PREAMBLE TO LAW 44/2002 OF 22 NOVEMBER ON MEASURES TO REFORM THE FINANCIAL SYSTEM

Within the current Spanish economy, the financial system is one of the sectors of greatest importance and international potential. It is also vital to Spain's economic development and its constant modernisation and revision are fundamental in the development of the real economy, the true driving force behind growth and job creation.

Since Spain's entry into the European Community in 1986, it is not possible to analyse the development of the Spanish financial industry without taking the process of Community integration into account. The European Economic and Monetary Union, of which Spain was a founder member, and the great progress made in integrating the Community's financial markets have led to a significant increase in the competition faced by our financial intermediaries.

In view of the variety and sophistication of the financial instruments used, the legal regulations governing financial intermediaries constitute a vitally important competitive factor. In fact, there is increasing competition between legislations as it is standard practice for large intermediaries to establish subsidiaries in countries where the laws are more flexible so as to base part of their operations there.

This situation only serves to highlight the fact that the competitiveness of a financial system in the European Economic and Monetary Union depends not only on the strength of a country's industries but also, to a great extent, on the country's legislation. A country whose legislation is excessively strict could find that financial business flees across its borders, which would have very serious consequences for: a) growth and job creation, since the majority of high added value activities would shift to other economies; b) public funds, for the same reasons; c) consumer protection, since national supervisory bodies would have difficulty ensuring that services offered to Spanish investors by other jurisdictions meet Spanish transparency and conduct of business regulations.

The competitive edge given by national legislation will become even more significant as the process of integrating the European Union's financial markets progresses, and this will force the liberalisation of the Spanish financial system, a process which has been progressing since Spain's entry into the European Community in 1986. The ultimate aim is to provide the system with regulations that are sufficiently flexible and competitive.

In short, the acceleration of the financial integration process, the need to improve the efficiency and competitiveness of the Spanish financial system in response to challenges from other countries, and the channelling of savings into the real economy, all without impairing the legal protection for customers of financial services, explain the majority of the objectives and content of this Law. From a material point of view, there are three basic objectives:

1. To ensure that the legislation does not impose unnecessary obstacles which might place financial institutions at a disadvantage compared to their EU counterparts. To fulfil this objective, measures have been adopted and instruments created to improve the efficiency and competitiveness of the Spanish financial industry.



2. To ensure that increased competitiveness and the use of new technologies do not impair the legal protection for customers of financial services. To this end, protection for users of financial services has been improved.



3. To encourage the use of savings to finance the real economy, the true driving force behind growth and job creation. To this end, financing conditions for small- and medium-sized companies have been improved on account of their importance within Spain's business structure.

From a formal point of view, the Law transposes various European Community Directives into Spanish finance legislation, such as: a) Directive 2000/26/EC of the European Parliament and of the Council of 16 May 2000 on the approximation of the laws of the Member States relating to insurance against civil liability in respect of the use of motor vehicles (Fourth Motor Insurance Directive); b) Directive 2000/64/EC of the European Parliament and of the Council of 7 November 2000 amending Council Directives 85/611/EEC, 92/49/EEC, 92/96/EEC and 93/22/EEC as regards exchange of information with third countries; c) Directive 2000/46/EC of the European Parliament and of the Council of 18 September 2000 on the taking up, pursuit of and prudential supervision of the business of electronic money institutions; and d) Directive 2000/28/EC of the European Parliament and of the Council of 20 March 2000 amending Directive 2000/12/EC relating to the taking up and pursuit of the business of credit institutions.

II

Chapter 1 establishes certain measures to improve the efficiency of the financial system, in the securities, credit and insurance markets.

Some of the most significant measures involve the integration of the securities clearing and settlement systems, which are a key factor in the correct functioning of securities markets. A great deal of the total cost and time spent completing securities trades can be attributed to these systems, and their regulation is vital to ensure legal certainty in trades.

In the Spanish market, the main clearing and settlement processes are carried out by the Central Book Entry Office (CADE) for public debt, and the Securities Clearing and Settlement Service (SCLV) for securities listed on the Stock Exchanges and on AIAF Mercado de Renta Fija, S.A. (an official secondary market in corporate fixed-income). Additionally, pursuant to article 54 of the Spanish Securities Market Law, the Autonomous Regional Governments with powers in this matter have created their own clearing and settlement services for securities listed in their respective stock markets.

