Spain appears to meet the preconditions for an effective regulatory framework for capital markets and the provision of financial services, as stated in the International Monetary Fund's (IMF) 2006 Detailed Assessment of Spain's compliance with the International Organization of Securities Commission's (IOSCO) Objectives and Principles of Securities Regulation. Twenty-five of the IOSCO principles were found to be fully implemented, two principles were broadly implemented, and two were considered to be not applicable. Finally, Principle 30 on clearing and settlement systems was assessed as part of the IMF's 2006 Detailed Assessment of Spain's Observance of the Committee on Payment and Settlement Systems (CPSS)/IOSCO Recommendations for Securities Settlement Systems. The IMF report identifies a few areas that still require action. In particular, the Spanish regulatory framework could be further strengthened by enhancing the oversight and sanctioning powers, as well as the institutional and operational independence of the securities regulator--the National Securities Market Commission. At the European Union (EU) level, the Prospectus Directive, the Market Abuse Directive, the Takeover Directive, and the Transparency Directive were all transposed into Spanish law. The EU Directive on Markets in Financial Instruments and its implementing Directive No. 2006/73/EC were expected to be enacted in April 2007. As of January 31, 2008, the European Commission, according to its website, decided to refer Spain to the European Court of Justice over non-implementation of the implementing Directive No. 2006/73/EC. The deadline for transposing those measures expired on January 31, 2007.

General Overview

In June 2006, the International Monetary Fund (IMF) conducted a Detailed Assessment of Spain's compliance with the International Organization of Securities Commission's (IOSCO) Objectives and Principles of Securities Regulation, as background documentation to the Financial Sector Assessment Program (FSAP) with Spain in May 2006. The report concludes that, overall, "Spain appears to meet the preconditions for an effective regulatory framework for capital markets and the provision of financial services" (p. 9). Full compliance was achieved with twenty-five of the thirty IOSCO Principles. Two principles were broadly implemented, and two were considered to be not applicable. Finally, Principle 30 on clearing and settlement systems was assessed as part of the IMF's 2006 Detailed Assessment of Spain's Observance of the Committee on Payment and Settlement Systems (CPSS)/IOSCO Recommendations for Securities Settlement Systems. The IMF report underlines that the Spanish regulatory framework could be further strengthened by enhancing the oversight and sanctioning powers, as well as institutional and operational independence of the securities regulator--the National Securities Market Commission (CNMV).

The regulatory framework for financial services in Spain has been modernized, and is based on the 1988 Law on Securities Market No. 24of 1988. Amendments to the Law on Securities Market include the Law No. 37 of 1998 on Reform of the Securities Market Law, Law on Reform Measures of the Financial System No. 44 of 2002, Law on Transparency of Listed Companies No. 26 of 2003 modifying the Securities Market Law, the Law on the Supervision of Financial Conglomerates amending other Financial Sector Legislation No. 5 of 2005, and Legislative Royal Decree on Corporations No. 1564 of 1989. The IMF's 2006 report describes the Spanish regulatory framework as a "one peak model" (p. 4) where the CNMV conducts prudential oversight on, and sets business conduct rules for, investment firms and asset managers. While the CNMV is the main regulator for the securities market, the Central Bank of Spain (BdE) has prudential oversight authority over credit institutions involved in securities dealing. The Ministry of Economy and Finance (MEH) also retains licensing powers. Spain is further divided into 17 regions, called autonomous communities (CAs), with each CA operating under its own legal framework. The CAs have jurisdiction on the financial instruments exclusively listed on their regional market.

