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March 30, 1992
TO: INTERNATIONAL MEMBERS NO. 6-92
INVESTMENT ADVISER MEMBERS NO. 13-92
RE: GERMAN FINANCIAL MARKETS REGULATION
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Counsel to the Institute has provided information about
proposals issued by Germany's Ministry of Finance in January that
would reform the German financial markets. The Ministry plans to
introduce legislation in the near future to implement the
proposals. The proposals deal primarily with the structure and
supervision of the German stock exchanges, but also affect the
German mutual fund industry.
The main features of the January proposals are: 1) the
introduction of money market funds in Germany, 2) creation of a
national stock exchange, 3) creation of a central exchange
commission as a national regulatory body, and 4) changes in the
methods of trading.
A. Introduction of Money Market Funds
German funds currently may invest only up to 49% of their
assets in money market instruments. The Ministry proposal would
eliminate this cap and allow true money market funds to be sold
in Germany. Money market funds historically have been opposed by
German banks, which fear an erosion both of their control over
the money supply and their deposit base. Recent information from
counsel to the Institute suggests that the Ministry may abandon
its efforts to introduce money market funds due to strong
opposition once again from the German banking industry.
B. Structure of the German Stock Exchanges
There are eight regional stock exchanges in Germany, each
of which is subject to separate local supervision. The Ministry
proposes a national exchange established and maintained by a
corporation in which all of the regional exchanges will become
stockholders.
C. Stock Exchange Supervision
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Current stock exchange supervision is done on a regional
basis and the Ministry believes that there is insufficient
supervision of trading practices such as insider trading. The
Ministry intends to set up a central exchange commission with
broad regulatory powers, one of the stated purposes of which will
be to facilitate the international exchange of information. The
central exchange commission will have investigative authority,
including the right to monitor trading.
Creation of this central authority will be accompanied by a
number of substantive changes. For example, new criminal
sanctions against insider trading will be introduced, as well a
new requirement to disclose to the German stock exchange large
transactions in securities of quoted companies.
D. Methods of Trading
Trading in Germany today is done almost exclusively on the
floor of an exchange. Trading is done by auction without
marketmakers, and the officially quoted price of a security is
determined by a small group of Kursmaklers (price brokers)
appointed by the regional exchange supervisors. The Ministry
intends to introduce computerized trading, a proposal that is
being met with opposition from the Kursmaklers.
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It is our understanding that the Ministry also intends to
introduce legislation regulating investment services even if the
European Community is unable to reach agreement on the terms of
the proposed Investment Services Directive. Details regarding
the scope of the investment services legislation likely will
remain unsettled pending the outcome of the proposed Directive.
We will keep you informed of further developments.
Angela C. Goelzer
Assistant Counsel - International