The focus on the Markets in Financial Instruments Directive (MiFID) has diverted attention from the slew of other measures being imposed on European capital markets by legislators in Brussels. Among them is the Transparency Directive (TD), which came into force on 20 January, which is set to change the European Union (EU) capital markets dramatically.
That change will cause large and unpredictable difficulties as different Member States implement the directive in different ways.
This was not how it was meant to be. The original aim of the directive was to harmonise stock exchange listing requirements throughout the European Union and the wider European Economic Area (EEA) by updating the existing ‘Consolidated Admissions and Reporting Directive’ (CARD).
The Transparency directive is a minimum harmonisation directive, whose principal aim, like that of MiFID, is to improve the integration of European capital markets – not drive them further apart.
It works by allowing member states to impose their own requirements on issuers whose securities admitted to trading on a regulated market they control – but not to impose requirements more severe than the issuer would face at home.
How this plays out in all member states has yet to become clear, since every country but one has yet to actually implement the Directive. With its provisions becoming mandatory in the first full accounting year after 20 January 2007, the Transparency Directive will not become law in most EU member states until 2008.
The country that has put the legislation in place already is the United Kingdom (UK), and even there the regulator – the Financial Services Authority (FSA) – is still working out a proper consultation and implementation timetable for the directive.
The Directive covers three main areas. First, the minimum content of annual, semi-annual and interim management reports. Secondly, the notification requirements of both issuers and investors in relation to the acquisition and disposal of major holdings in companies. Thirdly, the method of disseminating and storing the information covered in the reports and notification requirements on a pan-European basis.
How will these three factors be applies in the UK? The financial reporting requirements are similar to current UK listing Rules, but go beyond them. The directive will require issuers to produce periodic financial reports that are more detailed than current reports and made to a shorter deadline. However, preliminary statements, which were required to be produced every 120 days, are now voluntary. The reporting deadlines will begin in 2008 for issuers whose accounting year started before 20 January 2007. For issuers whose accounting year starts after this date, the reporting cycle will begin on the start date of the following accounting year. All regulatory responsibility for compiling the new annual and half-yearly reports falls exclusively to the issuer.
One question being asked by issuers is whether they will be given guidelines on how to compile the new reports. Christian Krohn, Primary Markets Policy, FSA, said that the regulator was “reluctant” to offer advice on this, and expects issuers to make their own decisions on this.
The second area – notification requirements when certain thresholds are cleared – is not even the responsibility of the FSA in the UK at present. Instead, it falls to the Department of Trade and Industry (DTI), under the Companies Acts, and it has yet to issue definitive guidance.
However, under the directive the obligation to notify the authorities when a threshold is passed does have some exemptions- for example, when shares are acquired solely for clearing and settlement purposes. Likewise, market-makers are not obliged to issue a notification if a threshold is passed while the firm is balancing its books.
The third requirement of the Transparency Directive, on the dissemination and storage of regulated information, is more straightforward. Issuers will have to disseminate information promptly, and on a pan-European basis, with discrimination between exchanges, data vendors or anybody else. Likewise, all of the information also has to be easily accessible and stored by the issuer. The FSA is requiring that each MemberState have one official mechanism for providing the information.
The FSA says that from the research they have done so far, respondents have on the whole been highly supportive of the directive. However, there has been some consternation over whether the Transparency Directive will be implemented in different ways in different countries.