RESTRICTEDWORLD TRADE
ORGANIZATIONS/FIN/M/39
7 April 2003
(03-1915)
Committee on Trade in Financial Services
REPORT OF THE MEETING HELD ON 26 FEBRUARY 2003
Note by the Secretariat1
1. The Committee on Trade in Financial Services held a meeting on 26 February 2003, under the
Chairmanship of Mr. Syed Habib Ahmed (Pakistan).  The agenda is contained in airgram
WTO/AIR/2036.
2. The Chairman noted his intention under "Other Business" to comment on the presentation
made during the morning by the World Bank of its 11th Policy Report entitled "Finance for Growth:
Policy Choices in a Volatile World".
3. The Committee so agreed.
A. ACCEPTANCE OF THE FIFTH PROTOCOL TO THE GENERAL AGREEMENT ON TRADE IN
SERVICES EMBODYING THE RESULTS OF THE FINANCIAL SERVICES NEGOTIATIONS .
4. The Chairman invited the six Members who have yet to accept the Protocol - Brazil,
Dominican Republic, Jamaica, Philippines, Poland, and Uruguay - to provide further information on
the status of their domestic processes.
5. The representative of Uruguay said that  on 10 January 2003, Uruguay enacted Law N° 17618
approving the Fifth Protocol to the GATS.  The formal acceptance at the WTO would take place soon,
as soon as the plenipotentiary powers were ready.
6. The representative of Poland informed the Committee that the ratification procedure had
almost been completed.  The motion of ratification of the Fifth Protocol had been submitted to the
President of the Republic of Poland for signature.
7. The representative of Dominican Republic said that on 7 February 2003, the President of the
Dominican Republic promulgated the ratification of the Fifth Protocol to the GATS, which had been
previously accepted by the Chamber of Deputies on 31 December 2002.  The formal acceptance at the
WTO would take place soon.
8. The representative of Brazil said that the ratification procedure was still in the final phase at
the Brazilian Congress.
9. The representative of the Philippines said that the domestic ratification procedure was still
under way.
10. The representative of Canada, the European Communities , Switzerland  and the United States
commended Uruguay and the Dominican Republic for having completed the domestic procedures of
                                                     
1  This document has been prepared under the Secretariat's own responsibility and without prejudice to
the positions of Members and to their rights and obligations under the WTO.S/FIN/M/39
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ratification.  The United States also urged quick action by those Members who had not yet ratified the
Protocol.
11. The Committee took note of the statements made and decided  to revert to this item at the next
meeting.
B. TECHNICAL ISSUES
12. The Chairman recalled that at the previous m eeting, delegations engaged in an interesting
discussion about the relationship between specific commitments on financial services and capital
movements, motivated by a statement by Brazil.  The Brazilian statement was circulated informally to
delegations on 10 January 2003.  A full account of the Brazilian intervention and the subsequent
debate was contained in the meeting report, do cument S/FIN/M/38, paragraphs 11 to 32.  He also
recalled that, as a result of that debate, the Committee requested the IMF to produce an annotated list
of key IMF publications dealing with issues of relevance for this debate, from the IMF perspective.The IMF produced such a document, focusing on "Financial Sector Stability, Reform Sequencing and
Capital Flows".
13. The representative of the International Monetary Fund said that three major issues were
addressed in the paper: domestic financial sector reforms; capital account reform; and trade in
financial services.  Domestic financial sector reform, capital account liberalization and liberalizationof trade in financial services were inter-related, yet distinct processes.  In its surveillance and
technical assistance capacities the Fund had focused on the opportunities and vulnerabilities arising
from capital account liberalization and, through its Financial Sector Assessment Programs (FSAPs),
on the strengthening of domestic financial sectors.  Based on this experience it had derived important
lessons for the sequencing of domestic financial reform and capital account opening.  Some of theselessons were developed in the annotated list of Fund publications distributed to Members.  These
issues, of great interest to the Fund, were kept  under frequent review, including at a forthcoming
discussion by Executive Directors.
14. In its work with member countries the Fund had emphasized the broad consensus in favor of
domestic financial reform.  He said that reforming domestic financial services, in the context of strongprudential supervision, would tend to benefit financial intermediation and hence growth and other
public policy objectives.  However, considerable capacity building was often required to educate
regulators, supervisors, legislators and the judiciary in order to create the appropriate framework for
financial services.  Foreign financial services providers might support this process through their
expertise, by strengthening competitive disciplines in the financial system, and by “importing” aspects
of the prudential standards of their home country jurisdictions.
