THE CHALLENGE OF COMPLYING WITH THE AMENDED TRANSPARENCY DIRECTIVE MANDATES

First introduced in November 2013, the Amended Transparency Directive (TDA) provided EU member countries two years to conform their regulations to those adopted by the EU Commission. With the deadline having come and gone, the TDA is in a confused state with only a handful of countries meeting the 26 November effective date and the remaining in various states of delay.  Some countries have yet to put forward draft legislation.

You might think that the large economy countries are the ones that have complied and met the deadline but you would be mistaken. Several countries of considerable size and market stability have missed the deadline. Countries such as:  Italy, Belgium, Netherlands and Ireland to name just a few have missed the deadline and may not comply until well into 2016. The whys and wherefores are as various as the 28 member states, but the effect is a nightmare for Compliance.

So what are the underpinnings of the Amending Transparency Directive:

1. Harmonize requirements relating to information about issuers whose securities are trading on EU regulated markets.
2. Provide transparency as to the ownership structure of an issuer.
3. Address the issue of disclosure regime for new types of financial instruments that expose investors to economic risk.

What changes have been implemented to meet the objectives of the TDA:

1. Financial Instruments – The scope of financial instruments which are disclosable have been expanded. It now also includes financial instruments with similar economic effect to shares and entitlements to acquire shares, including if they are cash settled.
2. Baskets, indices and ETFs – These instruments are now in scope when an individual component meets a minimum concentration level.
3. Rights to recall lent securities – Lent shares must now be included as a financial instrument
4. Delta adjusted calculation - When calculating a holding in an instrument with similar economic effect that is purely cash settled, a delta adjusted method must be used.
5. Standardization of exemptions for Trading Book, Market Makers, Client-serving transactions and Stabilization.
6. Initial disclosure threshold set at 5%.
7. Standardization of disclosure requirements including disclosure deadlines (T+4) and disclosure content including providing a breakdown of financial instruments held by category.  ESMA has published a new TR-1 disclosure form which provides the standard for disclosure.

On top of these changes, member states have the right to implement more rigorous requirements, i.e. “Gold Plating” as it relates to the disclosure thresholds, the timing to disclose and the laws controlling the change in ownership of a company. And so it is these very issues that EU member countries are struggling with - do they simply apply the TDA as written or do they implement a more rigorous and tailored requirement.

To date, ten countries have met the deadline: Austria, Croatia, Denmark, Estonia, Finland, France, Germany, Hungary, Spain and United Kingdom.  Ireland announced that the TDA came into effect in Ireland as of 26 November, but only adopted the amending legislation on 1 December.  Poland has published draft regulations, but no definitive effective date has been announced.  Luxembourg and Portugal are even more delayed, but have added to the confusion by suggesting that investors can “refer to the new provisions” of the TDA when making disclosures.  Looking at those that have implemented their national requirements we can see that all but one have imposed more stringent thresholds and most have implemented stricter notification periods.  Even worse, there are subtle differences in what is considered a relevant interest (requiring disclosure) and what can be excluded, and the categorization of Financial Instruments as (i) an entitlement to acquire shares or (ii) an instrument with similar economic effect.

So, if you are still with me, this all boils down to an extended horror show for compliance officers who are trying to comply with TDA and national implementation. First, it will mean more work in monitoring the national regulators to see when they will release their revised regulations. This can be quite a burden for an organization that is holding shares in several different markets. Second, once the revised regulations have been released then the real work begins to understand the new obligations and apply them accurately to your organization’s structure and investment strategy. Quite a feat for even the most seasoned compliance professional. That’s why so many financial institutions from hedge funds, to asset managers to investment banks are relying on the automated regulatory reporting systems to manage their substantial shareholding disclosure reporting obligations for them.

Many of the solutions today identify disclosure obligations for large positions, short positions, takeovers, foreign investment and sensitive sectors which positions these solutions to handle the complexities that can arise as a result of the TDA implementation.  Keeping a watchful eye when member countries release their national requirements is left to experts within the legal community who provide these vendor solutions with the necessary regulatory interpretation needed for these automated solutions to be effective.

Whether you’re concerned with keeping pace with the Amended Transparency Directive changes or the broader responsibilities of substantial shareholding disclosure reporting, you would be wise to explore automating your disclosure process to reduce risks and possible enforcement action.