This multiplicity of clearing and settlement systems in Spain has hindered the integration of Spain's securities markets with those of their European counterparts. The introduction of the euro brought a significant number of mergers and alliances between securities markets in the European Community, in both trading and clearing and settlement. Therefore, it is necessary to give Spanish systems the opportunity to trade from a single platform, and the resulting scale economies from the consolidation process would enable them to offer better services at lower costs as well as improve access to operations from foreign markets.

In order to resolve this situation, the Law establishes the necessary amendments to the legislation in order to integrate the existing clearing and settlement systems. A flexible, open legal regime has been established for the creation of the Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores (Sociedad de Sistemas) through the merger of SCLV and CADE. The Systems Company (Sociedad de Sistemas) can incorporate the other existing Spanish systems, such as the financial derivatives system and those managed by the Barcelona, Bilbao and Valencia stock exchanges, and it will be able to manage interconnections and alliances with systems in other countries.

Another new feature of the Law is the provision for the creation of one or more central counterparties. The aim of this category is to eliminate counterparty risk in transactions since the central counterparties will act as intermediaries between the contracting parties so that the parties are always assured that operations will be properly terminated.

To facilitate the integration process, the clearing and settlement systems are to be demutualised in parallel with the demutualisation of stock market management companies under article 69 of Law 14/2000 of 29 December on Tax, Administrative and Labour Measures. The demutualisation involves enabling investors who do not participate in the markets to become shareholders of those companies.

The regulation controlling cross-holdings by companies which manage secondary markets in their counterparts in other countries has also been modified to establish a more flexible regime enabling the integration of cross-border markets while ensuring a certain level of control over the suitability of the shareholders of Spanish markets. Among the most significant integration operations being encouraged is that relating to the derivatives markets, where it is standard practice for the various stages of an operation (trading, clearing and settlement) to take place in different countries.

The Law transposes Directive 2000/64/EC, which amends a series of Directives regarding the exchange of information in the area of insurance, securities and collective investment schemes, into the securities market regulation with the aim of improving the exchange of information between supervisory bodies in the European Community and those in third countries, with due assurances of confidentiality. This measure has already been applied in the credit market by virtue of article 6 of Legislative Royal Decree 1298/1986 on the adaptation of current law governing credit institutions to that of the European Community. An extensive regulation concerning multilateral trading facilities has also been introduced, which refers, among other aspects, to the authorisation regime, the obligation to create governing companies in the form of public companies limited by shares (sociedad anónima) and the supervision and penalty regime.
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It is envisaged that the State Treasury will be managed via repos of fixed-income securities, which will enable it to obtain a better yield on the available balance at the Bank of Spain.

The existing specific regulation regarding collateral provided to the Bank of Spain, the European Central Bank and other national central banks within the European Union has been systematised and completed to ensure compliance with obligations deriving from their monetary policy and intraday credit operations. Furthermore, it is envisaged that this collateral can be used temporarily for cash management by the Public Treasury.
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III

Chapter II creates and regulates various financial instruments in order to enhance the competitiveness of the financial industry.

Among the most significant new instruments are territorial bonds (cédulas territoriales). This new security, similar to a mortgage bond (cédula hipotecaria), provides Spanish credit institutions with a means of refinancing loans to Public administrations, similar to that available in other European Community countries. They are fixed-income securities issued by credit institutions and they are specially secured by loans and credits granted to the public sector, mainly local and regional public administrations. These securities are governed by the same tax and financial regulations applicable to mortgage bonds.

The scope of operations of collective investment schemes has been extended and they can now carry out lending transactions using securities in their portfolios, both on the market and over the counter (OTC). The objective of these measures is to offer greater yields to investors without jeopardising the security of their investment.

The Law provides security to "contractual compensation agreements" in the event of possible bankruptcy of either party. It is standard practice for financial institutions to operate among themselves under framework contracts which establish guarantees to cover, on a daily basis, the net position resulting from all the financing operations, securities loans, financial derivatives, etc., undertaken by the parties. The Law extends the regime envisaged in the tenth additional provision of Law 37/1998 of 16 November, which amends Law 24/1988 of 28 July on the securities market, to these agreements and also makes it applicable to over-the-counter (OTC) operations. However, certain restrictions are maintained as regards the contracting parties (at least one party must be a credit institution or investment services firm) and the content of the contract (it must include the mechanism for calculating the net outstanding balance) to ensure that the collateral is only taken up when strictly necessary.

