RESTRICTEDWORLD TRADE
ORGANIZATIONS/FIN/M/25
8 May 2000
(00-1871)
Committee on Trade in Financial Services
REPORT OF THE MEETING HELD ON 13 APRIL 2000
Note by the Secretariat
1. The twenty-sixth meeting of the Committee on Trade in Financial Services was chaired by
Mr. Jean Le Cocguic of France.  The discussion followed the agenda contained in airgramWTO/AIR/1282.  Under Other Business the Chairman added the reports to be made by Chairpersons
of the subsidiary bodies to the CTS Special Session.
Item A: Acceptance of the Fifth Protocol to the General Agreement on Trade in Services
Embodying the Results of the Financial Services Negotiations
2. The Chairman recalled that the Fifth Protocol to the General Agreement on Trade in Services
(GATS) entered into force on 1 March 1999 for the 53 Member governments that had accepted it by
that date. For the benefit of Members who were unable to meet the agreed deadline of
29 January 1999, it was decided to extend the period for acceptance of the Protocol until
15 June 1999.  Since then, Costa Rica and Nicaragua had requested to the Council for Trade in
Services the reopening of the Protocol for their acceptance.  He indicated that 10 Members, namely,Bolivia, Brazil, Dominican Republic, Ghana, Jamaica, Kenya, Nigeria, Philippines, Poland and
Uruguay were yet to accept the Protocol.  He informed that on 6 March 2000 a letter to those
Members requesting information on the state of ratification or acceptance procedures in their
countries had been sent by him, in his capacity as Chairman of the Committee.  Replies had been
received from Poland and Uruguay.  He invited those Members that had not yet accepted the Protocol
to provide any further information on the status of their acceptances.
3. The representative of Brazil indicated that the text of the Fifth Protocol had been sent to the
Parliament in July 1999.  In January it had been approved by the Committee on Foreign Relations and
Defense and, in February, adopted by the Economic Commission.  Consideration by two other
Committees (Finance and Justice) would be necessary before it could be sent to the Senate, which
might take some time given the priorities on the legislative agenda.  However, the Brazilian offer was
entirely in line with existing requirements and would not change the opening of the Brazilian marketwith regard to foreign financial services.  The repr esentative of Uruguay said that the Protocol had
been under consideration of the legislative branch for some time.  However, the previous legislative
period had concluded without its approval and the new government in office would present it once
again in the current legislative period.  He explained that the legal regime in his country established
that if a draft law was not adopted in one legislative period it had to be presented again at thesubsequent period.  Nevertheless, the Uruguayan of fer contained in the Fifth Protocol was already
domestic legislation and therefore it had been implemented for some time.
4. The representative of Poland said that efforts were being made to expedite the domestic
process of ratification, which was expected to be completed by the end of this year.  The scope of
liberalization committed as the result of the 1997 negotiations was in practice covered by nationallegislation and , therefore, implemented in practice.  He reiterated the great importance that Poland
attached to the effective functioning of the multilateral trading system.  The representative of Kenya
said that the necessary approval by the Cabinet had been obtained; he expected that the necessary anS/FIN/M/25
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action by the Ministry for Tourism, Trade and Industry would take place shortly so the acceptance
instrument should be received in the following tw o weeks.  The representative of Ghana explained
that according to their constitutional processes the Fifth Protocol had been ratified by Parliament
Resolution on 15 December 1999; that must be followed by the signature of an instrument of
ratification by the President which was pending.  It was therefore hoped that the instrument ofratification be received very soon to enable to complete the acceptance.