15. The liberalization of external capital flows might raise national welfare by lowering
borrowing costs and diversifying risks across a larger range of assets.  Yet, as shown - among other
work - in new Fund research to be published shor tly, the liberalization of capital flows (especially
short-term flows) might also involve significant risks.  There was evidence that international financial
integration through the liberalization of capital flows had in certain cases contributed to financial and
real sector volatility and exacerbated weaknesses in domestic financial sectors.  That was likely, inparticular, where access to external capital perpetuated, or possibly aggravated, inappropriate
practices in banking and insurance, such as risky lending and unhedged foreign currency exposures.
Such practices would tend to be especially prominent where financial supervision was inadequate, and
where expansionary monetary and unsustainable exchange rate policies encouraged excessive risk-
taking.  Contagion from developments in other countries, herding and momentum trading in certainfinancial markets had probably contributed to sudden spikes and reversals of capital flows, without an
obvious connection to economic fundamentals in the host country.  However, empirical studies of theS/FIN/M/39
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effects of financial opening were highly dependent on the composition of the country sample, and it
was difficult to control for all channels of the interaction.
16. He further explained that one clear and intuitive result was that the sound regulation and
supervision of domestic financial systems significantly mitigated vulnerability to these risks (as did an
appropriate macroeconomic framework).  Nevertheless, capital account liberalization did not have towait for domestic regulatory reform to run its full course.  Several developing countries had
proceeded cautiously and thereby availed themselves of the benefits of an open capital account, which
in turn had helped to spur domestic regulatory re form.  Experience in numerous countries had shown
that as a general rule: (i) the liberalization of foreign direct investment and of other long-term capital
flows can be considered relatively early on in the financial opening process, while there is reason to
be more cautious with short-term flows; (ii) it will often be appropriate to proceed with the
liberalization of outflows before that of inflows; (iii) it may be advisable to liberalize equity
transactions before debt transactions; and (iv) transactions of non-residents before those of residents.
17. With regard to the on-going negotiations in the WTO, the interpretation by WTO Members of
footnote 8 to Article XVI of the GATS would obvi ously be of particular importance since it would
determine the strength of the link between market access commitments and capital flows; in
particular, the definition of “essential” capital flows for a commitment under mode 1, and of “related”capital flows under mode 3.  Irrespective of the particular choice of definition, the safeguards built
into the GATS gave Members scope to react to imbalances.  These were not questions on which
existing research at the Fund, per se , could shed any light.  Nevertheless, the lessons of experience
reviewed here, and in the list of Fund research that was circulated together with this statement, might
help inform the Committee’s deliberations on these points.
18. For the purposes of practical policy advice, the benefits and vulnerabilities resulting from
international financial integration, through both market access and capital account liberalization,
would depend on country-specific conditions, many of which were documented in the FSAP reports.
Through its FSAPs and work relating to compliance with international financial standards, the Fund,
together with the World Bank, had accumulated a body of knowledge for a broad range of countrieson issues such as licensing, cross border business participation, the prudential framework, the
exchange of information with other regulatory bodies, and transparency of regulatory and financial
legislative processes.  These issues were closely linked to the topics covered in WTO negotiations on
trade in financial services.  He finally said that Fund staff looked forward to further assisting
individual WTO Members in developing their policies in this area, through Fund surveillance,
programs and technical assistance work, and to supporting the Committee in evaluating future
technical issues.
19. The representative of Brazil said that there was a need to study further whether the GATS
contained instruments to liberalize the capital account.  In Brazil's view, the GATS had instruments to
liberalize the capital account.  Therefore, issues such as the definition of mode 1 in the Annex on
Financial Services and in the Understanding on Commitments in Financial Services were particularly
relevant.  He cautioned against liberalization under mode 1, because that might have important effectsnot only on the balance-of-payments but also on the whole financial stability of a country.  Besides,
undertaking commitments under mode 1 might go against the attraction of foreign institutions to the
market.
20. The representative of Thailand said that further reflection was necessary on the relationship
between trade in financial services and capital movements.  She said that during bilateral negotiations,
Thailand's trading partners had stressed that they were not looking for capital movement
liberalization.  Nevertheless, the issue of liberalization of financial services under mode 1 should be
carefully considered, in light of the definitions contained in the Annex on Financial Services and
footnote 8 to GATS Article XVI, as explained by Brazil at the previous meeting.  She said she wasS/FIN/M/39
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confused as to what Members considered as e-finance.  In her view, if Thailand made commitments
allowing foreign banks to operate in mode 3, the principle of technological neutrality did not extend to
providing services in mode 1.  In other words, technological neutrality was mode-specific.  She gave
the following example to illustrate her point.  If a Thai consumer conducted banking transactions with
a Swiss bank not established in Thailand, in the absence of commitments under mode 1, the Thaigovernment was not obliged to honour those transactions.  However, if Thailand had made
commitments in mode 3, established foreign institutions would be able to provide services
electronically -i.e.  conduct e-finance activities- to Thai consumers.  But if that Swiss bank wanted
now to establish a commercial presence in Thailand, it could not be automatically assumed that the
bank would be able to provide electronic servic es from Switzerland to consumers in Thailand, since
that would imply the circumvention of mode 3 commitments.  Therefore, depending on the nature of
specific commitments, electronic finance could not be assumed to happen automatically.
