Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Wednesday, April 30, 2008

Market abuse on the rise?

There’s something ironic about the timing. As the Treasury closes its consultation on aligning the UK’s market abuse regime – which is “super equivalent” (we have more detailed rules) – more closely with the Market Abuse Directive, we receive a report from the FSA commenting that market abuse is on the rise.

In yesterday’s Market Watch, the FSA is highlighting again (this is the third year it has published estimates) that more than a quarter of takeovers in Britain last year were preceded by suspicious stock trading, including possible insider trades.

The FSA is highlighting its intent by introducing measures and sanctions to crack down on the problem.

The Financial Services Authority has faced criticism that it isn't aggressive enough in prosecuting cases of market abuse. The FSA itself expressed concern about the level of "informed price movement," - abnormal stock moves before takeovers. One of the problems is that trading can be the result of people trading based on media reports, speculation about likely mergers and acquisitions, as well as outright insider dealing.

The level of suspicious trading is "too high and not reducing as we would wish," said Sally Dewar, FSA's managing director of wholesale and institutional markets, in the newsletter.

In response to the criticism, the FSA said it will introduce more criminal prosecutions and request jail terms as punishment. It said it will push people to report suspicious trades and market abuse, among rivals and even within their own organisation.

And next year, the FSA will require that firms trading in securities record all phone conversations and electronic communications relating to client orders. The recordings must be kept for six months. About 80% of FSA-supervised firms currently do this.

And the FSA has also promised to be robust in investigating ‘system failures’. These could potentially include procedures in place at listed companies. It may be time to get a check-up on those in house systems and control procedures

Wednesday, April 23, 2008

Always a pleasure working with experts

To New York this week to moderate a session of the Disclosure Advisory Board. ( I thoroughly enjoy these meetings, where we get together to chew the fat over what matters in disclosure, in corporate reporting and other themes of importance to IR professionals.

For me, an interesting part is the spread of perspective the Board brings. Sell side, in house IR people, IR agency people, media, legal, accounting – all have a voice on the Board.

A significant portion of the meeting this week was spent working on non financial value drivers, representing 50% or more of the value of some companies, and figuring out how the IR profession can ensure that the full measure is taken.

If you are not communicating strategy, surely you are only complying with the minimum standards? How do analysts approach the task of understanding and ‘monetarising’ these assets?

The means by which this corporate information should be communicated was an interesting part of the debate. Where does the MD&A head from here? What is its role today?

And how can the IR team play a greater part in understanding and communicating the wider messages? What access do IRO’s in different types of company have to the decision making process?

So look shortly for a white paper on these and other issues.

Thursday, April 10, 2008

Australia – first out of the box with CfD/ derivative disclosures?

CfD’s and other equity derivatives are guaranteed to excite interest among IR professionals. And this blog has tried to capture that interest by reporting on various regulators’ progress in requiring transparency of the underlying beneficial owner of the CfD.

With the FSA consultation closed – and corporates keenly waiting for the result – it was encouraging to see a new front runner entering the race. In a speech to the CBI last week which laid out a "Vision for a Modern Australia", Australian Prime Minister Kevin Rudd – in discussing the financial markets – announced new regulations on derivatives such as Contracts for Difference.

He noted that both the UK and Australian markets for Contracts for Difference have grown significantly in recent years, with as much as 30% of companies’ capital being owned in this form.

However, as we know, these equity derivatives have enabled market participants, including speculators and hedge funds, to avoid the disclosure requirements associated with direct stakes. This has caused concerns in both UK and Australian investment (and corporate) communities, about lack of transparency on who owns – and controls – companies shares.

So companies in the UK will be heartened to hear Mr Rudd remarks.

“Today I can announce that Australia intends to take a lead in increasing the transparency of its financial markets in this important area.

I know that the Financial Services Authority here in the UK has recently been working on this area, and we are keen to ensure that the lines of communication between our agencies are open. I have asked the Australian Treasury to review appropriate disclosure requirements for equity derivatives.”

So, as the FSA mulls the responses to their consultation, it looks as if they have at least one ally that favours more transparency. Potentially good news for IR professionals.

Thursday, April 03, 2008

Naked shorts – and failed trades.

Whenever markets are in the doldrums, it happens. The rise and rise of those using shorting strategies is making regulators ask themselves whether there is sufficient transparency around the transactions. Especially the so-called ‘naked shorts’.

In this, those selling securities short do not secure the stock for delivery. In a typical short-sale transaction, the seller borrows a security and then sells it, with the goal of purchasing it at a lower price in the future and pocketing the difference. Critics say those pursuing naked shorts are essentially creating phantom shares to sell and drive down a stock's price.

So regulators are now looking at how this process works and consulting on rules changes.

In the US, where naked shorting is in fact illegal, the SEC has Regulation SHO, which went into effect in 2005. Broker-dealers must borrow the security, have entered a bona fide arrangement to do so, or have reasonable grounds to believe the stock can be obtained before settlement.

Under Reg SHO, broker-dealers are permitted to accept customer assurances that they have identified a source of borrowable securities. "We are concerned, however, that some short sellers may have been deliberately misrepresenting to broker-dealers that they have obtained a legitimate locate source," said the SEC in its proposal on beefing up SHO, published on March 21. In general, Reg SHO has done a good job of making the data surrounding these issues public, But, said Chairman Cox. “ the time has come to give it some enforcement teeth”.

Meanwhile, in Australia, the recent market turbulence had led to Treasurer Wayne Swan to call for laws clamping down on volatile share-trading techniques that have been driving down the value of superannuation funds and other stocks. He promises that "the Government will pursue legislative change to address the ambiguity around covered short-selling and disclosure."

And the ASX in a new consultation is proposing some immediate measures on increased transparency.

Back in 2002/3, in the aftermath of the internet bubble. the FSA did its own enquiry. They concluded that they did not need to make any rules changes, but in late 2003 CREST (Euroclear) started publishing aggregated data on the per-stock short selling.

Add in changes in the last month in India, Canada…and we have a picture of increased transparency on the levels of covered – and naked – short selling. Which those responsible for keeping tabs on whose holds their company’s shares will welcome.