Most European Union (EU) directives regarding capital markets have been transposed into Spanish law. The EU Prospectus Directive No. 2003/71/EC was incorporated into Spanish legislation through the Royal Decree on Public Offering of Securities No. 1310 of 2005. The integration of the EU Market Abuse Directive No. 2003/6/EC was completed in November 2005 with the publication of Royal Decree on Inside Information and Price Manipulation No. 1333 of 2005. In April 2007, the Spanish government issued Law No. 6 of 2007 to reform the Law on Transparency of Listed Companies No. 26 of 2003. Furthermore, Law No. 6 of 2007 was enacted in August 2007, transposing both the EU Takeover Directive No. 2004/25/EC and the EU Transparency Directive No. 2004/109/EC into Spanish law. Royal Decree related to transparency requirements for information about issuers of listed securities No. 1362 of 2007 also came into force in December 2007. The EU Directive No. 2004/39/EC on Markets in Financial Instruments (MiFID) and its implementing Directive No. 2006/73/EC were expected to be enacted in April 2007. As of January 31, 2008, the European Commission, according to its website, decided to refer Spain to the European Court of Justice over non-implementation of the EU Directive No. 2006/73/EC, implementing the MiFID directive. The deadline for transposing those measures expired on January 31, 2007.

The U.S. Department of Commerce's (DoC) 2008 Country Commercial Guide states that the Spanish Stock Market (BME) is supervised by the CNMV, and comprises four stock exchanges--the Madrid Stock Exchange, the Barcelona Stock Exchange, the Bilbao Stock Exchange, and the Valencia Stock Exchange. The BME, which strongly prohibits insider trading, ranks 4th or 5th at the European level, and 8th or 9th worldwide in terms of market capitalization, according to the U.S. DoC 2008 report. Official secondary markets and organized trading systems are clearly distinguished under the law. Pursuant to the Law on Securities Market, official secondary markets are those which operate on a regular basis including the stock exchanges, the registered government securities market, the market for financial futures and options (MEFF), and any markets authorized by CAs. Conversely, organized trading systems, which are more self-regulating than the official secondary markets, do not regulate markets and comprise the SENAF and MTS, Spain income electronic trading platforms. The establishment of organized trading systems that are not recognized as official markets is subject to authorization by the government upon a report of the CNMV. In cases where the CAs have jurisdiction, the organized trading systems must be authorized by the corresponding CAs.

The IOSCO multilateral memorandum of understanding (MMoU) is based on the thirty IOSCO Principles adopted in 1998 and the experience gathered by securities regulators in using bilateral Memoranda of Understanding (MoUs). The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU. Spain's CNMV is a signatory to the MMoU and an ordinary member of IOSCO.

The Principles

1. The responsibilities of the regulator should be clear and objectively stated.

FC

This principle is fully implemented, according to the IMF's 2006 report. The IMF notes that the responsibilities, powers and authority of the CNMV are defined under the Law on Securities Market No. 24 of 1988, as amended by Law No. 37 of 1998 on the Reform of the Securities Market Law, Law on Reform Measures of the Financial System No. 44 of 2002, and Law No. 26 of 2003 on Transparency of Listed Companies modifying the Securities Market Law No. 24 of 1988. The IMF report recommends clearly setting out in the law the division of responsibilities for regulation.

2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.

CP

This principle is only broadly implemented, according to the IMF's 2006 report, as "the institutional and operational frameworks under Spanish law do not seem to fully support the degree of independence called for in the IOSCO principles" (p. 14). While the CNMV is the main regulator for the securities market, the BDE has prudential oversight authority over credit institutions involved in securities dealing. The MEH further retains responsibility for granting and withdrawing licenses, as well as sanctioning very serious infractions of securities regulations. In this regard, the IMF report recommends vesting the CNMV with powers to adopt secondary legislation, the capacity to grant and withdraw licenses to credit institutions involved in securities dealing, and independent sanctioning powers. The IMF report further states that "appointments to CNMV's board should be for a longer term than the present four years, and should be non-renewable" (p. 14).

3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

FC

This principle is fully implemented, according to the IMF's 2006 report. The IMF states that "the CNMV is vested with supervision, inspection, and sanction powers on the regulated markets authorized in Spain and on all natural and legal persons" (p. 15). The CNMV also has the authority to issue rules for the implementation of Royal Decrees adopted by the government, and of executive orders published by the MEH. However, the MEH retains responsibility for granting and withdrawing licenses, as well as sanctioning very serious infractions of securities regulations. In this regard, the IMF report recommends vesting the CNMV with powers to adopt secondary legislation, the capacity to grant and withdraw licenses to credit institutions involved in securities dealing, and independent sanctioning powers.