5. The representative of the Philippines said that the process of ratification was going through in
accordance with its regular domestic legislative procedure.  The Senate Committee on Foreign
Relations had concluded its deliberations on the Protocol and, given the absence of any strong
opposition to the ratification, the Senate Committee was expected to endorse the favorable
consideration for second reading by the Senate in Plenary session.  It was a matter of time before the
Protocol could be ratified.  The representative of Nigeria communicated the concern felt in his
country of not having been able yet to ratify the Protocol.  He assured Members that Nigeria was still
committed to fulfilling its obligations within the WTO.  He explained that his delegation had
consulted with the Secretariat as to the possibility of accepting the Protocol in principle, pending
formal ratification by the National Assembly, and had been advised that such a process would only be
a statement of intent without legal value.  Internal processes requiring legislative ratification had beenparticularly demanding and frustrating for his country, having just transited to civil rule after nearly
forty years of military rule.  The political developments had caused delays in all legislative initiatives
before the National Assembly; however, he assured Members of their continued efforts to achieve
ratification of the Fifth Protocol as soon as possible.
6. The representative of the United States found the reports given by those delegations
encouraging.  She stressed the significance of having concluded successfully the 1997 financial
services negotiations.  Given that the financial services sector was one of the fastest growing sectors
of the world economy, it was of interest to all to build upon the liberalization achieved so far in a new
round of services negotiations.  The countries that had not been able to meet the 1999 deadline for
acceptance had made strong positive statements at that time about their intent to ratify also in a veryrapid time-frame.  Those statements had allowed the United States to support the entry into force of
the Fifth Protocol on those basis.  It was regrettable that 10 WTO Members had been unable so far to
translate those very good intentions in concrete results.  She encouraged those countries to provide
information on progress and on concrete plans to secure ratification on a very expedited basis.  In her
view delays in meeting obligations undercut the integrity of the multilateral trading system.  As
Members looked at how to proceed in the new round of services negotiations, the starting-point of any
future market access negotiations on financial services would assume full ratification andimplementation of the 1997 commitments.  She reminded those Members still in the ratification
process that they were bound by the Services Council decision adopting the Fifth Protocol not to take
measures that were inconsistent with their schedule d commitments to the fullest extent possible given
existing legislation.
7. The representative of the European Communities was pleased by the updates given and
stressed the importance of finalizing all domestic procedures and the acceptance of the Fifth Protocol
to continue work in a positive atmosphere.  This issue was a matter of legal certainty and of
confidence in the results of WTO work.  The representatives of Japan, Switzerland , and Canada
thanked for the information provided and urged those 10 Members to conclude acceptance of theProtocol as soon as possible.
8. In summing up, the Chairman
 thanked the delegations for the information provided, and noted
the calls for concluding acceptance as early as possible and for regular updates on the status of
internal procedures.  Several delegations stressed the importance of full acceptance of the Protocol for
the sake of legal certainty and the credibility of the WTO negotiating system.S/FIN/M/25
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Item B: Technical Issues
9. The Chairman recalled that at the previous meeting the Committee had continued its
discussion of what it could usefully do in preparation of the current round of services negotiations,
based on a Secretariat note containing an indicative list of issues for discussion (S/FIN/W/14 of
17 May 1999).  Although at the June 1999 meeting there had been no formal agreement to select anyitems as a priority, there was an exchange of views that had led the Chairman to believe that
discussion could be started with the distinction between modes 1 and 2, and the sectoral classification
of financial services.  That, of course, would not preclude nor exclude any other item of the
discussions.
10. The Chairman explained that the issue of the distinction between modes 1 and 2 had been
addressed in the past by the Committee.  It was first proposed for discussion in 1996, as one of a
number of technical issues regarding the scheduling of commitments and listing of Article II (MFN)exemptions that Members had identified in the c ontext of previous negotiations.  Back then, a
Secretariat note (S/FIN/W/9 of 29 July 1997) had been prepared and, in spite of the importance that
delegations attached to clarifying the issues involved, discussed only partially.  The main reasons for
that were the need to avoid any delay in the progress of the negotiations, given the limited time-frame,
and  recognition of the fact that this issue was not exclusive to financial services, and thus, hadhorizontal implications that warranted a careful approach.  If the Committee were to discuss this issue,
it might be helpful to consider the examples and questions posed by the existing note. This issue had
been also discussed by the Council for Trade in Services as part of the Work Programme on
Electronic Commerce.  That discussion had arrive d at no conclusion as to how to clarify the matter;
instead it had been agreed that further work was necessary.  Additionally, the Committee on SpecificCommitments had also touched upon the issue in the context of the work on scheduling guidelines.