21. The representative from the European Communities said, on a preliminary basis, that Brazil
had rightly pointed out that regulation was very important to stability.  However, as the World Bank
representative highlighted earlier that morning, opening  the financial sector to foreign institutions also
improved the stability of the financial sector.  Liberalization was not only good for efficiency but also
for stability.  He also said that, if he had heard the World Bank representative correctly, foreignfinancial institutions improved stability and efficiency of the financial sector, but that did not mean
that mode 1 commitments were not good for stability and efficiency.  On that point, he expressed
doubts about the point made by Brazil that taking commitments in mode 1 would be detrimental to
having foreign direct investment.  The European Communities' view was that modes 1 and 3 were
complimentary, rather than substitutes.
22. He also said that the discussion about the link between GATS commitments and capital
account liberalization was very interesting, but he had doubts as to whether it might have a real
impact on the negotiations.  In fact, he was not aware that Brazil or, indeed many other Members had
commitments on lending services under mode 1.  He wondered whether Brazil's interest on the matter
stemmed from its intention to take such a commitment.  Debates such as this one were only relevant if
they were linked to the negotiations.
23. The representative of the United States fully agreed with the European Communities’
summary of the issues raised by the World Bank representative earlier that day, including the fact that
participation of foreign financial institutions in a country improved the stability and efficiency of that
country's financial sector.  Regarding the specific issue at hand, she said that it might be an
overreaction at this time to assume that it was relevant in terms of current commitments under the
GATS.  Brazil had actually raised a difference between countries scheduling commitments accordingto the Understanding on Commitments in Financial Services versus countries scheduling in a  more
general fashion.  The United States believed that the distinction was not so important because its
expectation was that countries would engage into bilateral discussions to see the type of cross-border
supply that was actually taking place, and decide whether it would be appropriate to take further
commitments in that respect.  On a different matte r, she said that the United States was looking at
footnote 8 to Article XVI of the GATS because it did exist and would therefore have implications for
existing commitments under the GATS.  However, she noted that the footnote did not require total
liberalization of the capital account.  Instead, Members' obligations arose where the cross-border
movement of capital was an essential part of the service itself.  In any case, Members should remain
open to requests from other Members with respect to cross-border supply.  Members might stilldecide whether it was appropriate to take on commitments, and then, if they did so, a discussion on
issues associated with those commitments migh t be needed.  Regarding the intervention from
Thailand, the United States agreed that Members were only bound by the commitments they took, but
would expect Members to be flexible in negotiating what sort of access was appropriate for mode 1.
With regard to the statement by the International Monetary Fund, she reminded that discussions on,and negotiations of, commitments was solely within the purview of WTO Members themselves.S/FIN/M/39
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24. The representative of Hong Kong, China said  that the intervention by Brazil at the last
meeting raised two issues.  The first one was, in his view, a purely technical matter related to the
implications of commitments for capital movements.  This was a purely technical matter since it
concerned the scheduling options available under the GATS framework, taking into account
footnote 8 to Article XVI of the GATS and the U nderstanding on Commitments in Financial Services.
