Current Legal Issues Affecting Central Banks, Volume V


Robert Effros
Published Date:
May 1998
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This comment is intended to step back from the broad multilateral picture to look at some of the domestic considerations—often intensely practical and political—that can accompany international negotiations in financial services. Some of the factors that must be taken into account so that a country can be prepared to negotiate knowledgeably and effectively on an international basis in the sector are considered. Naturally, the particular issues that bedeviled U.S. negotiators during the Uruguay Round negotiations might not be a problem in all countries. However, the financial services sector has certain characteristics that increase the likelihood that countries undertaking such negotiations will face a number of common issues.

First, in nearly all countries financial services tend to be highly regulated. Regulators are likely to have a keen interest in ensuring that their ability to regulate for prudential reasons is well protected. In many countries, financial services regulators are not usually participants in trade negotiations. Therefore, it is often necessary to work out methods of cooperation and consultation with the trade ministries or other agencies that typically undertake trade negotiations.

Second, there is often considerable legislative interest in the conduct and outcome of financial services negotiations. Accordingly, domestic industries might take an active interest in the negotiations. In some cases, these companies might be hoping that negotiations will create new opportunities. At other times, they might be more interested in seeking to preserve certain protections that benefit them in the existing system.

These are some of the major factors that influence the conduct of financial services negotiations in general. These factors are examined in light of circumstances in the United States and how they affected the experience of U.S. negotiators in the Uruguay Round negotiations.

Getting Started: The Negotiations

The complexity of the U.S. financial system made it difficult to prepare for the negotiations in the Uruguay Round. The U.S. regulatory scheme in banking, securities, and insurance is not a model for the rest of the world. It is a complex system that someone setting out to establish a rational order for financial services might not deliberately design.

The United States regulates banking and securities on both the federal (or national) level and the state (or subnational) level. Examples of federal regulatory agencies are the Office of the Comptroller of the Currency (OCC), which is part of the Treasury Department and regulates nationally chartered banks; the Board of Governors of the Federal Reserve System, which, among other responsibilities, regulates bank holding companies while also playing a significant regulatory role with respect to foreign bank branches and agencies, whether chartered by the federal or state government; and the Securities and Exchange Commission (SEC), which regulates securities issuance and trading.

Federal law takes precedence in these matters, and Congress can, if it wishes, overrule or displace state regulation in many areas. However, banking regulation and securities regulation in actuality are generally concurrent. In other words, both federal and state laws exist at the same time, and many financial institutions, to their dismay, find themselves subject to laws at both levels. This system forced the United States to ensure that its international negotiating positions took into account state regulation and did not concentrate only upon the federal level. Moreover, an added difficulty with respect to insurance is that all U.S. regulation is at the state level, with no federal regulation at all.

This complex regulatory system gave rise to certain implications. First, U.S. negotiators had to consult with state regulators in all three of the substantive financial services fields—banking, securities, and insurance. Second, they needed to acquire sufficient expertise so that they could adequately explain the complicated U.S. system in the context of negotiations. Having recognized the various levels of regulation, it was necessary to figure out how to go about putting together a knowledgeable negotiating team to start work on financial services in the Uruguay Round.

In the 1970s and 1980s, the United States was an early and enthusiastic proponent of the expanded system of the General Agreement on Tariffs and Trade (GATT). U.S. financial services companies were in the vanguard. They were interested in the expansion of the system and hoped that market access could be achieved through a services agreement under GATT auspices. The objectives were relatively simple: U.S. companies wanted to maintain and lock in the relatively good access they enjoyed in a number of countries, but they wanted better access and national treatment in certain other countries.

In the U.S. government, trade negotiations are primarily the responsibility of the office of the U.S. Trade Representative (USTR). This began the overall negotiations on all agreements in the Uruguay Round when the round was launched in 1986. The USTR carried the negotiations forward into 1989, when financial services experts became involved for the United States. The United States decided that its financial services team would initially involve representatives of the federal banking regulators: the Federal Reserve; the OCC; the SEC as the federal securities regulator; and the Treasury Department because of its monetary and international economic policy responsibilities, which include financial services. The Treasury Department and the other regulators had responsibility for handling banking and securities issues in the Uruguay Round negotiations, while the USTR and the Department of Commerce handled insurance—the one area that was not federally regulated. The observations that follow apply mostly to banking and securities.

Some initial questions arose between the financial regulators and the USTR concerning who should attend certain meetings and who should be considered the head of the delegation. These questions required some consultation to resolve. However, satisfactory arrangements for effective participation by the financial services experts were achieved. Their participation was important, because the USTR is a relatively small agency, and it lacks substantive expertise in this area.

The early team of financial services experts, having determined to start on negotiations, arrived in Geneva to find that the General Agreement on Trade in Services (GATS)1 did not appear particularly well equipped to handle the special needs of the financial services sector. In order to address this problem, an informal group of financial services experts from a number of industrialized and developing countries gradually arose because of the common desire to see that the GATS dealt adequately with the sector. By 1989, in a preliminary draft, the GATS looked suspiciously similar to the GATT. Although it did not have any tariff provisions, it did have clauses on dispute resolution, payments and transfers, a balance of payments exception, and a most-favored-nation clause.