Chapter III seeks to improve financing conditions for small- and medium-sized companies. To this end, it enables small- and medium-sized companies to obtain financing through factoring, by allowing the transfer en bloc of accounts receivable from Public Administrations. It also enables firms (generally credit institutions) to increase the proportion of their mortgage portfolios which they can assign to asset securitisation funds under the heading of mortgage participations (participación hipotecaria) which, in this case, will be issued and marketed as a "mortgage participation certificate" (certificado de participación hipotecaria). This will improve financing conditions at small- and medium-sized businesses which have to resort to mortgage collateral in order to obtain bank finance.

One of the most significant measures undertaken to improve financing at innovative small- and medium-sized enterprises is the reform of the regulation on venture capital firms, governed by Law 1/1999 of 5 January. Experience gained since this regulation was introduced suggests that the following amendments are advisable: Firstly, venture capital firms should be allowed to retain in their portfolio shares in companies which were unlisted when acquired but which have subsequently been listed on a stock exchange. This Law also allows venture capital firms to invest in companies within their group, as long as the transparency requirements are met. Thirdly, venture capital firms are given more flexibility in their operations by allowing capital contributions in kind to be made following their constitution. Finally, the Law ensures that corporate operations performed by venture capital firms or which give rise to such firms are subject to due control.

Chapter IV regulates the legal effects of electronic trading and transposes the Directives regarding electronic money into Spanish legislation. The purpose is to increase competition, efficacy and legal certainty within the financial field by promoting the use of electronic techniques. To this end and in order to legally clarify the equivalence of distance trading and on-site trading, the Economy Minister is authorised to regulate special exceptions to the general regulations regarding electronic trading.

IV

Chapter V establishes a series of measures to protect financial services clients.

Firstly, it establishes Commissioners for the Protection of Financial Services Clients (Comisionados para la Defensa de los Clientes de Servicios Financieros). These are bodies attached to the Bank of Spain, the National Securities Market Commission and the Spanish Insurance and Pension Fund Authority (Dirección General de Seguros y Fondos de Pensiones) with the express aim of protecting the rights of financial services clients in the respective areas.

Secondly, the Law establishes the obligation of all credit institutions, investment services firms and insurance firms to attend to and resolve any complaints and claims which their clients present in relation to their legally recognised interests and rights. To this end, financial institutions must have a client services department. Furthermore, these institutions may designate an Ombudsman (Defensor del Cliente), who must be an independent firm or professional, to attend to and resolve claims which fall within the scope of his established duties. The financial institution shall be bound by any decision by the Ombudsman in favour of a claim. The Law authorises the Economy Minister to establish the minimum requirements to be met by the client services department and by the Ombudsman.

The extended powers given to the supervisory bodies with a view to protecting financial services clients include the extension of penalties to cover deficiencies in administration and internal control at credit institutions, investment services firms and insurance firms, and greater discipline requirements for foreign exchange establishments open to the public (casas de cambio).

Investor protection has been increased in the capital markets by promoting transparency regulations and recognising the enormous value of information. Firstly, transparency regulations have been imposed on related-party transactions to prevent executives and directors from acting against shareholder interests. In practice, this will provide investors with information on all operations between the listed company, its executives and its core shareholders. The regulation concerning price-sensitive information and inside information has also been reinforced in order to avoid loss of market integrity and, in the final instance, to avoid an increase in the cost of corporate financing resulting from a lack of confidence among investors. The concept of inside information has been extended to instruments other than transferable securities while the concept of price-sensitive information, which must obligatorily be communicated to the markets simultaneously, without granting any priorities, has been expanded in detail. Furthermore, various preventative measures have been specified in the organisation of firms which offer services in the securities market to prevent leaks of information between departments within the firm or entities in the same group ("Chinese walls"). The existing transparency obligations have been extended to executives, directors and employees. These individuals are also prohibited from engaging in practices designed to distort free pricing in securities markets, i.e. price fixing. Lastly, to ensure effective compliance with these transparency obligations, the powers of the National Securities Market Commission have been extended in order to protect investors.