This was an issue free of value judgement.  The second issue –raised in fact by the presentations by
the World Bank and the IMF- concerned the risks and benefits of capital account liberalization and its
relationship with financial services liberalization.  He took note in that regard that an appropriate
regulatory framework and sequencing would be essential.  In the longer run, the long term benefits of
financial services organization, as well as capital account liberalization, under a proper regulatory
framework, would serve the purpose of strengthening the financial infrastructure of the Member and
would bring infrastructural benefits to the econom y of the Member.  Turning back to the first
technical issue, he said that two aspects might be relevant.  The first one was how the commitments
made according to the Understanding on Commitments in Financial Services should be read in the
light of footnote 8 to Article XVI.  The second aspect was related to the legal status of the
Understanding on Commitments in Financial Services, particularly taking into account that as,
expressed by the Understanding itself, that approach for scheduling commitments was understood asnot conflicting with the provisions of the GATS and as not raising any presumption on the degree of
liberalization to which a Member was committing itself under the GATS.  He wondered whether the
Secretariat could provide some clarification on both aspects, particularly on what the legal status of
the Understanding was.  Finally, regarding the intervention by Thailand, he said that insofar as
market-access commitments were concerned, there was a clear distinction between mode 1 and mode3.  However, insofar as the issue of consumer protection was concerned, this was not perhaps directly
related to the scheduling of commitments but to the regulatory regimes under which the customer or
the service provider would be covered.  This was one of the regulatory challenges that Hong Kong,
China had identified in respect of e-finance, that is, how to enhance coordination among regulators
and how to ensure that transactions in respect of mode 1 would be subject to proper regulatoryregimes
25. In reply to the questions raised by Hong Kong, China, a representative of the Secretariat said
that, from a historical point of view, at the time when the Understanding was negotiated and drafted,
the drafting process was also under way with respect to Articles XVI, XVII, and indeed the rest of the
Agreement.  The intention was that the Understanding would constitute a formula that would facilitate
undertaking commitments at a level of liberalization which was predefined.  Besides, the
Understanding contained certain elements which were not provided for under Articles XVI and XVIIof the GATS.  So there were elements in addition to what was contained in Part III of the GATS.  But
the Understanding itself also stated explicitly that it did not conflict with the provisions of the
Agreement, including footnote 8 to Article XVI.  The application of the Understanding was also
without prejudice to the degree of liberalization that other Members might find appropriate.
26. The representative of Brazil made additional comments on the interventions by the European
Communities and the United States.  The points raised by Brazil at the last meeting were not meant to
be just a theoretical discussion.  Rather, they were the reflection of current demands made bilaterally
by major trading partners.  Therefore, Brazil would like to clarify –before undertaking any
commitment- the different approaches available for Members.  He agreed with the European
Communities that modes 1 and 3 were complementary, and that the evidence presented by the WorldBank representative earlier that day showed that liberalization could improve the stability of national
financial systems.  The question, however, was what kind of liberalization.  In that regard, it was not
clear to Brazil that the liberalization referred to by the World Bank was also meant to include mode 1.
Evidence presented by the World Bank focused actually on the foreign ownership of banks.  It seemed
there that it focused on mode 3.  There was strong evidence that liberalization under mode 3 couldlead to financial stability, but that conclusion did not seem to be so strong for mode 1.  The point
Brazil wanted to stress was that liberalization under mode 1 should be tackled on a different logic andS/FIN/M/39
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pace.  This mode of supply was very difficult to regulate.  The evidence submitted by the World Bank
and the IMF might suggest that a good strategy could be to leave mode 1 unbound in order to be free
to regulate and to adapt the legislation.  The case for seeking more clarity on the issues involved in the
liberalization of mode 1 was strong, particularly taking into account that, as far as he knew, there were
very few Members with unrestricted commitments for financial services in mode 1.  There must be areason for this.  He wondered why Members did not assume full commitments in mode 1 if
liberalization was that good for stability.  Brazil's intention was to understand this before getting into
any commitment.
27. The representative of Canada asked Brazil if it believed that the protection already included in
Articles XI and XII of the GATS was insufficient, and if that was the case, whether it was Brazil's
view that Brazil could not deal with such insu fficiency via the negotiation of commitments in an
appropriate fashion.
28. The representative of Uruguay said that Brazil rightly pointed out that in general there were
very few commitments on financial services under mode 1.  In fact, Uruguay might be one of the few
Members that made commitments in mode 1 in the banking sector, for example on deposit-taking.  He
took note of the statement by the European Communities that commitments under mode 1 were
positive.
29. The representative of Malaysia said that the presentation by the International Monetary Fund
raised a lot of important issues.  The point raised by Brazil today and the previous meeting was very
important.  He needed some time to reflect further on it.  Setting that aside, the interventions by the
International Monetary Fund and the World Bank earlier that day showed that there was definitely a
lot of emphasis on domestic regulation.  But the point was that what happened in 1997 in Malaysiaand other Asian countries was caused by a huge inflow and then sudden outflow of capital that upset
the whole system.  In that regard, he noted that according to the International Monetary Fund, recent
research showed that the liberalization of capital flows, especially short-term flows, might involve
important risks and lead to financial crisis.  That was why, based on that experience, Malaysia was
approaching the current negotiations with caution.  One important point made by the InternationalMonetary Fund representative was that there were benefits and vulnerabilities resulting from market
access opening, which he took to mean liberalization under mode 3.  The effects of liberalization
would depend on country specific conditions.  And that was worth stressing.
