Several weeks into the corona crisis, the regulators have taken many measures to stabilise the markets and safeguard economic prosperity. In this blog post, we will discuss the most striking measures the European and Dutch financial supervisory authorities have taken in previous weeks, and we will provide recommendations on how financial institutions can deal with this set of measures.
Due to the COVID-19 outbreak, the European stock market indices went into freefall. In the Netherlands, the AEX index (composed of the most actively traded securities on Euronext Amsterdam) lost almost a third of its value within two weeks. The same is true for the German DAX, the French CAC 40 and the British FTSE 100. Short selling further exacerbate the heavy fall in the stock price. The EU Short Selling Regulation provides the European Securities and Markets Authority (“ESMA”) with the mandate to intervene in exceptional situations to reduce risks to market confidence arising from short selling.
In light of the COVID-19 outbreak and its impact on the financial markets, on 16 March 2020 ESMA decided that holders of net short positions would bear an obligation to notify their national competent authorities (“NCAs”) if their net short position reaches or exceeds 0.1% of the issued share capital of the company concerned. Previously the notification threshold was set at 0.2%. The requirement does not apply to shares admitted to trading on a regulated market where the principal venue for the trading of the shares is located in a third country, or to market making or stabilisation activities.
In several jurisdictions, the competent NCAs decided to impose a ban on short selling. A ban was implemented in Italy, Austria, Belgium, Greece, France and Spain. The Dutch, German and British NCAs have indicated that they are not considering the implementation of a short selling ban. When developing their investment strategies, investors should be wary of these regulatory discrepancies between European jurisdictions, in particular in the event of dual listings (e.g. a French-Dutch or a Belgian-Dutch dual listing).
Remuneration and Dividend Distribution
The European Banking Authority (“EBA”), in its 12 March statement, urged banks to follow prudent dividend and other distribution policies, including as regards variable remuneration, and use capital to ensure continuous financing to the economy. The Dutch Central Bank (De Nederlandsche Bank, “DNB”) communicated this to Dutch banks and provided Dutch banks with EUR 8 billion in capital relief to be used to finance the corporate and household sectors.
The EBA urged all banks to refrain from dividend distributions to maintain robust capitalisation. The EBA urged banks to communicate with their competent authorities in the event that they consider themselves legally required to pay out dividends. The EBA also stressed that NCAs should monitor whether capital is allocated efficiently and prudently within banking groups. The major Dutch banks have followed the call of the EBA and postponed their dividend payments.
Additionally, the EBA expects NCAs to ask banks to review their remuneration practices to ensure that they are consistent with the current economic situation and promote sound and effective risk management in the context of the current COVID-19 outbreak. This means that remuneration and, in particular the variable portion of such, should be set at a conservative level. As a specific measure, the EBA suggests that variable remuneration of bank employees could be deferred for a longer period and a larger proportion could be paid out in equity instruments.
Share buyback programs
European and global stock markets have hit historic lows because of the COVID-19 outbreak and the related economic developments, such as the falling oil prices and rising unemployment levels worldwide. In response, many issuers decided to suspend their pending share buyback programs until the end of June 2020. They will instead use their cash to support their operations, or in the case of banks, to support the economy at large by providing loans to distressed companies.
Various other European issuers have reviewed their pending share buyback programs because of recent market developments. Many companies are exploring options regarding these programs; they may either want to terminate their programs in order to retain cash available for operational expenses, or may want to accelerate their program to make use of the current low market prices. This phenomenon has not escaped the view of the regulators. The EBA, for example, has urged banks to limit or refrain from executing share buyback programs.
However, changing or terminating pending buyback programs is not an easy feat. Issuers will have to review whether their contractual position with a cooperating bank allows for termination or an amendment. Furthermore, changing or terminating a buyback program can be considered inside information according to the Market Abuse Regulation (“MAR”). In the current circumstances, this is not clear as the impact of COVID-19 and other market circumstances is significant on almost all issuers, but not always to the same extent. The above means that issuers need to tread carefully when considering share buybacks and must give appropriate attention to the related MAR and investor relations aspects.
