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MAI DRAFT TEXT OF 1997: VII. FINANCIAL SERVICES

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 thefinancial 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.

137

CONFIDENTIAL DAFFE/MAI(97) 1/REV2

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.

INFORMATION 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.

138

CONFIDENTL\L DAFFE/MAI(97) 1/REV2

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".

139

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".

140

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.

141

CONFIDENTIAL DAFFE/MAI(97) 1!REV2 l

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.

142

CONFIDENTL\L DAE:FE/MAI(97) 1/REV2

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.

143

CONFIDENTIAL DAFFEIMAI(97) l/REV2

"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.

144

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).

145

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.

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