30. The representative of the European Communitie s said, with respect to the intervention by
Malaysia, that the World Bank's empirical research showed that foreign bank entry led to deeper
financial systems, greater growth and less of a tendency to have banking crisis.  That did not mean
that simply opening your market would lead to a very strong sector.  Of course, prudential rules werealso needed.  But the evidence shown meant that liberalization was conducive to such a result, and
that was worth stressing.
31. Regarding the questions raised by Canada, the representative of Brazil said that Articles XI
and XII of the GATS were drafted in order to cope with balance-of-payment problems and transfers
and payments related to liberalization of services as a whole, that is, 12 sectors and 4 modes ofsupply.  So he was not sure as to whether those two articles were designed or were thought to cope
with problems regarding capital account liberalization.  He asked Canada whether it was willing to
take a full commitment in mode 1, both in market access and national treatment, according to the
Annex on Financial Services, just because Articles XI and XII were there.
32. The representative of Japan said that these discussions were quite important and quite helpful
to understand the character of capital transactions across the border.  But he pointed out that mode 1
transactions did not necessarily and automatically lead to the transaction of capitals.  That depended
on the service in question.  Transactions in the banking sector were different from transactions in theS/FIN/M/39
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equities markets or transactions regarding insurance.  That ought to be taken into account when
discussing these issues.  Secondly, e-finance did not necessarily lead to a transaction across the
border.  According to his experience, a lot of e-finance activities still remained within the border.
33. The representative of Norway said that his interpretation of the World Bank policy report
differed from the Brazilian one.  It could not be said that the World Bank did not encourage mode 1
commitments.  The report was an empirical research and the fact was that there was not enough data
to say as much about mode 1 commitments as had been said about mode 3 commitments.  One
conclusion that could be drawn from the World Bank  policy report was that finance did involve risk,
but it also involved possibilities for gains.  The ch allenge was to minimise the risks.  Norway had for
example taken mode 1 commitments, but also differentiated among different types of consumers.
There was in fact a difference between professional market players, who were able to assess the risks
involved, and the simple consumer in the street, who did not have the same capacity to monitor firms.In his view, by being narrow in the range of mode  1 activities covered, the Understanding implied that
there was a difference between professional players in mode 1 and more normal consumers.  Norway
was willing to discuss with its trading partners the possibility of widening its mode 1 commitments.
34. The representative of Switzerland said, regarding the distinction between mode 1 and mode 3,
that both modes of supply were rather complementary.  It was difficult to imagine that a bank or an
insurance company would provide services only on a cross border basis through mode 1.  As to
commitments under mode 1, he said that some activities could be liberalized further under mode 1
without threatening the whole financial system.  Fina lly, on the points made by Brazil, he agreed that
not many countries had taken many commitments under mode 1 and, probably, only a few countries
undertook a commitment under mode 1 without any restrictions.  However, he also acknowledged thatvery few countries undertook commitments under mode 3 with no restrictions.  In fact, Switzerland
had more restrictions under mode 3 than under mode 1.
35. The representative of Canada replied to the last question posed by Brazil, by saying that in
Canada's view the GATS contained sufficient protections with regard to payments and transfers, and
balance-of-payments actions.  With regard to further commitments under mode 1, Canada scheduledits commitments according to the Understanding, so it had obviously taken commitments in mode 1
that were restricted.  That decision was based on Canada's assessment that that was the proper thing to
do in the context of the negotiations in 1997.  If that situation were to change, Canada's view might
well change.  However, the reason for Canada's que stion to Brazil was whether there was something
inherent in the construction of the Understanding , the GATS and the Annex on Financial Services
that made impossible for Brazil to undertake negotiations on mode 1 in such a way that would be
appropriate to Brazil's own interest.  Canada did not see there were such flaws in the Agreement so itwas up to individual countries to structure their exchanges of commitments in a fashion that was
appropriate to their interests.  These negotiations offered a chance to do so.
36. The representative of the People's Republic of China fully agreed with the points made by the
representative of the International Monetary Fund in his presentation, and highlighted two of them.
