03 October 2013

EuropeanIssuers: Investor disclosure of interests in financial instruments other than shares

On disclosure of derivatives, all the market participants argued in favour of a principles-based approach but taking into account existing rules under CRD IV. In essence, the banks already use delta calculations for risk management purposes to calculate their holdings of derivatives, which already have to be approved by banking supervisors. So they suggested using the same internal models for disclosure under the TD, since they have the IT systems in place and it would be difficult to manipulate an existing regulated mechanism.

Several banks felt that the delta method of calculation was not the appropriate method for the calculation of voting rights (as opposed to the calculation of market exposure for risk management purposes) and that the nominal method would have been better. However, the text has reached political agreement so it is too late to change.

Using the banks’ own internally approved models might result in some small differences in the results where they use different variables; for example, different banks might assume a different future dividend rate, so the input into the model would be different and thus the output would be different also. However, they felt that these differences would probably be quite small.

The banks all seemed to use one figure across the different departments, whereas the investors might use separate calculations in their front and back offices; the front office sometimes using intraday figures for trading purposes.

The banks were happy that there is an exemption for market makers, but had a question concerning index books. Indices are generally traded separately from individual stocks and they wanted to check that they would not have to translate those holdings into a single stock position. (Although there is apparently a rule that if the index holds 20 per cent or more in one stock then that must be disclosed.)

The banks felt that they could manage their own disclosures using their own models, but were less sure about their clients. Some argued that retail investors e.g. in Germany hold many derivatives and that it could be difficult for them to disclose. However, others pointed out that 3 or 5 per cent of a company is probably more than most retail investors would buy and that individuals who are family owners should not be exempted. But clearly smaller investors will not be able to calculate a complex delta equation themselves and only receive calculations monthly, not daily, so some thought would need to be given as to how the disclosures could be managed.

The key points for EuropeanIssuers would seem to be:

Issuers need to know who has an interest in their shares. The people who will suffer from lack of disclosure are the companies and the other investors who are unaware of stake building.

In principle, EuropeanIssuers would want to avoid a situation where different market participants might submit very different disclosures, depending on whether they are based in different EU countries. Having heard the banks speak, however, it seems to me that their internal models would produce slightly different results, but that we could probably live with this. Therefore, it would probably make sense for the traders to use the CRD IV models which already exist.

The real question is what happens at the next level with their clients. Large investment houses will be able to make their own calculations in-house. But the smaller houses will presumably have to rely on the figures used by the banks trading for them, or on those of the back office service providers such as the fund administrators. Otherwise it seems probable that this is where any discrepancies could arise. The Directive does not allow different rules for institutional and retail investors but there may be room for some flexibility in calculations. Some banks and fund managers may have to upgrade their IT systems to help client disclosure.

Some banks suggested that there could be a problem with retail disclosure. Susannah Haan is not convinced for the following reasons:

• Firstly, the amounts would have to be very large so this would not be relevant to most retail clients. It might be relevant to the retail funds run by the banks and asset managers, but surely that is the whole point of the legislation, if they are exercising the voting rights on behalf of their clients. It might also be relevant to large family holdings, but again this was clearly the policy intention, as one of the national regulators cited cases such as Schaeffler / Conti and Porsche / Volkswagen, which should be prevented in the future.

• Secondly, banks are supposed to:
  • comply with MIFID rules to act in the clients best interests,
  • comply with anti money laundering rules to know your client,
  • ensure that they comply with other rules on safeguarding client assets post Lehman Brothers, etc.,

so surely they should know if their clients own more than 5 per cent of company stock via financial instruments. But they may have to set up some new systems if their investor clients want them to make the additional disclosures on their behalf, or to provide them with the calculations more frequently.

Newsflash

© EuropeanIssuers