Spain
Financial Sector Assessment Program: Detailed Assessment of Implementation of the IOSCO Objectives and Principles of Securities Regulation

This assessment focuses on the National Securities Market Commission (CNMV) but takes into account the activities of other institutions insofar as they oversee investment service providers, markets, and clearing and settlement systems, and thus affect implementation of the IOSCO Objectives and Principles of Securities Regulation. The assessment also reviews the efficiency of the arrangements by which such institutions interact and cooperate in the performance of their regulatory, supervisory, and enforcement functions, and also reflects the views of the mission team on the findings in their particular areas of emphasis.

Abstract

This assessment focuses on the National Securities Market Commission (CNMV) but takes into account the activities of other institutions insofar as they oversee investment service providers, markets, and clearing and settlement systems, and thus affect implementation of the IOSCO Objectives and Principles of Securities Regulation. The assessment also reviews the efficiency of the arrangements by which such institutions interact and cooperate in the performance of their regulatory, supervisory, and enforcement functions, and also reflects the views of the mission team on the findings in their particular areas of emphasis.

I. Iosco Objectives AND Principles OF Securities Regulation1

A. General

1. Spain has modernized the legal structure for financial services through several amendments to the main founding Law 24/1988 of July 28 on the Securities Market known as the Ley del Mercado de Valores or or LMV. These are Law 37/1998 of November 16, 1998 on LMV Reform, Law 44/2002 of November 22, 2002 on Measures of Reform of the Financial System (Ley 44/2002 de Medidas de Reforma del Sistema Financiero) Law 26/2003 of July 17, 2003 modifying the LMV, Legislative Royal Decree 1564/1989 of December 22 on corporations (Texto Refundido de la Ley de Sociedades Anónimas) and Law 5/2005 of March 11, 2005 introducing changes for conforming with the EU directive. As amended by these laws, the LMV simplifies and consolidates the laws affecting financial markets and institutions and related products and professionals.

2. The Spanish regulatory framework can be described as a “one peak” model, where prudential and conduct of business rules of investment firms and asset managers are both overseen by the CNMV (National Securities Market Commission). The regulatory model articulated under the LMV and other relevant legal texts is clearly set out and simple, notwithstanding the legal specificities of the Spanish constitutional and legal framework.

3. The CNMV is the main regulator of all firms and individuals related to the securities market, notwithstanding the exclusive prudential oversight of the Bank of Spain (BE) over credit institutions (CIs) involved in securities dealing and the role of the Ministry of Economy in licensing. Although legal provisions require the Bank of Spain to inform the CNMV about CIs’ activity in securities dealing, in practice this only occurs through computerized data flows. The BE only consults with the CNMV when the CI intends to dedicate a significant part of its business to the provision of investment services.

4. While generally reflecting the features of sound financial market regulation, the Spanish regulatory framework could be further strengthened by integrating additional oversight and sanctioning capabilities and by reinforcing both the institutional and operational independence of the securities regulator.

5. The president, vice president, and non-executive members of CNMV’s Board are appointed for four-year terms, renewable once. To increase independence, appointments should be for a longer term than the present four years, and should be non-renewable. In addition, although no evidence was found of inappropriate political interference in the CNMV’s decision-making process, it is recommended that the appointment of at least some non-executive members of the Board be made, drawing from varied constituencies, for example, academia or the private sector.

6. With regard to operational independence, it is noted that important regulatory powers in adopting new regulations in key operational areas of the securities field as well as the power to grant and withdraw licenses and to impose sanctions for very serious infractions of the securities regulation (infracciones muy graves) remain within the remit of the Ministry of Economy and Finance (ME). Although the current framework does not result in gaps in oversight or regulation, compliance with international standards would be greatly enhanced by vesting the CNMV with the power to design and adopt secondary legislation which would then be promulgated by the executive authorities; to grant and withdraw licenses of regulated entities; and to impose sanctions on administrative grounds for any infractions of the securities’ laws and regulations.

7. This assessment focuses on the CNMV but takes into account the activities of other institutions insofar as they oversee investment service providers, markets, and clearing and settlement systems, and thus affect implementation of the IOSCO Objectives and Principles of Securities Regulation (Principles). The assessment also attempts to assess the efficiency of the arrangements by which such institutions interact and cooperate in the performance of their regulatory, supervisory, and enforcement functions. The discussion below and under Principles 1 and 2 describes the institutional components of the regulatory structure.