Firstly, the way in which financial services liberalization should take place should be different fordifferent countries, depending on their level of development.  Secondly, Members should exercise
caution in liberalizing their capital accounts if the domestic financial sector was weak.  That was
exactly what China was doing.  China had not fully liberalized its capital account, and the reasons
were exactly those that had been shown in the presentation by the International Monetary Fund and in
various research papers.  Regarding the link between financial services liberalization and capitalaccount liberalization, in her view the GATS was not intended for the liberalization of the capital
account.  The liberalization of financial services was one matter and the liberalization of the capital
account was an entirely different matter.  However, footnote 8 to GATS Articles XVI gave the
impression that liberalization of certain services would involve the free flow of capital, that is capital
account liberalization, either under mode 1 or under mode 3.  And that was a concern for China asS/FIN/M/39
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well.  If a Member had not yet completely liberalized its capital account, there would be risks
involved in making commitments on certain financial services.  Like Brazil, China had also been
faced with requests of that nature in the current negotiation, and she expressed the hope that those
Members could take into account that capital account liberalization was entirely different from
financial services liberalization.
37. The representative of Brazil said that the intervention by China showed that there was no
clear understanding on whether the GATS covered or not the liberalization of the capital account.  In
replying to the Canadian question, he said that Brazil was just trying to understand what was on the
table without prejudging whatever kind of commitments.  The intention was to discuss what were the
effects of having commitments in mode 1 according to the Annex or to the Understanding.  In his
view, liberalizing mode 1 according to the Understanding could be less than liberalizing mode 1
according to the Annex because of the list of activities involved.  Brazil took note that Canada hadcommitments in mode 1 for financial services acco rding to the Understanding, but invited Canada to
make full commitments in mode 1 according to the Annex on Financial Services.
38. The representative of Korea said that, after hearing the statement by the representative of the
International Monetary Fund, he fully understood, and agreed on, the necessity and benefits of capital
account liberalization.  However, if the meaning of capital account liberalization was similar to fullcommitments on financial services under mode 1, then in his view, most Members had to make a
reservation to their commitments on mode 1.  Members should undertake this process step by step.
This approach would be helpful to prevent individual economies, and indeed the world economy,
from facing a dangerous situation with volatile capital movements.  Furthermore, the necessity of
introducing world-wide guidelines to legislate volatile capital movements should also be addressed.He asked whether the representative of the International Monetary Fund could comment on these
issues.
39. The representative of the International Monetary Fund commented on some issues raised by
Members during the meeting.  Capital account liberalization was an extremely difficult and complex
matter, which was kept under continuous review by the Fund's Executive Board.  The Board was insession three times a week in Washington.  The forthcoming discussion would be in early March,
when the Board would be addressing in detail the effects of financial globalization on developing
countries.  And the pertinent study was prepared on the basis of vast empirical evidence gathered by
the Fund's research department.  Eventually, that report would be published after introducing the
corrections and opinions expressed by the members of the Board.  Thus the issue was not closed for
the Fund.  Secondly, capital account liberalization was not part of the Fund's Articles of Agreement.
WTO Members becoming members of the Fund did not take a commitment to liberalize their capitalaccounts.  Thirdly, the Fund was very concerned about the issue of volatility of capital flows raised by
Korea among others, and was working on the ways to better address this volatility in a multilateral
context.  As an observer in the WTO, the Fund stood ready to contribute to the ongoing discussion by
providing its technical expertise, views and background materials.  But, as mentioned by the
representative of the United States, it was up to the WTO Members to conduct the negotiations.  TheFund had its own mandate and was not going to intervene and participate in the discussion unless that
was specifically requested by the WTO Membership.
40. The Chairman said that the discussion on this particular agenda item was very interesting and
stimulating, focusing on some very complex issues regarding the liberalization of capital flows.  The
statement made by the representative of the International Monetary Fund, which would be circulated,provided relevant information for Member's reflection.  The issues raised were of direct relevance to
the ongoing negotiations.  In his view, such discussions should continue in the Committee, in order to
support a better-informed negotiating process.  Having said that, he suggested that the Committee take
note of the statements and revert to this agenda item at its next meeting.S/FIN/M/39
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41. The Committee so agreed.
C. RECENT DEVELOPMENTS IN FINANCIAL SERVICES TRADE
42. The Chairman recalled that at the last meeting the Committee had heard a very interesting
presentation by Peru on its regulatory regime.  Additionally, Hong Kong, China presented a very
interesting document on e-finance, which was subseque ntly circulated as S/FIN/W/25.  In his view,
this contribution should be particularly welcomed since it focused on an issue largely overlooked by
the Committee: e-finance.  He also reminded Members of the decision to revert to this document and
this issue at the present meeting.
43. The representative of Thailand said that consumer protection was of primary importance in
the realm of e-finance.  The Bank of Thailand had undertaken studies on the establishment of an
appropriate regulatory framework.  Although e-fi nance brought benefits to consumers, its growth
raised some concerns as it might lead to volati le capital movements.  In any case, the issue was
important and deserved further discussion.
