RE: Implementation of the Transparency Directive Amending Directive (2013/50/EU) and other Disclosure Rule and Transparency Rule Changes

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1 20 May 2015 Kate Hinchy Markets Division Financial Conduct Authority 25 The North Colonnade Canary Wharf London E14 5HS Submitted via to: RE: Implementation of the Transparency Directive Amending Directive (2013/50/EU) and other Disclosure Rule and Transparency Rule Changes Dear Kate, BlackRock is pleased to have the opportunity to respond to the consultation on implementation of the revisions to the Transparency Directive (the Directive ) and associated changes to the Handbook. BlackRock is a premier provider of asset management, risk management, and advisory services to institutional, intermediary, and individual clients worldwide. As of 31 March 2015, the assets BlackRock manages on behalf of its clients totalled 3.22 trillion across equity, fixed income, cash management, alternative investment and multi-investment and advisory strategies including the ishares exchange traded funds. BlackRock represents the interests of its clients by acting in every case as their agent. It is from this perspective that we engage on all matters of public policy. BlackRock supports policy changes and regulatory reform globally where it increases transparency, protects investors, facilitates responsible growth of capital markets and, based on thorough cost-benefit analysis, preserves consumer choice. We welcome the opportunity to address, and comment on, the issues raised by this consultation and we are willing to work with HMT and the FCA on any specific issues that may assist in implementation. Key points The Directive seeks to deliver further transparency across markets, and recognises that a harmonised regime for notification of major holdings of voting rights should improve legal certainty, enhance transparency and reduce the administrative burden for cross-border investors. We fully support this objective. However, we have some concerns that the changes which are being proposed by the FCA in relation to stock lending and the lack of certainty around collateral are likely to result in a notable increase in the volume of disclosures being made by investors but without any tangible increase in information for the market. We also consider that there is a lack of clarity in the proposed rules and guidance (such as in the practicalities associated with completing the TR1 form) which will given the time available from publication of the final rules to their implementation make it difficult for investors to achieve a consistent application. 1

2 Responses to questions We have only provided responses to questions we felt were relevant to our business, or the interests of our clients or we had a strong view to express. HMT Q4: Do you think that the FCA should be empowered to suspend voting rights in the case of the most serious breaches, as this consultation is proposing? We agree that voting rights should only be suspended in those instances which constitute the most serious breaches and that such suspension process would necessarily include application to the courts. HMT Q5: TDAD? How should a most serious breach be defined in the transposition of the The definition of what constitutes a most serious breach should consider a range of factors in establishing that suspension of voting rights is effective and proportionate in the particular circumstances. Specifically, attention should be directed towards identifying instances of intentional breach to mask major shareholding interests and differentiate those from instances of genuine error in calculation, presentation or timely dissemination of information. Additional criteria to assist in identifying a most serious breach could include consideration of: (a) the actions taken by the natural person or legal entity to self-identify and rectify the breach and improve conduct and controls to avoid repetition; (b) how late and materially inaccurate the notification was; (c) the market impact and/or reaction to the breach event, having regard to the nature of the particular issuer/security concerned, the prevailing market conditions and including what a normal and reasonable person would do if the event had not occurred; and (d) whether suspension of voting rights delivers an effective sanction on the natural person or legal entity responsible for the breach without introducing adverse impact on innocent parties to the breach. We believe that determinations of a most serious breach will require a detailed consideration of the specific facts and circumstances of the breach and would not be supportive of a definition that relies simply on the size of the relevant issuer and/or the size of the relevant holding and/or the period of delay in making a fully compliant notification. Q5: Do you agree with our proposal to delete DTR5.3.1R(2A) and DTR5.3.1AG? Do you agree with our proposal to delete FCA specific guidance set out in DTR5.3.3G(2) and rely on the new RTS? Do you agree with our proposal to include a new DTR5.3.2AG and to make amendments to DTR5.3.2R(1) and to remove the link to MiFID in DTR5? Do you agree with our proposal to delete DTR5.8.2R(4) and include a new DTR5.3.3AR and rely on the new RTS? The changes will remove the definition in the FCA Handbook of financial instrument and place reliance upon the Regulatory Technical Standards. We believe that this approach introduces significant risk of differing interpretations as to the specific instruments that should be in scope for production of DTRs. In particular, we are concerned that the RTS does not provide sufficient clarity as to the treatment in DTRs of securities received as collateral. In response to their prior consultation, we requested ESMA opine on this point to deliver clarity to the market and ensure that the approach taken across Europe was consistent. Unfortunately, no specific guidance on this point was forthcoming and the approach the FCA now propose adds to the risk of differing 2

