Recent events in Europe have illustrated how government defaults can jeopardize domestic bank stability. Growing concerns of public insolvency since 2010 caused great stress in the European banking sector, which was loaded with Euro-area debt (Andritzky (2012)). Problems were particularly severe for banks in troubled countries, which entered the crisis holding a sizable share of their assets in their governments’ bonds: roughly 5% in Portugal and Spain, 7% in Italy and 16% in Greece (2010 EU Stress Test). As sovereign spreads rose, moreover, these banks greatly increased their exposure to the bonds of their financially distressed governments (2011 EU Stress Test), leading to even greater fragility. As The Economist put it, “Europe’s troubled banks and broke governments are in a dangerous embrace.” These events are not unique to Europe: a similar relationship between sovereign defaults and the banking system has been at play also in earlier sovereign crises (IMF (2002)).
Posts Tagged ‘EU’
Corporate governance remains a hot topic worldwide this year, but for different reasons in different regions. In the United States, this year could be characterised as largely “business as usual”; rather than planning and implementing new post-financial crisis corporate governance reforms, companies have operated under those new (and now, not so new) reforms. We have witnessed the growing and changing influence of large institutional investors, and different attempts by companies to respond to those investors as well as to pressure by activist shareholders. We have also continued to monitor the results of say-on-pay votes and believe that shareholder litigation related to executive compensation continues to warrant particular attention.
On 23 July 2014, the European Commission fined Marine Harvest ASA €20 million for failing to notify its acquisition of Morpol ASA in accordance with the EU Merger Regulation and closing the transaction prior to receiving the European Commission’s approval. This is the first time the European Commission has imposed a fine in relation to a two-step transaction comprising a sale of a block of shares followed by a mandatory public bid for the remainder of the target’s shares. The level of fine is a further reminder that failure to comply with the EU Merger Regulation can have significant financial and reputational consequences.
Earlier this year, the International Swaps and Derivatives Association Inc. (ISDA) published the 2014 Credit Derivatives Definitions (the 2014 Definitions). The 2014 Definitions introduce a new government bail-in Credit Event trigger for credit default swap (CDS) contracts on financial Reference Entities in non-U.S. jurisdictions and also modify the typical terms of sovereign CDS contracts in light of the Greek debt crisis, by allowing a buyer of protection to deliver upon settlement the assets into which the Reference Obligation has converted even if such assets are not otherwise deliverable. Further, they create a concept of a Standard Reference Obligation, which means that most CDS contracts on a given Reference Entity would have the same Reference Obligation, thereby increasing the fungibility of such CDS contracts.
The concept of institutional investor stewardship is based on the notion that in publicly listed companies responsibility for corporate governance is shared. The primary responsibility lies with the board, which oversees the actions of its management. Institutional investors in the company are assumed to play an important role in holding the board to account for fulfilling its responsibilities. According to the UK Stewardship Code (2010), effective stewardship is about well-chosen engagement. This means that institutional investors monitor and engage with companies on matters such as strategy, performance, risk, capital structure, and corporate governance, including culture and remuneration. Engagement means having a purposeful dialogue with companies on these matters as well as on issues that are the immediate subject of votes at general meetings.
In the European Union insider trading has been regulated much more recently than in the United States, and it can be argued that, at least traditionally, it has been more aggressively and successfully enforced in the United States than in the European Union. Several different explanations have been offered for this difference in enforcement attitudes, focusing in particular on resources of regulators devoted to contrasting this practice, but also diverging cultural attitudes toward insiders. This situation has evolved, however, and the prohibition of insider trading has gained traction also in Europe. Few studies have focused on the substantive differences in the regulation of the phenomenon on the two sides of the Atlantic.
1. On 10 April 2014 some of the legislation that provides for the extraterritorial effect of the European Markets Infrastructure Regulation (“EMIR”) came into force. The remaining legislation will come into force on 10 October 2014. This post considers this legislation and the counterparties to which it applies. It also considers whether some counterparties might be able to avoid the extraterritorial effect as a result of the European Commission making an equivalence decision in respect of third country jurisdictions. It considers the European Securities and Market Authority (“ESMA”) advice to date on the equivalence of the regulatory regimes in the US, Japan, Australia, Canada, Hong Kong, India, Singapore, South Korea and Switzerland and notes that even in the US ESMA did not find full equivalence. Finally this post also considers the requirements that third country central counterparties (“CCPs”) and trade repositories must meet in order respectively to provide clearing services to their EU clearing members and to provide reporting services to EU counterparties which enable those counterparties to satisfy their clearing reporting requirements under EMIR.
Regulation of proxy advisers is a widely discussed subject matter worldwide. The European Securities and Markets Authority (ESMA), the regulator responsible for enforcing European securities regulation, declared in its ESMA Final Report and Feedback Statement on the Consultation Regarding the Role of the Proxy Advisory Industry in February 2013, to favor a self-regulatory approach over mandatory regulation of the industry. “In order to ensure a robust process in developing, maintaining, and updating the Code of Conduct,” ESMA set up a list of key governance for developing a Code of Conduct for the industry (see ESMA, Final Report, at p. 11). These included, inter alia, a transparent composition and the appointment of an independent Chair that possesses the relevant skills and experience. The Code of Conduct was required to “adequately address the needs and concerns of all relevant stakeholders (including proxy advisors themselves, institutional investors, and issuers).” ESMA’s Final Report offered guidance for the detailed elaboration of the Code of Conduct on certain subject matters. In particular, ESMA asked the industry to respond to concerns regarding conflicts of interests and communication with issuers.
…continue reading: Best Practice Principles for Proxy Advisors and Chairman’s Report
Over the past few years there has been a noticeable increase in the frequency of activist investors building up considerable stakes in German listed companies in the context of public takeovers. One reason for this development is what appears to be a new business model of hedge funds—the realization of profits through litigation after the completion of a takeover. To this end, the funds take advantage of minority shareholder rights granted under German stock corporation law in connection with certain corporate measures which are likely to be implemented for business integration purposes following a successful takeover.
Like in the US, European policy-makers have taken a number of measures as a reaction to the financial crisis, some of which address corporate governance issues of credit institutions and investment firms (hereafter collectively referred to as “banks”). Other than in the U.S., however, and more consistently with the financial origins of the crisis, very little has made its way into legislation that applies to non-financial corporations.