The Law also includes an amendment to the system of authorising collective investment schemes, by which it is the regulatory body that authorises the service provider (the operator), and the supervisory body which authorises the product (the collective investment scheme). Law 24/1988 of 28 July on the Securities Market has been amended to extend the general requirements relating to the fitness and properness of directors, general managers and similar posts at investment services firms to include authorised signatories with general powers of representation. The Law also updates the regime of penalties applicable to credit institutions, investment services firms and insurance firms, establishes the system for approval of the Internal Regulation (Reglamento Interno) of the National Securities Market Commission, and regulates the conditions under which the supervisory bodies may have access to the working papers of the auditors of firms under their control.

In brief, this is a comprehensive text which will place our financial industry in a competitive position while at the same time ensuring client protection.

Chapter I - Scope of the law

Article 1

The purpose of this Law is to regulate primary and secondary securities markets by establishing principles for their organisation and operation, rules governing the activities of persons and institutions operating in these markets, and a system for their supervision.

Article 2

The scope of this Law includes transferable securities issued by public or private persons or entities and grouped in issues. The criteria of uniformity whereby a group of transferable securities will be considered to make up an issue shall be laid down by regulation.

The scope of this Law shall also include the following financial instruments:

1. Any type of contract that is traded on an official or unofficial secondary market.



2. Financial forward contracts, financial option contracts and swaps, provided that they relate to transferable securities, indexes, currencies, interest rates, or any other type of underlying of a financial nature, independently of the way in which they are settled and regardless of whether they are traded on an official or unofficial secondary market.



3. Contracts or operations on instruments not envisaged in a) or b) above, provided that they may be traded on official or unofficial secondary markets, and even though the underlying is not financial, including, for that purpose, goods, commodities and any other fungibles.

Financial instruments shall be subject to the regulations provided in this Law for transferable securities, mutatis mutandis.

Article 3

The provisions of this Law shall be applicable to all securities issued, traded or marketed in Spanish territory.

Article 4

For the purposes of this Law, entities that constitute a decision-making unit because one of them exercises, or can exercise, direct or indirect control over the others, or when said control corresponds to one or more physical persons who systematically act in concert, shall be deemed to belong to the same group.

A decision-making unit shall be deemed to exist whenever any of the cases envisaged in article 42.1 of the Code of Commerce applies, or when at least half plus one of the directors of the controlled company are senior executives or directors of the parent undertaking or of another company controlled by the parent undertaking.

For the purpose of the preceding paragraphs, to the rights of the dominant company shall be added those it holds through controlled companies or through persons acting on behalf of the parent undertaking or other controlled companies or any of those which it possesses by agreement with any other person.

Chapter II - Securities represented by book entries

Article 5

Transferable securities may be represented by book entries or by certificates. The chosen form of representation must apply to all the securities making up a single issue.

Representation of securities by book entry shall be irrevocable.

Representation by certificates shall be revocable. Notwithstanding the provisions of the first paragraph, conversion to the book entry system may be carried out progressively, as and when the holders give their consent to the change.

The Government may provide, generally or for particular categories of securities, that representation by book entry is a necessary condition for listing of the securities on any official secondary securities market. The Government shall likewise determine the exceptional cases in which the provisions of the second paragraph are not applicable.

Article 6

Representation of securities by book entry shall always require the execution of a public instrument stating the denomination, number of units, nominal value and other characteristics and conditions of the securities making up the issue. The instrument of issuance may serve this purpose.

The issuer and the firm responsible for the book entry records must at all times have a copy of said instrument at the disposal of the holders and interested members of the public.

In the case of issues of Debt by the State and Autonomous Regional Governments and also in other cases provided by law, the publication of the terms of the issue in the pertinent Official Gazette (Boletín Oficial) shall take the place of the public instrument envisaged in the preceding paragraphs.

The public instrument referred to in this article shall not be required for financial instruments traded on official secondary future and option markets, or in the cases established by the Government, in the conditions to be established by regulation.

Article 7

1. A single firm shall be designated to keep the book entry records for the securities of a single issue represented by book entry.