For financial services experts, a serious deficiency in the preliminary GATS draft was its lack of any special consideration for financial services. U.S. financial services experts believed that the financial services sector was highly regulated virtually all over the world, with special characteristics that needed to be recognized and, where necessary, protected. It was not only that financial services were not goods, like widgets, or commodities, like soy beans, but that financial services were not necessarily like other services. They bore little resemblance to tourism, and they were not like legal services or accountancy, either.

There was one particularly overriding concern for financial services regulators: to protect their ability to regulate on prudential grounds in order to insure the safety and soundness of the financial system and to protect the consumers of financial services. This goal was shared by all of the U.S. financial services negotiators from the beginning. As time went on, it became clear that this objective was almost universally accepted, because all countries came to recognize the value of such a prudential carveout.

Another idea that emerged quite naturally was the need to include an annex to the GATS that dealt specifically with the needs of the financial services sector. By the end of 1990, when the Uruguay Round was originally to have been completed, the idea of an annex had become generally accepted. The resulting Annex on Financial Services contains a number of useful provisions.2 First and foremost is the prudential carveout, which is set forth in Paragraph 2(a) of the Annex.3 The Annex also has a broad, open-ended listing of activities that are considered to constitute financial services.4 Moreover, it defines what governmental services mean in the financial services context and provides that certain governmental activities are not covered, such as the activities of a central bank in pursuit of monetary or exchange rate policies.5

Legislative and Industry Concerns

While the negotiations in Geneva were occurring, the U.S. financial services negotiators were in contact both with members of Congress and with members of the financial services industry. This practice was a matter of law and political realities. As far as the law was concerned, the United States in 1974 passed a new trade act that established a number of procedures for the conduct of trade negotiations.6 One of the most important aspects of the law was its creation of the so-called fast track process.7 Fast track sets up a special procedure that provides an expedited timetable for consideration of international agreements by Congress and, significantly, permits no amendments.8 Fast track is essential for trade agreements in the United States, because so many interests are affected. The temptation of Congress to amend the agreements had proven nearly irresistible in the past. Before fast track, trade agreements were regularly amended to such an extent that they sometimes no longer resembled the agreement originally negotiated. Fast track attempted to overcome this problem.

The 1974 Trade Act also incorporated a number of provisions to ensure that Congress and the industries concerned would be kept involved in the negotiation process.9 Although Congress voluntarily adopted the special fast track procedures that limited its own powers, it still retained the power simply to refuse approval of an agreement if it did not like its provisions. Accordingly, it was prudent for the USTR to keep Congress up to date on developments. The 1974 Trade Act also envisaged the establishment of industry advisory groups.10 There was an active group of banks, securities firms, and insurance companies in the financial services group with which the Uruguay Round negotiators met regularly. One purpose of these regular contacts was to apprise the industry of recent developments, but another purpose was to elicit information that would aid in the bilateral request-offer exercise in the negotiations. This exercise was part of the process in the Uruguay Round by which each country ultimately decided on its scheduled commitments in financial services and discussed their own commitments with other countries.

The existence of fast track is important for successful trade negotiations by the United States. Concerns arose over the ability of the United States to continue participation when the Uruguay Round was not completed in 1990 as originally scheduled, and subsequently in 1991 and 1992. Fast track was due to expire on June 1, 1993,11 which was before anyone realistically believed that the Round could be completed. Moreover, a change of administrations in the United States made it difficult to determine what the new administration was going to do. As it turned out, the uncertainty was resolved early in 1993 after the new administration committed itself to completing the Uruguay Round. Congress and the administration reached agreement on an extension of fast track procedures through December 15, 1993.12 This date became the decisive date for the United States and had a clear influence on the overall date for ending the Uruguay Round. It also seems likely that everyone was seeking some excuse for a final deadline, given the sheer fatigue that comes from negotiating nonstop for more than seven years.

Financial services negotiations were not, however, completed by December 15, 1993. Instead, the Uruguay Round’s package of documents permitted negotiations on financial services to take place during the first six months after entry into force of the agreement that established the World Trade Organization (WTO)—January 1, 1995.

By that time, in the United States there was another legislative requirement with which to contend. Using the fast track process, legislation was adopted in the United States that allowed the WTO agreements to enter into force on January 1, 1995.13 However, that law specified that financial services negotiations would continue and established certain requirements for the extended negotiations.14 First, the legislation established objectives for the negotiators. Briefly, these objectives were

to secure commitments, from a wide range of commercially important developed and developing countries, to reduce or eliminate barriers to the supply of financial services, including barriers that denied national treatment or market access by restricting the establishment or operation of financial services providers.…15

In the Statement of Administrative Action that accompanied the legislation, the Administration undertook to provide an interim report to Congress as of April 30, 1995, describing the status of the then ongoing negotiations. In addition, the Administration agreed to consult with Congress and the financial services industry prior to determining whether a most-favored-nation exemption would go into effect and whether the U.S. schedule of commitments should be modified.