4. The regulator should adopt clear and consistent regulatory processes.

FC

This principle is fully implemented, according to the IMF's 2006 report. The IMF notes that "clarity and consistency of the regulatory processes of the CNMV are generally provided for under the legal organizational framework and the general rule of law" (p. 16). Decisions, interpretations, and criteria for interpretation are made publicly available in the CNMV's annual report. Some criteria for interpretation are also posted on the CNMV's website.

5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

FC

This principle is fully implemented, according to the IMF's 2006 report. The IMF notes that "observance of the highest professional standards including standards of confidentiality by the CNMV's staff is provided by several complementary layers of legislation and regulations and complies with best international practice" (p. 20).

6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.

II

According to the IMF's 2006 report, this principle is not applicable. The market operators in Spain--including the four stock exchanges, the registered government securities market, the MEFF, and any other market authorized under the Securities Market Law--as well as clearing and settlement systems do not qualify as self-regulatory organizations (SROs). While market operators and clearing and settlement systems adopt rules that are subject to supervision of the CNMV, the IMF notes that "those rules (and any powers or actions with respect to their infraction) are regarded as founded in contract and not in public law" (p. 21).

7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

II

See Principle 6.

8. The regulator should have comprehensive inspection, investigation and surveillance powers.

CP

Pursuant to the Law on Securities Market "the CNMV is vested with very comprehensive surveillance, inspection, investigation powers and capabilities over regulated entities and any other person connected with the securities markets" (p. 24), as stated in the IMF's 2006 report. However, this principle is assessed as being broadly implemented as "the right of the CNMV to inspect regulated entities on an unannounced basis is not explicitly mentioned in the law" (p. 71) the IMF report observes. This shortcoming should be addressed to achieve full compliance with the principle.

9. The regulator should have comprehensive enforcement powers.

FC

This principle is fully implemented, according to the IMF's 2006 report. While the CNMV is vested with sanctioning powers, the MEH retains responsibility for sanctioning very serious infractions of securities regulations. In this regard, the IMF report recommends entrusting the CNMV with independent sanctioning powers. Per the IMF report, it is further advised that "the CNMV continue to ensure that prosecution on criminal grounds of major market abuses remains timely" (p. 71).

10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

FC

This principle is fully implemented, according to the IMF's 2006 report. The IMF report states that "the powers, technical resources and staff expertise of the enforcement of the CNMV are adequate and effective" (p. 28).

11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

FC

This principle is fully implemented, according to the IMF's 2006 report. The IMF states that "the CNMV is vested with state-of-the-art powers in matters of international cooperation" (p. 30). The CNMV is also experienced in sharing information with foreign regulators. At the domestic level, cross membership arrangements are in place for information sharing and cooperation, which are complemented by comprehensive MoUs with the BDE and the Directorate General of Insurance and Pension Funds (DGSFP).

12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.

FC

This principle is fully implemented, according to the IMF's 2006 report. Pursuant to the Law on Reform Measures of the Financial System No. 44 of 2002, per the same report, the CNMV and other supervisory authorities are empowered "to sign memoranda of understanding with each other to anticipate and resolve possible conflicts regarding their respective competencies and to design means of cooperation" (p. 11). The CNMV is a signatory to the MMoU, and an ordinary member of IOSCO. The IOSCO MMoU is based on the thirty IOSCO Principles adopted in 1998 and the experience gathered by securities regulators in using bilateral MoUs. The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU.

13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

FC

This principle is fully implemented, according to the IMF's 2006 report. The IMF states that "the CNMV is vested with the powers to obtain and share all the type of information necessary that might be requested by a foreign regulator in the discharge of its supervisory functions" (p. 33-34). Confidentiality of information is further guaranteed by the CNMV.

14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.