2. When the securities are not listed on official secondary markets, said firm may be freely designated by the issuer among the investment services firms and credit entities authorised to perform the activity provided for in article 63. 2. a). The designation shall be registered in the National Securities Market Commission Registry provided for in article 92 of this Law as a pre-requisite to keeping the book entry records. The Systems Company (Sociedad de Sistemas) referred to in article 44 bis may also adopt that function according to the requirements to be established in the Regulation referred to in article 44 bis, section 4.



3. Without prejudice to the powers assumed by the Autonomous Regional Governments regarding securities that are listed exclusively on a securities market in their territory, the book entry records relating to securities listed on the Stock Markets or in the Public Debt Market represented by Book Entries shall be kept by the Systems Company, as the central registry, and by the participating entities authorised for that purpose, or by the former alone if so established by regulation. Nevertheless, the keeping of said records may be entrusted to the management company of the Stock Exchange in question should this be decided pursuant to the provisions of section 2 of article 44 bis.

   The keeping of book entry records relating to securities listed on other secondary markets shall be entrusted to the body or firm, including the Systems Company, that is determined by regulation or that is expressly designated by the management companies of the secondary markets or multilateral trading facilities.




4. In connection with both the various entities entrusted with keeping the book entry records and the various types of securities, the Government shall establish rules for the organisation and operation of the relevant registers, the guarantees and other requirements, the identification and control systems for securities represented by book entries, and the relationships of those entities with issuers and their participation in the administration of the securities. The aforementioned regulation shall be issued by the competent Autonomous Regional Government if it has made use of the powers provided for in section 2 of article 44 bis and in relation to the services envisaged therein.



5. Failure to make the pertinent entries, inaccuracies therein or delays and, in general, any infringement of the rules laid down for the keeping of records shall give rise to liability on the part of the firm in breach vis-à-vis the aggrieved party, unless the aggrieved party is solely to blame. Said liability must, as far as possible, be satisfied in kind.



6. The provisions of this article relating to the Systems Company shall be applicable to similar services created by the management companies of the Stock Markets in accordance with section 2 of article 44 bis, when so authorised by the relevant Autonomous Regional Government, after first hearing the issuer and the service.

Article 8

Securities represented by book entry shall be classified as such by virtue of their entry in the relevant book entry records which shall, as appropriate, be central, from which point they shall be subject to the provisions of this Chapter. The contents of securities so recorded shall be determined by the instrument envisaged in article 6.

Subscribers for securities represented by book entry shall be entitled to have the relevant entries made in their favour free of charge.

The conditions enabling securities represented by book entry to function as fungibles for the purposes of clearing and settlement operations shall be laid down by regulation.

Article 9

The transfer of securities represented by book entry shall be effected by accounting transfers. Registration of the transfer to the purchaser shall have the same effects as the delivery of certificates.

The transfer may be enforced vis-à-vis third parties from the time of its registration.

A third party purchasing for consideration securities represented by book entry from a person who was legitimately entitled to transfer such securities according to the book entry records shall not be liable for any claim for their recovery unless said third party acted in bad faith or with gross negligence at the time of purchase.

Article 10

The creation of limited rights in rem or liens of any other kind on securities represented by book entry shall be recorded on the relevant book. The recording of a pledge is equivalent to delivery of possession of the security.

The creation of the lien is valid vis-à-vis third parties from the time the corresponding entry is recorded.

Article 11

Any issuer which, in good faith and without gross negligence, provides a benefit to such certified owner shall be held harmless even if said person is not the owner of the security.

In order to transfer and exercise any rights pertaining to the owner of the security, it must first be registered in the name of the holder.

Article 12

Entitlement to transfer and exercise the rights deriving from securities represented by book entry may be proved by showing certificates duly issued by the entities responsible for book entry records, in accordance with their entries.

Such certificates shall confer no rights other than those relating to said entitlement. Any dispositions made of such certificates shall be null and void.

No more than one certificate may be issued for the same securities for the exercise of the same rights.

Entities entrusted with keeping book entry records and members of securities markets may not process transfers or pledges nor make the relevant entries until the person making the disposition returns the certificates previously issued to him. The obligation to return the certificate lapses when the certificate has expired.