B. Information and Methodology Used for Assessment

8. Several tools were used in conducting this assessment: the Principles themselves, the Methodology for Assessing Implementation of the IOSCO Objectives and Principles of Securities Regulation (Assessment Methodology), the IMF Guidance Notes and Templates, and various IOSCO reports referenced in the Assessment Methodology and the Principles.

9. The assessment is based on meetings and discussions with the ME staff; senior CNMV staff responsible for each of the functional areas addressed by the Principles; staff of the Bank of Spain (with respect to their roles in the securities framework); BME Spanish Exchanges S.A (Bolsas y Mercados Espanoles, Sociedad Holding de Mercados y Sistemas Financieros SA—Madrid)(cash and derivatives markets); selected asset management and investment firms; and related professional associations. Selected material reviewed for the assessment included the above institutions’ annual reports; laws, regulations, and published guidelines; statistics on operations; published information on issuers; official registries of licensed institutions; published information on regulatory actions; CNMV responses to the IOSCO questionnaires; and other material submitted by the CNMV during the course of the on-site portion of the assessment. The assessment also reflects the views of the mission team expressed at mission meetings in which participants briefed each other on findings in their particular areas of emphasis.

10. The assessor wishes to express his warmest thanks to the staff of the CNMV and other institutions contacted in the course of this assessment for their support, resourcefulness, and flexibility, and appreciates in particular the high quality responses to the Assessment Methodology adopted by IOSCO.

C. Institutional and Macroprudential Setting, Market Structure

11. Bolsas y Mercados Españoles (BME) is the holding company that operates the securities markets. The BME’s competencies encompass the markets for variable- and fixed-income securities, and derivatives, as well as the clearing and settlement systems. The BME group consists of the four stock exchanges (Madrid, Barcelona, Bilbao, and Valencia), MF Mercados Financieros, Iberclear, and BME Consulting (see figure below).

12. By end-2004, BME had consolidated its position as an international financial center. With a market capitalization of €672 billion at end-2004 (equivalent to 80 percent of Spain’s GDP), BME became Europe’s fourth largest stock market. In total share value traded, BME ranked seventh in the world (see table below). The Spanish stock market has yielded a return of 241 percent over the last ten years, the highest in the world.2 Latibex is the BME-owned stock exchange for Latin American shares traded in euros. With total market value close to €150 billion, Latibex is the third largest stock exchange in Latin American shares, after Brazil and Mexico.

Top 7 Exchanges by Total Value of Share Trading, 2004

(In billions of US dollars)

Source: World Federation of Exchanges.
A01ufig01

Overview of BME Holdings

Citation: IMF Staff Country Reports 2006, 220; 10.5089/9781451812220.002.A001

Source: BME.

D. Description of Regulatory Structure and Practices

13. CNMV’s Board and Executive Committee: The CNMV is an autonomous public authority governed by a seven-member board (Consejo)3 chaired by a full-time president. A permanent Executive Committee (Comité Ejecutivo), comprising the president, vice president and the three full-time members of the Board, prepare the board agenda and exercise delegated powers.

14. Consultative committee. Besides the CNMV’s board and executive committee, Article 22 of the LMV provides for the setting up of a consultative committee chaired by the vice-president of the CNMV as a nonvoting member. The organization of the committee (under Royal Decree 504/2003) provides for the appointment of 17 members who represent secondary markets, issuers, investors and the three relevant Autonomous Communities. In accordance with Article 23 of the LMV, the committee must be consulted on the drafts of CNMV circulars, on the imposition of sanctions for very serious infractions (i.e., not on light and serious infractions), on licensing, delicensing mergers, and takeovers of investment firms, and on the authorization and revocation of authorization of branches of investment companies of non-EU member states.

15. Scope of competence. The CNMV prudentially supervises investment service providers (Empresas de Servicio de Inversion, ESIs), regulates public offerings and takeover bids, oversees the financial information related to securities and supervises the marketing and distribution of financial instruments. The CNMV also has responsibility for custodians of securities and of assets of collective investment schemes, for clearing and settlement systems and related custodians, without prejudice to the functions of the Bank of Spain and its specific role with respect to payment systems.

