The EU’s Shareholder Rights Directive II (SRD II) could be an excellent opportunity for intermediary businesses – chiefly issuer central securities depositories (CSDs) – to augment their STP (straight-through-processing) capabilities. However, significant concerns have yet to be addressed about the extent of the regulation’s harmonisation on a cross-border basis.
SRD II demands intermediaries in the custody chain identify shareholders in EU listed companies and relay that information back to the issuers.
In addition, the regulation stipulates that intermediaries will be expected to help support shareholder rights by transmitting information from issuers to investors and ensuring that arrangements – such as proxy voting forms – are available to them without undue delay.
Some see this as an opportunity as it could incentivise technological innovation across intermediary providers.
“SRD II requires issuers to share information with the first intermediary, which is defined in the directive as the issuer CSDs. This is a chance for the issuer CSDs to become the primary sources of information in the market in what could facilitate improvements in data scrubbing and pave the way for true STP,” said Michael Collier, director, EMEA product development at Deutsche Bank, speaking at the AFME (Association for Financial Markets in Europe) European Post-Trade Conference in London.
As SRD II is a directive and not a regulation, there is however, scope for arbitrage across different member states, something that is undoubtedly being exacerbated by Brexit as well. Collier said industry-wide efforts were underway to improve harmonisation in the application of SRD II. “AFME has been very proactive in engaging with policymakers on SRD II on matters like standardising the investor identification process. This directive is a genuine opportunity for the industry to break down a number of barriers,” he added.
The rules are not just aimed at intermediaries. For instance, institutional investors such as asset managers will now be subject to strict disclosure obligations, whereby they must publish their engagement strategies and make their voting policies public. Meanwhile, proxy advisers will be expected to become more transparent about their codes of conduct along with their policies behind voting recommendations and potential conflicts of interest.
SRD II is coming into force in July 2019, although the actual deadline for firms to implement shareholder identification processes and mechanisms to transmit information between issuers and investors will not go live until September 2020. Despite this, industry awareness is poor. A straw poll conducted at the AFME Post-Trade Conference found barely half of all attendees knew anything about SRD II. As the implementation date rapidly approaches, the industry needs to urgently get on top of the directive’s requirements.