Select Committee on Treasury Written Evidence

Memorandum from the Tripartite Authorities

  1.  This note sets out the views of the Tripartite Authorities on the Market Abuse Directive (MAD) regime and disclosure requirements concerning the provision of emergency liquidity support to financial institutions by way of explanation of the conclusions reached in Northern Rock.


  2.  The general requirement laid down by the Directive is that publicly-traded companies must make public disclosures of inside information—ie information of a precise nature likely to have a significant effect on the price of their securities—as soon as possible. MAD operates on the basis that full, timely and proper transparency is a pre-requisite for trading in financial markets.

  3.  The relevant exclusion from this general disclosure requirement in the MAD framework is the provision which allows companies at their own risk to delay the disclosure of inside information so as not to prejudice their legitimate interests. An example of this are cases involving matters in the course of negotiation where the outcome would be likely to be adversely affected by the disclosure of the information. An implementing Directive specifically mentions cases where the financial viability of the company is in grave and imminent danger and where disclosure would seriously jeopardise the interests of shareholders by undermining the conclusions of negotiations to ensure the company's long-term recovery.

  4.  However, the ability to delay a disclosure is subject to two overriding conditions:

    a.  The company must be able to ensure the confidentiality of the inside information. Hence if a leak occurs, the information must be disclosed as soon as possible—there can be no further delay.

    b.  The failure to make a disclosure of the information should not be likely to mislead the public. Non-disclosure would be misleading, for example, where the market would reasonably expect the company to make a disclosure in order to correct an impression resulting from its recent market statements which was now contradicted by the inside information which had arisen.

  As the Directive is currently drafted, neither of these conditions can be waived or disapplied.


  5.  News that a financial institution's financial position is such that it requires emergency liquidity support from the Bank of England is capable of constituting inside information as it is information which could have a significant impact on the institution's share price. Unless the conditions for delaying a disclosure are met, the information would in that case need to be announced to the market as soon as possible.

  6.  Accordingly where a publicly traded company has applied for and obtained from the Bank of England emergency liquidity support and where that constitutes price sensitive inside information it can delay disclosing that information for so long as the both of the conditions in MAD for doing so remain satisfied:

    a.  that the information has not otherwise become public; and

    b.  non-disclosure would not be misleading because, for example, silence amounted to endorsement of a specific misapprehension by the market resulting from recent statements by the company.

  7.  It is in the first instance for a listed company to consider its disclosure obligations, in conjunction with its advisers. Within the framework of the Tripartite arrangements and the Financial Services and Markets Act 2000 it is the responsibility of the FSA as the UK Listing Authority to supervise listed companies in this respect.


  8.  In the period leading up to the announcement on 14 September of emergency liquidity support for Northern Rock, each of the Tripartite authorities took legal and other advice on a number of issues as they arose, including on issues of disclosure. However, the question of whether Northern Rock, as a listed company, was subject to specific obligations to disclose was an issue for the company itself, and for the FSA as the UK Listing Authority. It was the view of the FSA that, once the company had obtained emergency liquidity support, an announcement would have to be made if the market was not likely to be misled, given previous statements made by the company. Hence there was no reason to dissent from the view taken by the directors of the company, on the basis of their own legal advice, that an announcement should be made. In the event, given the reports about the company on 13 September the confidentiality condition was also not met and the company made an announcement before the market opened the following morning.

  9.  The Tripartite Principals took the view that, given there was going to be an announcement by the company, there should be a formal announcement of the support by the Tripartite in the interest of maintaining orderly markets.

Mervyn King

Governor of the Bank of England

January 2008

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