He invited delegations' views on how to proceed with the discussion.
11. The representative of the United States felt that, while the distinction between modes 1 and 2
for the provision of financial services may need clarification at a later date, for the present time the
issue might be set aside.  Although the United States had included some clarification in its schedule inrelation to mode 2 in financial services, in practice her delegation had not encountered any problem
and would like to allow for some time to determine whether problems existed.  Additionally, this
issue had horizontal implications and, given that a more general consideration of the matter could be
conducted at that stage, it would be preferable to proceed with caution in the financial services
committee, showing prudence in assuming that GATS provisions needed to be rewritten or clarified.
She suggested to set aside this issue for the time be ing, allowing for other issues to be taken up and, if
appropriate, to return to it at a later stage in the negotiations in relation to the schedules.
12. The representative of the European Communities observed that a conclusion from the
discussion in 1997 was that the responsibility for clarifying the commitments under modes 1 and 2
would lie on individual Members and, therefore, the issue should not be forgotten.  However, for the
time being his delegation was reflecting on the relation between modes 1 and 2, particularly in the
light of the importance that the electronic provision of financial services was gaining.  His delegationwould like to revert to this issue at a later stage.
13. The representative of Switzerland indicated that in his experience this issue had posed certain
problems, not insurmountable since qualifications could be entered in individual schedules and
difficulties could be circumvented during negotiations.  The relation between modes 1 and 2 had
horizontal implications, highlighted by the increase of electronic commerce, and therefore could betaken up in the Committee on Specific Commitments (CSC).  This matter had been on the table since
1996 and Members had had the opportunity to explore it in detail, for instance, there was a note by the
Secretariat that suggested five different ways of  dealing with the matter, each setting up advantagesS/FIN/M/25
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and drawbacks.  In his view there was no urgency but an important need to take decisions on this
matter in the light of forthcoming negotiations.
14. In summing up the Chairman noted that those who spoke had observed that the matter had
been on the table for some time and the situation had not changed, nor posed any serious practical
problem.  There seemed to be a tendency to put the matter aside for the time being as this was not feltto be a priority issue.  However, one delegation had pointed out that it was not appropriate to remove
any interest from the matter.  He proposed to keep the item on the agenda of the next meeting.  The
Committee agreed to this proposal.
15. In relation to the sectoral classification of financial services, the Chairman
 recalled that this
matter had also been identified for discussion in 1996 but had not been take up since then.  The
Committee on Specific Commitments was conducting discussions on classification issues but had left
the relevant issues of financial services aside.  In addition, the Council for Trade in Serviceswitnessed some discussion on financial services classification points as part of the information
exchange program.  He invited delegations views on whether to initiate discussion on this issue.
16. The representative of Japan indicated that his delegation was facing an actual problem with
the classification of financial services with one acceding country.  Therefore, he believed that
discussions on financial services classification aiming at a common understanding would help in thecontext of negotiations; however, his delegation had no specific proposal as to the most efficient way
to address this matter at that point in time.  Th e representative of Australia expressed interest in
addressing the relationship between the financial services classification in the GATS and the Central
Product Classification (CPC).  The purpose would be to ensure that the resulting classification be
clear and easy to understand, fitting the reality of the market and widely accepted.
17. The Chairman concluded that the issue would be kept in the agenda for the next meeting
when ways to pursue this work could be decided.
Item C: Other Issues for Future Discussion
18. The Chairman indicated that the purpose of this item was to determine whether the list set out
in S/FIN/W/14 contained other issues that the Committee would wish to discuss and whether there
were other points not listed there that required attention.