3 interpretations of in scope instruments by Member States and natural persons or legal entities making DTRs. In our opinion, collateral should not be included in calculations to determine the proportion of the voting rights of an issuer reportable under DTRs. The reasoning underlying our opinion is that: collateral is ordinarily received to manage the counterparty risk of an unrelated derivative transaction and not for the purpose of obtaining economic exposure to, or voting rights in, the issuer; a recipient will generally set parameters for the type and amount of collateral that is acceptable but will not mandate the securities of a particular issuer; and collateral provided will change day-to-day in response to mark-to-market movements in the transaction the collateral supports, market movements in the value of the collateral itself and also at the sole discretion of the collateral provider to substitute or replace with different securities. If included, the daily movement of collateral can and will generate a significant increase in the volume/frequency of DTRs which we regard as noise rather than providing useful market information in regards to major shareholdings. Consequently, we believe that guidance should be included in the Handbook to specify that collateral should not be considered as a financial instrument with similar economic effect for the purposes of the DTRs. Q18: Do you agree with our analysis that, other than the transitional provisions in respect of DTR6.4.2R, DTR6.4.3R and DTR6.4.4R, no other transitional provisions are required in the DTRs as a result of the TDAD amendments to the TD? The amending Directive (TDAD) does not provide a grace period within which implementation can be achieved and the FCA have stated that final rules are due to be published in October Given the need to amend systems to incorporate TDAD changes to calculation methodology, including but not limited to, in scope instruments and the consequential changes to presentation format required by the FCA (and other Member State regulators) in making DTRs, we urge the FCA to publish final rules as soon as practicable. In the event that insufficient time is available to deliver system-based compliance solutions, the need for manual workarounds not only introduces additional operational risk for DTR filers but also risks the consistency and comparability of DTRs across Member States that TDAD is intended to deliver. Accordingly, if final rules cannot be published during summer, we request further consideration of transitional provisions. Q19: Do you agree with our proposed treatment of stock lending transactions for the purposes of the Article 9 notification regime (set out in the proposed DTR5.1.5R(1)(e)) and our proposal to apply the EU minimum thresholds? We note the FCA s acknowledgement that the proposed change in treatment of stock lending transactions is not in response to any identified market failings. Instead, the intent is simply to harmonise with other Member States implementation of the Directive. However, we disagree with the implication that Member States other than the UK implemented the Directive in a consistent manner as regards the treatment of stock lending transactions. Moreover, while we agree with Mazars analysis that stock lending agreements do indeed result in title transfer, this focusses attention on the individual legs of the transaction and ignores that from a practical perspective the change in ownership is temporary and explicitly intended to be reversed. The analysis goes on to assert that the result of legal transfer is that notifications under the Directive (DTRs) should be done by both lender and borrower. This would make sense in terms of market transparency if the Directive were a transaction based reporting 3

4 requirement whereby lends and borrows could be matched against one another. But, as the Directive is directional in nature and focused on aggregated holdings, it is highly unlikely that such transactions will ever result in similar but opposite DTRs being filed by the lender and borrower. Accordingly, the misconception leads to additional complexity for DTR filers and lesser rather than enhanced transparency for issuers and the market in trying to understand the relevant content of DTRs. Putting aside our philosophical disagreement with the proposed treatment of stock lending transactions within the Directive, we are concerned that from a practical perspective the current TR1 form could be completed in multiple ways for a single disclosure. The potential for inconsistent interpretation by DTR filers will not deliver the intended clarity of ownership to the issuer or the market. We therefore request additional guidance be included in the Handbook to assist market participants in understanding the proper representation of stock lending transactions within DTRs. Consistent with the approach taken in relation to many of the reporting forms contained in SUP 16, we believe guidance issued alongside the TR1 form would aid firms and deliver a consistent approach to the disclosure of the new requirements. By way of example, we believe it is necessary to include guidance which specifically addresses: (a) what should be considered the determining factor in the Reason for the notification section when there are likely to be multiple reasons for a change in position requiring a DTR notification on any given day; (b) the nature of the descriptor which should be used in Section 2 ( Other ) to document stock lending and borrowing in order that the market can identify similar occurrence which have altered the reported holding of voting rights; (c) the nature of the descriptor which should be used in Section 7 when a disclosure is required if the overall percentage level of voting rights remains the same but there is a notifiable change in the percentage level of one or more of the categories of voting rights held; and (d) how the categories of voting rights should be displayed in Section 8. Q20: Do you agree with our proposed deletion of DTR5.1.5R(1)(d) and our proposed amendment to DTR5.1.5R(2)(e), which allow all investment managers to make vote holder notifications at the EU minimum thresholds? We strongly support this change to recognise the role played by investment managers and ensure an even playing field in regards to DTRs. Q24: Do you agree with our analysis of the impact of applying the notification regime to stock lending transactions? No we do not believe that the proposed treatment will remove asymmetric disclosure, nor will the information provided enable investors to acquire or dispose of shares in full knowledge of changes in voting structure. Q25: Do you have any further comments on the costs of notifying stock lending transactions? We note that the FCA states that with the pre-existence of monitoring systems, the costs of making these notifications are expected to be marginal. While we agree that the introduction of these notification requirements is unlikely to change shareholders behaviour, and the additional DTR notifications will not generate a material direct cost, the existing monitoring 4

5 systems and processes underlying DTR creation will require amendment and this cost may not be marginal. Conclusion We appreciate the opportunity to address and comment on the issues raised by the consultation paper and remain open to discussion, including to work through specific examples with the FCA, which may further assist in implementation. Yours sincerely, Tim Dudley Managing Director Head of EMEA Regulatory Thresholds John Ardley Director Compliance