Regulated Markets Disclosure and Reporting
COVID-19 developments have also raised challenges for issuers, for instance relating to disclosure of information and periodic financial reporting. ESMA has made recommendations with respect to the disclosure of information relating to COVID-19. Firstly, issuers should disclose as soon as possible any relevant significant information concerning the impact of COVID-10 on their fundamentals, prospects or financial situation in accordance with their transparency obligations under the Market Abuse Regulation. Furthermore, issuers should provide transparency on the actual and potential impacts of COVID-19, to the extent possible based on both a qualitative and quantitative assessment on their business activities, financial situation and economic performance in the 2019 year-end financial report if these have not yet been finalised or otherwise in their interim financial reporting disclosures.
Additionally, ESMA has urged NCAs to show leniency concerning upcoming reporting deadlines stemming from the Transparency Directive. Specifically, ESMA hinted at the following two reporting deadlines:
- annual financial reports referring to a year-end occurring on or after 31 December 2019 but before 1 April 2020 for a period of two months following the deadline; and
- half-yearly financial reports referring to a reporting period ending on or after 31 December 2019 but before 1 April 2020 for a period of one month following the deadline.
The Netherlands Authority for Financial Markets (Stichting Autoriteit Financiële Markten, the “AFM”) confirmed that they will show some leniency towards issuers that will miss those deadlines. However, the AFM also noted that this will only apply to late notifications caused by the COVID-19 outbreak.
The AFM flexibility is mirrored in the upcoming reporting requirements pursuant to the Securities Finance Transaction Regulation. As of 13 April 2020, new reporting obligations for credit institutions, investment firms, and relevant third-country entities become applicable. ESMA, however, now expects NCAs not to prioritise their supervisory actions towards entities subject to Securities Finance Transactions reporting obligations until 13 July 2020.
In addition to ESMA’s recommendations, we urge issuers to take into account several pointers:
- Issuers should regularly evaluate their message and communication plan for updating investors, analysts and other stakeholders to ensure up-to-date and consistent disclosure of information.
- Issuers should assess whether it is necessary to provide information about the expected impact on their medium to long-term financial results, including their results for the remainder of the year.
- Issuers should be prepared to address questions relating to COVID-19 and its expected impact on their results during investor analyst meetings. As always, issuers should be mindful not to disclose material, non-public information that has not been properly disclosed through a press release.
- Finally, issuers that have provided guidance to the market regarding their operational or financial results should consider whether there is a need to update or withdraw such guidance with a view to adequately manage market expectations.
ESMA notes in a public statement dated 11 March 2020 that if a listed bank experiences financial difficulties and the crisis worsens significantly, the occurrence of certain events concerning an affected bank may constitute inside information. Generally, like all issuers, banks will be required to disclose such inside information. However, if the disclosure entails a risk of undermining the financial stability of the bank and the financial system, the bank concerned may delay public disclosure provided this is in the public interest, confidentiality of such information can be ensured, and the competent market authority has consented to the delay (see Article 17(5) MAR); for instance, if a bank faces temporary liquidity problems and needs to receive temporary liquidity assistance.
On 1 April 2020, the European Banking Authority published a statement on increased money laundering risks during the COVID-19 outbreak. EBA states that based on previous crises, an increase in illicit transactions is likely. Therefore, the EBA urges NCAs to promote awareness of this increased risk amongst financial institutions. Since anti-money laundering has been one of the main supervisory priorities of European and Dutch regulators for some time now, we expect that NCAs will answer the call of the EBA and increase their scrutiny of financial institutions regarding anti-money laundering procedures. Therefore, it is paramount that financial institutions critically review their internal processes and report any unusual transactions to the FIU.
More about the coronavirus
You can read more publications on the impact of the coronavirus on our website. Here you will also find a list of contacts within our organisation who can advise you with questions about the implications of the coronavirus for your company.