On January 6, 2012, the Securities and Exchange Commission (SEC) published guidance (CF Disclosure Guidance: Topic No. 4) setting forth the views of the Staff of the SEC's Division of Corporation Finance1 urging banks and other financial institutions to enhance disclosure of their exposure to debt instruments of European countries. The guidance is driven by current uncertainties in connection with European sovereign debt exposures, together with a concern that there is a lack of transparent, comparable information.
The guidance is intended to expand current disclosure requirements in the MD&A, risk factors and, with respect to bank holding companies, disclosure required by Industry Guide 3.
The guidance recommends that issuers provide:
- separate disclosure of their exposure to European debt instruments on a country by country basis, including an explanation as to the basis for the countries selected for disclosure and the basis for determining the domicile of the exposure;
- segregated disclosure between sovereign and non-sovereign exposures (comprised of exposure to corporations and financial institutions) for each identified country, and by financial statement category, to arrive at gross funded exposure, as appropriate;
- separate disclosure of the gross unfunded commitments made; and
- information regarding hedges in order to present an amount of net funded exposure.
In determining which countries are covered by the guidance, the guidance provides that issuers should focus on those experiencing "significant economic, fiscal and/or political strains such that the likelihood of default would be higher than would be anticipated when such factors do not exist." As such, the countries covered by the guidance are likely to change over time.
The guidance encourages issuers to consider the type of counterparty involved, the category of financial instrument, total gross exposure and the effect of credit default protection to arrive at net exposure in deciding what disclosure is relevant and appropriate for the particular circumstances of each issuer. Additionally, issuers should disclose how management is monitoring and/or mitigating direct and indirect exposures and any relevant current developments of the identified countries, and how these developments could impact the issuer.
To view the SEC guidance, please click on the following link.
1 - The guidance is not a rule, regulation or statement of the SEC and its content has neither been approved nor disapproved by the SEC.
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