I had not read that text, but agree with your interpretation: i.e. member countries can implement "domestic regulation" that does not "conform with the provisions of the Agreement" without violating the terms of the agreement as long as it is done "for prudential reasons" and not "as a means of avoiding the Member's commitments or obligations under the Agreement."

However, one Jayati Ghosh quotes the exact same passage, but interprets it in the exact opposite sense (her emphasis):

networkideas.org - The WTO as Barrier to Financial Regulation

The section on domestic financial regulation in the Annex makes the following point:

''Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system. Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member's commitments or obligations under the Agreement'' [emphasis added].

So, if countries have already made commitments to allow certain kinds of financial activities of foreign financial institutions, they cannot impose any prudential regulations (even when they are necessary for the stability and viability of the system) if they run counter to such commitments! What this means is that much of the regulation now being considered or proposed in developed countries would run counter to this provision in the Annex to GATS. Any such regulation could be opposed by another member country whose financial firm is affected by such rules. Given the cross-border proliferation and complex entanglements of financial institutions, it seems to be almost inevitable that such challenges will occur.

As for the FSA (which was added in 1999 and thus four years after the Annex excerpted above), I linked to the Understanding on Commitments in Financial Services ("deregulation on steroids"), whose "standstill" clause (also linked above, though embedded in the text) is cited in various places I have found this issue discussed:

Any conditions, limitations and qualifications to the commitments noted below shall be limited to existing non-conforming measures.

I thought the Understanding on Commitments in Financial Services was an addendum or section within a larger "Financial Services Agreement", but as it gets its own section on the WTO Agreements page, I am wondering if it is in fact the FSA itself.

The march of civilizations is a series of defenses that man has put up against the dread of pure existence.