44. The representative of the United States said the paper by Hong Kong, China was very
interesting.  She made some specific comments.  She concurred with the statement in paragraph 7 of
the paper that regulation should not be specific to the medium of delivery.  That was consistent with
the principle of technological neutrality.  It was also interesting to note, in paragraph 9 and footnote 7of the paper, the way Hong Kong, China's authorities elaborated disclosure and advertisement
requirements for deposit taking by virtual banks.  That was a proof of the way regulators might
respond to the challenges of e-commerce.  She agreed that the international regulatory bodies
provided valuable information on regulatory approaches to these issues, and opportunities for
cooperation, particularly with respect to enforcement.
45. The representative of Switzerland said that the issue of e-finance was very important.  Certain
studies showed that the use of information t echnology in the financial sector increased its
productivity.  For example, the cost of a transaction through a branch might be  US$ 1, while the same
transaction conducted over the Internet cost less than US$ 0,10.  He said that Switzerland would
present its own regulatory experience in this fiel d at a future meeting of the Committee.  The paper
submitted by Hong Kong, China showed that the regime put in place in that Member was liberal.  The
regulatory environment seemed to favour the development of such activities.  Switzerland agreed with
the approach taken by Hong Kong, China's Securities and Futures Commission, according to which
the fundamental regulatory principles must not discriminate between different ways of delivery.  This
approach seemed to be consistent with the principle of technological neutrality.  He asked two
questions of Hong Kong, China.  Firstly, he asked whether there was any absolutely virtual bank in
Hong Kong, China.  If so, he asked to know the number of such banks and whether they providedservices abroad.  Secondly, he noted that the soli citation of deposits from the public in Hong Kong,
China by overseas institutions was not subject to authorization, provided the deposits were placed
overseas.  In that regard, he asked whether further information on the general approach taken by Hong
Kong, China regarding solicitation might be provided, particularly with respect to other financial
services, such as investment funds.  In particular, he asked whether Internet pages were considered asactive solicitation.
46. The representative of Malaysia said that e-banking should not only be viewed as synonymous
to cross-border supply but also as a factor contributing to liberalization in the domestic market.
Perhaps, there might be restrictions to the opening of retail outlets or ATMs, but once e-banking was
allowed for both nationally-owned and foreign-owned institutions, then some meaningfulliberalization took  place.  He said in that regard that Malaysia had recently allowed nationally-owned
and foreign-owned banks to perform e-banking activities, and expressed the hope that trading partners
would take that as a liberalization measure.S/FIN/M/39
Page 10
47. The representative of Hong Kong, China replie d to some of the points raised.  Regarding
comments made by Thailand, Malaysia, and to a certain extent the United States, it was true that the
paper's aim was to share the latest market trends e xperienced in Hong Kong, China in the fields of e-
banking and online trading.  And those trends concerned mainly the domestic market.  However, the
overall objective of the regulatory regime should be to facilitate the development of such activities notonly within the border but also across the border.  One of the main principles adopted in Hong Kong,
China was technological neutrality.  Other requirements, such as capital requirements, were also
applied on a non-discriminatory basis.  That did not mean that regulators should not cater for the
specific circumstances of the electronic mode of transaction.  In fact, Hong Kong, China's regulatory
authorities issued specific guidelines and policies with respect to the electronic mode of delivery of
financial services.  On the questions raised by Sw itzerland, he confirmed that, as far as he was aware,
one bank had been licensed to conduct business on a purely virtual basis.  The services provided bythis bank were still concentrated on the domestic market, but that was not due to any regulatory
limitations imposed on the supply itself.  The range of services provided to customers was similar to
the one provided over-the-counter by other traditional retail banks, albeit perhaps on a more limited
scale.  Regarding the position on active solicitation, he said he would revert to it at a later stage.
48. The representative of Malaysia said that the existence of virtual banks that might conduct
transactions on a cross-border basis raised questions regarding accountability.  He wondered whether
Hong Kong, China could provide further informati on on how this aspect –accountability- was dealt
with.
49. The representative of Hong Kong, China  shared the feeling of Malaysia that that was not an
easy issue to tackle.  He pointed to two developments that might be of relevance in that regard.
Firstly, Hong Kong, China banking regulators were participating in the electronic banking group of
the Basel Committee on Banking Supervision.  The group was looking at various supervisory issues
of relevance to e-banking, including cross-border issues and risk-management principles for
electronic banking services.  Participating in that work would be useful to all regulators.  Secondly,
Hong Kong, China regulators had been involved in discussions with other supervisors in the Asia-Pacific region, with a view to exploring the scope for international cooperation with regard to
electronic transactions.