19. The representative of the United States expressed some ideas as to the broader role that the
Committee on Trade in Financial Services (CTFS) could play, and the technical issues that could be
considered, in support of the current negotiations.  In respect to the CTFS' role, it was suggested that
the Committee keep track of developments in the CTS and its subsidiary bodies which were likely to
have relevance to financial services, with a view to  developing them further in the financial services
context.  For instance, the work on transparency and regulatory issues conducted by the working partyon domestic regulation (WPDR).  A second role could be to explore technical issues that were not
otherwise covered by work in other fora.  For instance, specific issues regarding the classification of
financial services could be taken up, although the classification in the Financial Services Annex was a
good basis for the scheduling commitments.  In relation to the suggestion on looking at the relation
between the classification in the Annex and the CPC,  her delegation did not exclude its consideration
but it was necessary to ensure that the broad commitments made by countries not using the CPC were
respected.  She proposed to have a full discussion on various scheduling approaches that had been
used so far, for instance, the Understanding on Fina ncial Services.  Meaningful results for financial
services would require trade negotiators to have their regulatory communities more fully into the
discussion; for instance, having special meetings including regulators and having internationalorganizations involved in regulatory issues as observers.S/FIN/M/25
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20. The representative of Australia indicated that given the importance of the carve-out for
prudential regulation in financial services, it might be desirable to develop a definition or common
understanding of the meaning of "Prudential Regulation".  This could be done using for banking the
core principles in the Basle Agreement and for insurance the IAIS Agreement as a basis.  The
objective would be to have a common understanding of  what was excluded so that coverage by the
carve-out  would not be used to introduce regulatory behaviour that could become protectionist.  Her
delegation had distributed an informal paper posing some questions for reflection and to be addressed
at the following meeting.  The representative of Japan supported this proposal.  The representative of
Hong Kong, China asked the delegation of Australia whether the results of the work proposed would
be applicable to all commitments or only to those to be taken in the future.
21. The representative of the European Communities noted that there was enough material for
technical discussion.  The ideas on classification issues and on following up the work conducted in
other fora, particularly in the WPDR, were interest ing.  The representative of Switzerland concurred.
22. The representative of Malaysia expressed reservations as to the usefulness of taking up the
issue proposed by Australia.  The prudential carve-out was the result of a fine balance struck when the
GATS was concluded and trying to define prudential regulation could upset that balance.
23. The Chairman concluded that several proposals had been put on the table and delegations
wanted to further consider those ideas.  The Comm ittee took note of the proposals and would revert to
them at the following meeting.
Item D: Recent Developments in Financial Services Trade
24. The Chairman  invited delegations to give any updates on regulatory or economic
developments in countries that affected financial services trade.  The representative of
Hong Kong, China informed that the one-building condition- namely the rule that allowed foreign
banks to operate from one building only, with two backup buildings- had been liberalized in 1999,
now being a three-building condition.  This year th e interest rates would be deregulated on a phased
basis, and in July the interest rate cap on time de posits with maturity of less than seven days would be
removed.  Steps were being taken to consolidate securities and futures regulations; to that end a whitepaper for public consultation had been prepared.  That effort aimed at establishing a regulatory
framework for the development of a fair and transp arent market, in accordance with international
standards and practices.  The bill intended to consolidate 10 existing ordinances and simplify
regulatory arrangements to reduce compliance burden, to close existing regulatory gaps in order to
promote market confidence, to enhance investor s' protection, to reduce market misconduct and
systemic risks and facilitate innovation and competition.
