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.
THE MAD DISCLOSURE
2. The general requirement laid down by
the Directive is that publicly-traded companies must make public
disclosures of inside informationie information of a precise
nature likely to have a significant effect on the price of their
securitiesas 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
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 possiblethere
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.
Governor of the Bank of England