

In the context of this visit also the issue of delisting was brought up; the SEC (Chairman

Donaldson) has replied to Commissioner Bolkestein with letter of 1 October 2004. M.

Donaldson confirmed, that the SEC’s Division on Corporate Finance is still considering

the proposal set forth by European issuers earlier this year. He agrees with the

Commission suggestion that this issue should now be discussed in the EU-US dialogue.

He also sees it as a topic for the SEC-CESR dialogue, "if the Commission (SEC) were to

proceed with rulemaking proposals."

The next formal and full EU-US Dialogue meeting at directors’ level is scheduled for the

second half of November 2004 in Brussels.

8. IMPLEMENTATION DEADLINE FOR MIFID

The Chairperson gave some background information on this issue: DG MARKT services

have received numerous queries from the industry claiming that the deadline imposed by

the MIFID for its transposition (April 2006) poses impossible challenges for investment

firms who have to implement these laws. Major IT changes means more time will be

needed. Numerous market participants have contacted the Commission services calling

for solutions such as phased implementation or transitional provisions.

At this stage, DG MARKT is exploring solutions with the Legal Service; the solution

should be legally sound, for instance not exceed the limits of the habilitation provided in

the relevant comitology provisions; moreover, the debate should concentrate on solving

this technical matter and must not reopen difficult political debates.

Some delegations stressed the difficulties that the industry will face in transposing the

requirements set out in the Directive and its implementing measures; in practice they will

have no more than 4 months to put all the new requirements in place. An extension of the

transposition deadline of 9 months would be very helpful. The Commission’s attention

was drawn to a number of issues that they should take into consideration when reflecting

on the solution, for instance:

- The time of entry into force of the level 2 legislation should not be different from that

of the level 1 Directive; the contrary would be very difficult to apply in practice;

- The text of the MiFID constitutes an ensemble; all issues are linked to each other. The

solution should be a global one covering the entirety of the text;

- The solution adopted should not allow for a differentiated entry into force of the

Directive in the various Member States; legislative arbitrage should be avoided.

The Chairperson pointed out that, an eventual extension of the transposition timetable

should not go too far: in 2008 the Commission will run out of delegated powers; the

ability of the Commission to use those powers before they expire should not be

eradicated by a long term solution. The Commission services hope to have a solution

agreed with their Legal Service for the next ESC meeting in November.

9. MARKET DEVELOPMENTS IN THE MEMBER STATES

No contributions were received for this meeting. For the next meeting one Member State

asked to discuss primary markets; the Chairperson asked this Member State to send a

written contribution ahead of the meeting.

10. A. O.B –

10. 1. Information point on IAS

The Commission services informed delegations of the vote on IAS 39 which took place

at the meeting of the Accounting Regulatory Committee on 1 October. Member States

voted on a regulation endorsing most parts of IAS 39. There are two carve-outs in this

text:

a) The full fair value option of assets and liabilities; this means that companies

cannot apply the full option. Alexander Schaub will have talks with Sir David Tweedie

(IAASB) in December; he thinks he will be able to sort out this issue at that time.

b) The hedge accounting provisions, which pose according to many European banks,

a problem for their risk management operations in a fixed interest rate environment. The

limitation of macro hedging to cash flow hedges and to fair value hedges and the strict

requirements on the effectiveness of those hedges make it, according to those banks,

impossible to hedge core deposits on a portfolio basis.

The European Parliament (the Economic and Monetary Affaires Committee) are about to

prepare a supporting document in this respect. Final adoption is expected in November –

pending translation into 20 languages. In the meantime, the Commission services will

prepare some frequently asked questions (by end of October), which they will put on the

Commission’s website.

10.2. Discussion of a letter by CESR on extending the deadline for the mandate on

Article 22(1)

The letter by CESR had been circulated to delegations before the meeting. The

Commission services explained that they consider that the CESR request to extend this

deadline until April 2005 is reasonable since this issue is linked to the mandates granted

in the context of Art. 19(1) and 21. No delegation objected to this approach. The

Chairperson then said that the Commission services will draft a short complement to the

formal mandate – for reasons of legitimacy and transparency vis-à-vis the EP. This draft

mandate will be submitted to delegations for written comments; the Commission will try

to send the complement to the mandate to CESR as rapidly as possible.

***************************************