25. The representative of the United States announced that the Financial Modernization Bill had
been signed on 12 November 1999.  That bill represented the reform of the laws covering the US
financial sector in a comprehensive manner.  The greatest benefit of the Gramm-Leach-Bliley Act was
that it repealed restrictions that had prevented any financial services firm from offering a full range of
products and which in some cases forced foreign firms to adjust their legal structures and scope of
activities when establishing in the United States.  The new legislation eliminated many federal lawsregarding to the affiliations among banks and securities firms and insurance companies.  It also
created new statutory mechanisms for establishing financial holding companies whose subsidiary
depository institutions were required by the law to be well capitalized and well managed.  Those
holding companies could engage in a statutorily provided list of financial activities including
insurance, securities underwriting agency activities and so forth.  He noted that the reform respondeddirectly to what could be characterized as sustained foreign criticism of US financial regulation over
the years, but it was undertaken for its own economic benefits in the market.  As regards foreign
institutions applying for licenses as financial holding companies and other aspects of the Act, the newS/FIN/M/25
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legislation instructed the Federal Reserve to apply comparable capital and management standards to
such foreign institutions.  Since November, a series of regulations had been issued and as of that date
13 foreign institutions had been approved as financial holding companies.
26. The representative of the European Communities welcomed the announcement by the United
States.  He noted, however, that there was some concern in relation to an interim rule by the Federal
Reserve concerning the applications by foreign firms to become financial holding companies.  The
concern related to the application of different crit eria to determine when a financial holding company
was considered well capitalized and well managed.  It was hoped that this matter would be resolved
when the Federal Reserve issued its final rule.
Item E: Request for Observer Status- International Association of Insurance Supervisors
27. The Chairman drew the attention of delegations to the communication from the International
Association of Insurance Supervisors, dated 27 March 2000, requesting observer status in the
Committee.  The International Association of Insurance Supervisors (IAIS) was an organisation
comprised of national insurance regulators and supervisors from over 100 jurisdictions.  Established
in June 1994, the IAIS contributes to global financial stability through developing cooperation among
members; setting international standards on insura nce regulation; assisting members in complying
with IAIS standards at national and international levels; coordinating work with other national andinternational financial institutions.  He invited delegations' views on this request.
28. The representative of Japan observed that the setting of global standards was in the interest of
effective supervision of internationally active insurance firms.  The IAIS at the moment was
considering standards for the effective supervision of financial services provided on cross-border
basis through Internet.  Given that that work was ve ry relevant to the work of the CTFS, he hoped that
the IAIS be granted observer status in the Committee.  The representative of the United States said
that her delegation would like to further consider the request until the following meeting; however, ifa decision needed to be taken that day, her delegation would support the granting of "Ad hoc",
meeting by meeting, observership.  The representative of the European Communities welcomed the
request and suggested to postpone a decision until the following meeting.  The representative of India
concurred.  The representative of Malaysia suggested to look at this issue within the context of the
discussion on observership conducted by the General Council.  The representative of Japan
understood the concerns raised by some delegations, however, he argued that if cross-border
transactions were to be liberalized Members had to bear in mind that proper supervision needed to be
in place.  Therefore, the inputs in that regard that IAIS could provide would benefit the work of the
Committee as a whole.
29. In concluding, the Chairman took note of the interventions and  indicated that the Committee
would revert to this issue at its following meeting.
Item F: Date of the Next Meeting
30. The Chairman invited delegations' views on the frequency of meetings and whether they
should be aligned with those of the Council for Trad e in Services (CTS).  The representatives of the
United States, Australia  and the European Communities  proposed to align the following meeting with
that of the CTS.  The representative of Argentina pointed out the need for a substantive agenda to
have fruitful meetings.
Item G: Other Business
31. The Chairman  indicated that his successor would be presenting an oral report to the next
Special Session of the Council for Trade in Services, together with other chairpersons of theS/FIN/M/25
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subsidiary bodies.  He would make that report on his own authority, unless Members had any
objections.  No objections were voiced.
Item H: Appointment of the New Chairperson for the Committee
32. The Committee elected  Mr. Lotfy Abdel-Hamid from Egypt as the Chairperson for this year;
this appointment took effect at the end of this meeting.
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