Internal Market Commissioner Frits Bolkestein commented afterwards "The Directive will make it easier for businesses to raise money, improve investor confidence and promote growth. The only losers will be those who want to hide behind national barriers to stifle competition and short change issuers and investors. If we can get this Directive through on time, as I think we will, Europe, its financial markets, investors and citizens will all be winners."
In answer to a question Mr Bolkestein stated "This Directive will be of immense benefit to the City of London. Internalisers will obtain a single European passport and so be able to do business all over the EU, and notably in those Member States where internalisation is currently not allowed. The reason why the City is currently responsible for the largest part of internalisation business in the EU is precisely because it is not allowed in other countries. In terms of a level playing field, it is important that internalisation is accompanied by maximum price transparency, particularly for retail investors".
The proposed Directive would increase harmonisation of national rules and give investment firms an effective "single passport", which would allow them to operate throughout the EU on the basis of authorisation in their home Member State. It would also make sure investors enjoyed a high level of protection when employing investment firms, wherever in Europe they were located. It seeks to establish, for the first time, a comprehensive regulatory framework governing the organised execution of investor transactions by exchanges, other trading systems and investment firms. It is a crucial part of the Financial Services Action Plan.
The proposed Directive will require all Member States to allow the 'internalisation' by banks and investment firms of client orders to buy and sell equities outside regulated markets. Currently a number of Member States do not allow 'internalisation' at all (such as France, Italy, Spain, Austria, Portugal, Greece and Belgium) whereas others allow it only under very restrictive conditions (such as Germany). However, the text agreed attaches conditions to prevent market distortion and ensure investors, particularly retail investors, are not sold short or overcharged through a lack of market transparency.
In particular, as regards pre-trade transparency, the Council agreed that 'systematic internalisers' would be required to publish a firm quote in those shares admitted to trading on a regulated market and for which they want to trade. The quote would have to include a firm bid and offer price or prices as well as the size or sizes attached to those price or prices, and reflect prevailing market conditions for that share. However, this pre-trade transparency obligation would not apply to transactions of a size which is large compared to the normal market size. In the case of illiquid shares, public quotes would only have to be given on request.
On price improvement, although 'systematic internalisers' would have to execute orders from retail and professional clients at the quoted prices, in the case of professional clients they could execute orders at a better price in justified cases on condition that:
- the orders are of a size bigger than the size customarily undertaken by a retail investor
- the price at which the order is executed falls within a range and
- this range is made public together with the quote and must be close to market conditions.
