The European Securities Markets Expert Group (ESME) just released a position paper on the issue of transparency of holdings of cash settled derivatives (in response to 'hidden ownership') - an issue I've blogged about in previous posts, lastly in post No. 149.
First, the Group identifies several possible negative consequences, including inefficient pricing and avoidance of the mandatory bid. It is not clear why the Group does not attempt to exhaustively list the possible negative consequences, which would lend further support to its plea to require full disclosure of cash settled equity derivatives, detailed below. I've attempted to offer such a such an exhaustive overview in my paper making the case for mandatory ownership disclosure, available here.
In light of these negative consequences, ESME recommends separate disclosure of long positions (and short positions!) in cash settled derivatives, if these positions exceed a high enough threshold (5% or 10%). Netting of positions would not be allowed.
ESME has quite a pragmatic reason for why it is recommending a separate disclosure obligation for substantial positions in cash settled derivatives, as opposed to requiring that cash settled derivatives be aggregated with physically settled derivatives and shares when computing whether the threshold for ownership disclosure is reached (as is required in the UK). ESME is concerned with the fact that the current regime of ownership disclosure differs in every single EU Member State, due to the minimum harmonization nature of the Transparency Directive. The Group believes that the present differences in implementation of the directive lead to excessive compliance costs for asset managers operating on a cross-border scale, and does not wish to increase these costs by adding complexity. It is therefore pleading for a separate reporting obligation that is general and harmonized at EU level - preferably with an Edgar-type of central filing system.
One may question the wisdom of introducing a separate disclosure system, which would force investors to examine two different sources of information to obtain a complete picture of major holdings in listed firms. But the real question this raises is, should we not move towards an integrated European system for ownership disclosure, based not on a directive but a regulation instead?
The position paper is available here.
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