FC

This principle is fully implemented, according to the IMF's 2006 report. The IMF states that "Spain has in place a very comprehensive regulation that covers completeness, accuracy, and timeliness of financial results disclosure" (p. 36). When issuing securities, listed entities are required to publish their audited financial statements in their public offering prospectuses. Similarly, whenever a security is admitted to trading on a regulated market, entities are required to publish their audited financial statements in their listing prospectuses. The EU Prospectus Directive No. 2003/71/EC was incorporated into Spanish legislation through the Royal Decree on Public Offering of Securities No. 1310 of 2005. Law No. 6 of 2007 was enacted in August 2007 to reform the Law on Transparency of Listed Companies No. 26 of 2003, transposing both the EU Transparency Directive No. 2004/109/EC into Spanish law. Furthermore, Royal Decree related to transparency requirements for information about issuers of listed securities No. 1362 of 2007 came into force in December 2007.

15. Holders of securities in a company should be treated in a fair and equitable manner.

FC

This principle is fully implemented, according to the IMF's 2006 report. The IMF report states that "Spain has a fairly complete system for the protection of minority shareholders" (p. 38). In addition, the EU Prospectus Directive No. 2003/71/EC was incorporated into Spanish legislation through the Royal Decree on Public Offering of Securities No. 1310 of 2005. The transposition of the EU Market Abuse Directive No. 2003/6/EC was completed in November 2005 with the publication of Royal Decree on Inside Information and Price Manipulation No. 1333 of 2005.

16. Accounting and auditing standards should be of a high and internationally acceptable quality.

FC

This principle is fully implemented, according to the IMF's 2006 report. When issuing securities, listed entities are required to publish their audited financial statements in their public offering prospectuses. Similarly, whenever a security is admitted to trading on a regulated market, entities are required to publish their audited financial statements in their listing prospectuses. Listed entities are further required to submit their annual accounts for audit to the CNMV in a timely manner. According to the regulatory and standard-setting framework assessment published by the Institute of Auditors of Spain in June 2005, the CNMV issues Circulars that provide additional reporting obligations for listed companies. The IMF's 2006 report recommends enhancing the participation of the CNMV in guidance on, and enforcement of, accounting standards for listed companies.

Per the February 2008 update available from the Deloitte & Touche IAS Plus website, the Spanish government has adopted the new Spanish Generally Accepted Accounting Principles or GAAP (Plan General de Contabilidad), effective January 1, 2008, based on International Financial Reporting Standards (IFRSs). The Spanish GAAP issued by the Institute of Accounting and Auditing--an autonomous entity whose objective is to implement EU accounting principles and policies in Spain--applies to individual companies and unlisted consolidated groups. Conversely, listed consolidated groups are subject to IFRSs. However, unlisted groups have the option to use IFRSs since 2005.

17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.

FC

This principle is fully implemented, according to the IMF's 2006 report. The Law on Collective Investment Schemes No. 35 of 2003, and the implementing Royal Decree No. 1309 of 2005, set standards for the eligibility and regulation of those who wish to market a collective investment scheme (CIS). In its report, the IMF recommens that the CNMV be given direct legal powers "to grant licenses for those who wish to operate a CIS" (p. 72).

18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.

FC

This principle is fully implemented, according to the IMF's 2006 report. The IMF states that "the CNMV has in place strong programs together with impressive information technology and appropriate human resources to oversee a well-designed legal system governing CISs" (p. 45). The regulatory system allows CISs to operate either as an investment fund or as an investment company.

19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.

FC

This principle is fully implemented, according to the IMF's 2006 report. The IMF states that "the CNMV has in place comprehensive disclosure requirements on CISs risk factors and investment policies" (p. 47). In addition, an investor education program has been developed to bring attention to collective investment products.

20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.

FC

This principle is fully implemented, according to the IMF's 2006 report. The IMF states that "the CNMV has excellent rules in place for asset valuation and its effective monitoring" (p. 49). The CNMV has further established prerequisites governing redemption of units. Late trading and market timing are also being monitored by the CNMV.

21. Regulation should provide for minimum entry standards for market intermediaries.

FC

This principle is fully implemented, according to the IMF's 2006 report. The Spanish legal framework provides for minimum entry standards for market intermediaries, which are monitored by the CNMV and the BDE. It is recommended by the IMF that emphasis be put on cooperation and coordination of supervision between the CNMV and BDE.