50. The representative of Thailand asked Hong Kong, China whether the requirement for virtual
banks to establish in Hong Kong, China (Re. paragraph 8 of S/FIN/W/25) meant that virtual banks
must be incorporated in Hong Kong, China.
51. The representative of Hong Kong, China said th at he would reply in greater detail at a future
meeting.  He felt nonetheless that there were two issues involved in the question.  The first one
concerned the ability of foreign virtual banks to provide services across the border in Hong Kong,
China.  The second issue was who would be under the Hong Kong, China regulatory regime.  With
respect to the first issue, foreign financial instit utions were already providing services across the
border.  He would reply to the second issue at a future meeting.
52. The Chairman said that the discussion was very interesting.  He highlighted the importance of
using this agenda item to discuss issues such as e-finance, which were of extreme relevance for the
negotiations, since they gave an idea about the context in which financial services trade took place.
This must not be ignored by the Committee given the growing role of e-finance in financial services
trade.  He encouraged Members to come up with similar presentations and documents.
53. The Committee took note of the statements made, and decided  to revert to this item at the
next meeting.S/FIN/M/39
Page 11
D. DATE OF THE NEXT MEETING
54. The Chairman suggested that the Committee hold  its next meeting during the next cluster of
services meetings, in May 2003.  The exact date would be announced in due course.
55. The Committee so decided.
E. OTHER BUSINESS
56. The Chairman commented on the presentation made during the morning by the World Bank
of its 11th Policy Report entitled "Finance for Growth: Policy Choices in a Volatile World".  The
comments were under the Chairman's own responsibility.  He found that the most interesting aspect of
this presentation, and of the policy report, was that it did not focus on the application of abstract
principles; rather, the conclusions were based on an analysis of concrete evidence.  In that regard, it
was becoming increasingly clear that finance contributed to long-term prosperity.  Getting the
financial system to function more efficiently in providing the full range of financial services was anendeavour that would be rewarded with economic growth.  But well functioning financial systems
called for adequate legal and regulatory frameworks.  Governments needed to ensure that legal and
information foundations.
57. In his view, the World Bank presentation provided the Committee with a lot of evidence and
insights on why finance matters, on what had been the experience with different types of policies, andon what were the preconditions to successful reform programmes.  The Committee's activities, and
indeed delegations themselves, would greatly benefit from continuing the discussion on these issues
in the future.
58. The representative of Malaysia raised a procedural question regarding the Chairmanship of
sessions such as the one conducted with the World Bank during the morning.  He was under the
impression that the World Bank presentation was part of the Committee's agenda, and should
therefore be chaired by the Chairman himself.  He sought clarification in that regard.
59. The Chairman invited the Secretariat to explain the rationale for the Secretariat chairing the
presentation by the World Bank during the morning.
60. The representative of the Secretariat said that the chairing of such events by the Secretariat
was upon request of Members.  He explained that the practice had emerged some time ago to mark the
distinction between events of a purely informative nature (such as seminars, symposia and briefing
sessions like the one conducted that morning) and the formal institutional structure of the Services
Council and its subsidiary bodies.  In that context, the Secretariat was given the role of chairing the
former, which were not part of the agenda of Committees or the Council.  Such activities had been
systematically organized along those lines.  Of course, Members might decide otherwise in future
occasions.  As delegations might see, the kind of discussions held in events such as the presentationby the World Bank were completely different from the kind of discussions that took place in the
formal meeting of the Committee.
61. The representatives of Brazil and Thailand
 sought clarification as to the nature of the
statement made by the Chairman at the start of this agenda item.
62. The representative of Uruguay said that, if he understood correctly, the comments made by
the Chairman were under his own responsibility.  That did not mean that those comments reflected the
understanding of the Membership.  On that basis, he saw no problems with reflecting those comments
in the report of the meeting.S/FIN/M/39
Page 12
63. The Chairman confirmed that his comments were under his own responsibility and that was
how they would be reflected in the report of th e meeting.  On the issue raised by Malaysia, he
suggested that the Committee take note of the question raised by that delegation, and that the matter
be the subject of further informal consultations to be held in due course by the incoming Chairman.
64. The Committee so decided.
F. APPOINTMENT OF THE NEW CHAIRPERSON FOR THE COMMITTEE
65. The Chairman said that according to the Rules of Procedures, the Committee should elect its
Chairperson at the first meeting of the year, effective at the end of such meeting.  However, given that
the consultation on that matter by the Chairman of the Council for Trade in Services had not yet
finished, he suggested that the formal election of the Committee's Chair for this year and the hand
over take place at the beginning of the next meeting, right after the adoption of the agenda.
66. The Committee so decided.
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