Monday, January 09, 2012

ESMA Guides on Inside Information, Dividends and Derivatives under Market Abuse Directive

Concerned about recent incomplete disclosure of the full details of dividend payment announcements that may have caused undue effects on equity derivatives, the European Securities and Markets Authority (ESMA) reminded issuers that they should consider any relevant information related to dividend payments and policies as inside information should this information be likely to have a significant effect on the prices of either the issuer’s shares or related derivatives or both. Using a Q&A vehicle, ESMA noted that the definition of inside information in Article 1 of the Market Abuse Directive expressly includes information relating to an issuer of financial instruments that would be likely to have a significant effect on the prices of related derivative financial instruments.

ESMA is aware of the influence that information on expected dividends has on the price of futures and other derivatives. The Authority also acknowledges the effect that changes in dividend policies and payment patterns have on the price formation of equity derivatives, including futures. Like any inside information, noted ESMA, this information should be disclosed as soon as possible, according to Article 6 of the Market Abuse Directive, and in a manner which enables fast access and complete and timely assessment of the information by the public.

The provisions affect various aspects of dividend policies and payments that might have a significant effect on the prices of derivative instruments, such as ex-date, provisional and final amounts, nature of the payment, special dividend, any changes on previously announced information, and changes in dividend payment patterns. For instance, a decision to change the ex-dividend date compared to the preceding year’s date should be disclosed in a timely manner so that the information is incorporated into the pricing models used on the derivative markets.

The disclosure of this type of information should be done promptly, said ESMA, even when the proposals for any change on dividend policy, including dates and nature of the dividend, are still subject to further consideration or approval by the general shareholders meeting. Investor relations units should take special care when replying to questions posed by investors or firms so as to ensure that only the information that was previously disclosed by the issuer under the Market Abuse Directive obligations is provided in those answers and that selective or unintended disclosures regarding the issuers' dividend policy are avoided.

ESMA therefore urges issuers, especially those whose shares are included in reference indices and are the underlying in listed derivatives contracts, to pay special attention to this issue in order to ensure an effective and harmonized application of the Directive.