16. Sanctioning powers. The CNVM has somewhat restricted sanctioning powers, that have to be exercised after the nonbinding advice of its Consultative Committee as provided for under Article 23 of the LMV. The CNMV can only sanction light or serious breaches of relevant laws and regulations (infracciones leves o graves). With regard to very serious infractions (infracciones muy graves), the CNMV prepares a report on the case and proposes a sanction for the ME to impose. Potentially criminal acts must be referred to the public prosecutor (Consejo Fiscal del Estado). The CNMV board must inform the Bank of Spain of any sanction that it intends to apply to a credit institution (Article 97 of the LMV).

17. Licensing. Licensing (and withdrawal of licenses) of investment service providers is the responsibility of the ME, upon the recommendation of the CNMV (Article 66 of the LMV). The ME also has the same licensing and delicensing powers over (a) insurance companies, upon the recommendation of the DGSFP, and (b) credit institutions, on the recommendation of the Bank of Spain.

18. Coordination with the Bank of Spain. Coordination of day-to-day operations between the Bank of Spain and the CNMV is organized through inter-staff contacts, information sharing, sharing of data bases and regular monthly meetings. The CNMV maintains a registry of credit institutions involved in providing investment services that is publicly available on its website. Information on credit institutions is updated daily by the Bank of Spain. The registry also includes the tariffs and the typical contractual documents as filed with the CNMV.

19. Cross-membership arrangements. Cross-membership of the supervisory authorities also fosters cooperation and aims at reinforcing information-sharing mechanisms among financial regulators. Thus, the vice president of the CNMV is an ex-officio member of the board of the Bank of Spain, and reciprocally, the deputy governor of the Bank of Spain is a member of the CNMV Board. However, cross-membership on boards does not apply to the insurance supervisor. Regular meetings of the heads of the three financial sector supervisors could facilitate institutional links and add certainty to information-sharing mechanisms.

20. Market operators and clearing and settlement systems are monitored through protocols that are subject to review by the competent authority, and those protocols (and any powers or actions with respect to their infraction) are regarded as founded in contract law and not in public law. Power to impose penalties or fines, and to suspend or prohibit the participation of any participants in the markets is the responsibility of the CNMV and ME. Without prejudice to the disciplinary powers of the CNMV and ME, persons included within the scope of the BME regulations are also held liable for any infractions under the applicable employment or professional regime.

21. There are also protocols among the national regulators and markets within the BME, SA Holding group, and the related clearing and settlement institutions that apply to how those institutions are operated and supervised.

22. The law applicable to securities is largely contained in the main LMV as subsequently amended and further completed by a Royal Decree transposing both the Market Abuse and the Prospectus directives in order to bring the Spanish framework fully in line with the European directives.

23. Applicable law is also found in certain related legislation, such as company law, bankruptcy law, commercial law, property law, penal law, and administrative codes.

24. As a member of the European Community, Spain also recognizes credit institutions and investment firms, including market operations, that enter Spain from other European Economic Area jurisdictions in which they are authorized, either by exercising a right of establishment or a right to provide cross-border services.

E. General Preconditions for Effective Securities Regulation

25. Overall, Spain appears to meet the preconditions for an effective regulatory framework for capital markets and the provision of financial services. Such preconditions assume the existence of a legal framework that supports the integrity of contract and property rights, a legal structure that recognizes the instruments traded in the market and the rules that facilitate their trading, a commercial and insolvency regime that facilitates the taking of collateral, the use of clearing services, and the enforcement of guarantees, sound company law that protects direct investors, laws that support the ability to identify and protect client assets, reliable and consistent accounting standards, and the confidence of the marketplace that the rules will be consistently and equitably enforced and can be applied notwithstanding the bankruptcy of particular market participants. These assumptions are further premised on the assumption that the judicial, administrative, and regulatory authorities will reliably honor and equitably apply the rule of law. Certainty as to the application of the law and confidence in its equity are fundamental to the reliable functioning of markets and market confidence.

26. As regards market openness, market regulators in Spain have historically been open to cross-border arrangements within the European Union, including the Lamfalussy process. This process aims at better harmonizing national approaches to the regulation of financial services within the single European market, specifically by broadening use of the mechanisms for regulatory development and consultation with the Committee of European Securities Regulators (CESR).

27. Also, the design of the regulatory framework should be kept under review to determine if further efficiencies and streamlining are possible and whether essential cooperation continues to occur.

F. Principle-by-Principle Assessment

Table 1.

Detailed Assessment of Observance of the IOSCO Objectives and Principles of Securities Regulation