Transparency in the fog...


In September 2018, Euroclear entered into initial discussions with the Paris Stock Exchange on the "transparency initiative" project.

The aim of which was to develop the Identifiable Bearer Share offer, to anticipate implementation of the Shareholders' Rights Directive (or SRD2) by setting ambitious objectives that are still relevant today and including a multi-channel information transmission offer (API, Web interface, ISO20022 messaging, standard file transfer). Since then, the "transparency initiative" has faced regulatory fog and the confusion of all the work being done in a wider context to comply with SRD2.

However, the legislative and regulatory framework was simple to begin with. In 2017, the second European Shareholders' Rights Directive was published under number (EU) 2017/828. It was named SRD2 for "Shareholders' Rights Directive II" and amended the original Directive (2007/36/EC). It aims toprotect shareholders' rights and increase their involvement in the life of companies. SRD2 is therefore a wide-ranging measure that can be reduced to two key ideas: transparency and interaction between the shareholder and the issuer. It affects companies listed on a regulated market of the European Economic Area, whose registered office is located in this area, as well as their shareholders, wherever they are.

A part of the provisions gives these companies the unenforceable right to request identification of their shareholders from any intermediary that has these shares on its books. This legislation opens the door to the emergence of multiple Identifiable Bearer Share offers throughout Europe.

The Directive lays down general principles specified by implementing acts which set minimum standards to be complied with by each country. It is comprised of two stages.

The first stage is the "SRD2" Directive. This has to be transposed into national law before 9 June 2019. This is followed by local implementing decrees. France thus published "Decree No. 2019-1235 of 27 November 2019 transposing Directive (EU) 2017/828 of 17 May 2017 amending Directive 2007/36/EC to promote shareholders' long-term commitment". In reality, this Decree mainly focuses on obligations relating to the remuneration of corporate officers and very little on shareholder identification. It introduces new information to be reported and concerns issuers that are outside the scope of SRD2 provisions. Management companies may thus request their fund distributors to be identified.

Furthermore, these measures are transitional pending the second stage, which is that of Implementing Regulation (EU) 2018/1212, which comes into effect on 3 September 2020. It sets out minimum requirements to be met in the interaction between issuers and shareholders. These acts cover identification, information and facilitating the exercise of shareholders' rights, with a considerable impact on players in the securities industry, leading to tremendous pressure on transmission times and forcing a high degree of processing automation. Identifying shareholders is only the tip of the iceberg, and the minimum requirements are already a challenge.

The concept of minimum requirements suggests the temptation to take the best offer at national level and therefore the emergence of local disparities. In fact, all the European players have come together to set out a joint approach to the issue through various European working groups.

This is how the Shareholder Identification Task Force came into being, to define the European landscape of shareholder identification. In this landscape, an issuer makes a request for identification through its central depository, which guarantees its origin and then disseminates it along the chain of intermediaries. In turn, each intermediary declares to this clearly identified central depository the natural or legal persons that appear on its books. This is all carried out on the basis of formatted messages designed for this purpose (ISO20022 type messages) and which can be integrated into systems.

This "Identifiable Bearer Share" model could even surpass the "transparency initiative". It has however been clouded by problems: 

  • The first comes from certain foreign issuers, which require intermediaries to respond directly to a designated third party. The legislation does allow this, but operational implementation assumes that this third party is identified and can be communicated with in an industrial and secure manner.

  • The second comes from the specific features of the organisation of each country. Some countries want information to be transmitted by the chain of intermediaries and not through the central depository.

  • The third comes from the initial ambitions of the "transparency initiative" in terms of scope, timeframe, response format and implementation schedule.

The scope extends to management companies and includes new data. These two elements are outside the scope of SRD2. It is likely that there will be a lack of response to cross-border requests and that responses will be incomplete in a domestic context.

In terms of timeframe, "transparency" initially aimed for a response by the end of the day, involving the implementation of new exchange methods such as the use of "API". With regard to formats, the new ISO20022 messages recommended by the European standards are in conflict with the current file exchange method.

Lastly, the initial deployment schedule for "transparency" aimed for a first stage in September 2019 with file exchanges, new data, faster transmission and an increase in the number of requests. The postponement of this stage to November 2019 and then early February 2020 has reduced its interest for intermediaries, whose fundamental objective is still to meet the prerogatives of SRD2 in September 2020, the date of the second stage of the "transparency initiative".

All these issues have formed a thick fog making the transparency initiative much less transparent. Although February 2020 is almost upon us, 3 September 2020 is not far off and there is currently no visibility on the deployment of the second stage of this initiative.

However, the fog may soon lift ahead of the launch of SRD2. On the one hand, Euroclear is soon to present its measures with a view to launching stage 2 of its initiative. At this point, the multi-channel offer set out at the beginning of the transparency initiative should be unveiled. On the other hand, in keeping with its tradition, the Paris Stock Exchange is developing a structure to enter into the implementation phase of SRD2 requirements. The measures planned for the transparency initiative will naturally be followed by integrating a European dimension. In addition, this approach will integrate the regulatory dimension to identify any shortcomings locally to meet the requirements of SRD2 in September 2020 and to see how these can be addressed.

Fog can be a sign of good weather to come and it is quite possible that this may also be the case for "transparency", provided, of course, that the fog lifts.

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