State Concerns

The last element in the process dealt with issues concerning the 50 states and the District of Columbia of the United States. As extended Uruguay Round negotiations in financial services got under way early in 1995, the U.S. negotiators knew that they would have to seek reservations for a number of existing measures that were not consistent with the GATS’s principles of market access, national treatment, or most-favored-nation exemptions. It was easy to list measures on the federal level, but the GATS clearly applied to subnational jurisdictions as well, so inconsistent state measures needed to be listed. The USTR’s overall approach to this problem was based on the conclusion that, while some difficulties existed, the United States had a relatively open market in financial services. Since Congress was not going to overrule state banking and securities measures in the context of trade negotiations, the approach was to reserve existing state measures where inconsistencies existed. Treasury and the USTR had conducted a thorough examination of state measures for the financial services chapter of the North American Free Trade Agreement (NAFTA),16 but the obligations were not the same in the two agreements, so the negotiators could not employ the same exact language.17 The negotiators drafted a schedule of commitments based on NAFTA and earlier information gathered specifically for the Uruguay Round. Then, they sent this schedule to the state banking and securities regulators of each state and the District of Columbia. (The USTR and Commerce took similar action for the insurance sector.) There were 51 different jurisdictions in all, and at least 2 different regulatory bodies in each jurisdiction. This proved to be a monumental job, because the GATS is a document not easily understood by those unfamiliar with its terms. This lack of familiarity proved a particular problem for state regulators of smaller states, some of whom had never even received an application from a foreign bank to set up business in their state. As a result, some had never had to consider how such a bank would be treated under state law. Of necessity, the USTR had to engage in a lengthy dialogue with the states.

Treasury discovered that many states were revising old laws and, in doing so, were often simplifying, updating, and making it easier for foreign banks to do business. A number of changes were being made to attract out-of-state banks, which included any bank from a different state, whether it was a foreign bank or another U.S. bank. Other state law changes were impelled by the need to adapt to a new federal law on interstate banking that went into effect in 1995 and enabled all banks, foreign or domestic, to expand into every state through the acquisition of existing banks.18 (This law represents an instance in which Congress overruled inconsistent state laws in this area.)


The projected end of the extended negotiations in financial services was 1995. The summer of 1995 was the culmination of a long process that revealed a number of lessons for those in the United States engaged in the financial services negotiations. Some lessons that may have relevance beyond the United States should be noted.

First, financial services negotiators should have been involved longer and sooner. For whatever reason—perhaps because of the belief that the idea of including financial services would fade—financial services experts did not become involved until nearly the end of the negotiations. It would have been far better for the financial services experts to have taken action earlier. They did not do that and, as a result, the negotiators were constantly trying to catch up. By the time NAFTA was being negotiated, the lesson had been learned, and financial services experts led the negotiations in their sector from the very beginning.

Second, a certain sequencing of the negotiations arose. At the beginning, the interests of financial services regulators were uppermost, as everyone worked on the text of the agreement. It was crucial to involve the regulators, both for substantive expertise and because it would have been inappropriate to seek congressional approval without addressing the most important concerns of regulators. Later, the attention moved from regulatory concerns to concerns with individual countries and their specific commitments. The input from industry members was then particularly important.

Third, the U.S. negotiators had to take into account the concerns of individual states. Congress had long recognized and accepted the principle of state regulation of banking and securities, and there was not the requisite expertise on the federal level to ensure accurate listing of relevant state reservations. The system for working with the states was imperfect, although Treasury did work quite effectively with associations of state banking and securities regulators that had representative offices in Washington.

Fourth, the process in the United States, although somewhat unwieldy, accomplished quite a lot. The Administration ended up with a position that was accepted by Congress and the financial services industry, and that kept negotiating options open for further talks. The U.S. negotiators managed to keep in touch with all concerned parties and tried earnestly to accommodate their interests. In addition, most negotiators developed a greater appreciation for the complexities of the U.S. system—the layers of regulation and the relevant actors, both public and private, involved in the process.

Finally, financial service negotiators of all countries, working together, accomplished much. They produced the first significant multilateral agreement across the financial services sector, overcoming a number of obstacles in the process. They won acceptance of the principle that certain characteristics of this highly regulated sector required special provisions and protections. They came up with their own annex and their own prudential carveout. They also were able to have incorporated into the Uruguay Round documents the concept of sectoral committees, and to achieve at the very beginning the establishment of the Committee on Trade in Financial Services to discuss and make recommendations on issues of concern to the sector. While not every goal of every country was achieved, a start was made, and a framework for further negotiations was firmly established. Furthermore, the negotiations are not over yet. It is quite possible that the liberalization a number of countries have undertaken for their own reasons may be available for incorporation into commitments in the GATS when negotiations resume.

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