22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.

FC

This principle is fully implemented, according to the IMF's 2006 report. Pursuant to securities regulation, investment services firms are responsible for providing investment services According to the IMF report, the authorization process of these investment services firms include minimum capitalization requirements, as well as other initial and ongoing requirements. Furthermore, both securities firms and market intermediaries are required to comply with the solvency ratio, which is defined by the IMF report as "the legal requirement to maintain a certain minimum level of capital determined with respect to their overhead costs and to the risks they undertake" (p. 52).

23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.

FC

This principle is fully implemented, according to the IMF's 2006 report. The Spanish regulatory framework sets a number of requirements on market intermediaries to protect the interests of clients. More specifically, as stated in the IMF's 2006 report, "legal provisions set out detailed obligations for intermediaries with respect to their rules of conduct and internal controls" (p. 53-54).

24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

FC

This principle is fully implemented, according to the IMF's 2006 report. The Spanish regulatory framework deals with the failure of market intermediaries through preventive mechanisms, investigations, suspension or revocation of authorizations, and the Investment Guarantee Fund. As stated in the IMF's 2006 report, these procedure are "aimed at minimizing the potential for contagion to spread to other intermediaries and for clients to incur damage or losses" (p. 56).

25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

FC

This principle is fully implemented, according to the IMF's 2006 report. Official secondary markets and organized trading systems, also known as multilateral trading systems, are clearly distinguished under the law. Organized trading systems, which are more self-regulated than the official secondary markets, do not regulate markets, and comprise the SENAF and MTS, Spain income electronic trading platforms. The establishment of organized trading systems that are not recognized as official markets is subject to authorization by the government upon a report of the CNMV. In cases where the CAs have jurisdiction, the organized trading systems must be authorized by the corresponding CAs. At the time of the IMF assessment, it was noted that the implementation of the EU MiFID in April 2007 would "change the authorization procedure of the Multilateral Trading Facility (MTF) and allow investment firms to run them" (p. 61). The MiFID directive and its implementing Directive No. 2006/73/EC were expected to be enacted in April 2007. As at January 31, 2008, the European Commission, according to its website, decided to refer Spain to the European Court of Justice over non-implementation of the EU Directive No. 2006/73/EC, implementing the MiFID directive. The deadline for transposing those measures expired on 31 January 2007.

26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.

FC

This principle is fully implemented, according to the IMF's 2006 report.

27. Regulation should promote transparency of trading.

FC

This principle is fully implemented, according to the IMF's 2006 report. The IMF states that "market transparency is one of the fundamental principles of the (Law on Securities Market), and all regulated markets and other trading systems are bound to observe transparency requirements" (p. 62). At the time of the IMF assessment, it was noted that the implementation of the MiFID directive in April 2007, with regards to transparency requirements on the securities markets, would require "a high level of monitoring" (p. 64). The MiFID directive and its implementing Directive No. 2006/73/EC were expected to be enacted in April 2007. As at January 31, 2008, the European Commission, according to its website, decided to refer Spain to the European Court of Justice over non-implementation of the EU Directive No. 2006/73/EC, implementing the MiFID directive. The deadline for transposition of those measures expired on 31 January 2007.

28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.

FC

This principle is fully implemented, according to the IMF's 2006 report. The IMF report states that "Spain has extensive regulatory provisions concerning market manipulation" (p. 64). The transposition of the EU Market Abuse Directive No. 2003/6/EC was completed in November 2005 with the publication of Royal Decree on Inside Information and Price Manipulation No. 1333 of 2005.

29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.

FC

According to the IMF's 2006 report, Spain fully implements this principle "by assuring the functioning of the stock-exchange settlement risk management system run by Iberclear, the derivatives markets clearinghouses (...), and the central counterparty for fixed-income transactions run by the MEFF" (p. 67).

30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.

II

According to the IMF's 2006 report, this principle has not been rated. This Principle was assessed as part of the IMF's 2006 Detailed Assessment of Spain's Observance of the CPSS/IOSCO Recommendations for Securities Settlement Systems.