As part of its review of the Transparency Directive, the Committee of European Securities Regulators (CESR) has indicated it may extend transparency requirements to include instruments that create a similar economic effect to holding shares. This would mean that more data would be required in the effort to disclose entitlements to acquire shares as part of major shareholding notifications.
These proposals are included in a recent consultation paper that was prepared by CESR’s Transparency Group, which is chaired by Hans Hoogervorst, chairman of the Netherlands Authority for the Financial Markets. The work is all part of the regulator’s endeavour to indicate its recognition that these instruments may potentially be used to acquire or exercise influence in a company with shares admitted to trading on a regulated market, or allow for creeping control.
The basis of CESR’s concern lies in the fact that these instruments grant the holder a special proximity to the physical share. “This is because generally these instruments are a bilateral contract between holder and writer, and the writer will seek to hedge its contractual obligation in order to mitigate its exposure,” states the regulator.
Under CESR’s logic, instruments that create a similar economic effect to holding shares and entitlements to acquire shares effectively create a long economic exposure to the issuer. Currently these instruments are outside the legal scope of the Transparency Directive but the regulator is now proposing to widen this scope to include all instruments referenced to shares that allow the holder to benefit from an upward movement of the price of these shares.
Much the same as the other market transparency initiatives flying about the industry at the moment, such disclosures would require firms to provide national regulators with an additional layer of data. “There is a range of instruments that can be used to create a similar economic effect, and a long economic exposure, to those financial instruments already captured under the Transparency Directive without giving legal title to or the legal right to acquire the underlying shares, including certain options, equity swaps and contracts for difference (CfDs),” says the regulatory paper.
This is not just an issue that has been recognised at a European level; several member states have already taken or are soon planning to take steps to broaden the scope of their national regime for the reporting of major holdings to include such instruments or to establish specific disclosure rules regarding them. The UK Financial Services Authority (FSA), for one, introduced new rules which came into effect on the 1 of June last year for more disclosures around CfDs. In France, new rules came into force on the 1 of November that require that once a threshold has been crossed by holdings of shares and options, gross long positions held through financial instruments of similar economic effect to holding shares also need to be reported.
CESR, on the other hand, is keen for a “broad definition” to be used with regards to the instruments covered, which it says balances the need for legal certainty with the potential for avoidance. “The intention is to cover all instruments that can be used to create an economic long position,” it states. However, the scope of the broadened disclosure regime is to remain limited to instruments referenced to shares to which voting rights are attached, already issued, of an issuer whose shares are admitted to trading on a regulated market.
“The principles underlying CESR’s proposed approach to disclosure aims for meaningful notification, avoiding disclosure of information which is either unnecessary or potentially misleading to the market,” adds the regulator in its statement.
However, this level of uncertainty about the data required within such disclosures will likely prove problematic in a practical sense, as firms seek to alter their internal reporting systems ahead of any deadlines. The calculations underlying the aggregation of this data will require some degree of investment in data infrastructure, which CESR recognises in its paper, although it has not estimated any costs directly.
“CESR considers that extending the scope of major shareholding notifications would lead to additional costs as market participants need to change their systems in order to capture more instruments. CESR also considers that investors, issuers and regulators would incur ongoing costs in order to make and process additional notifications,” it states.
The regulator has given firms until 31 March to respond to its proposals.