SEC Disclosure Guidance on Exposures to European Sovereign Debt

The following post comes to us from Brian V. Breheny, partner at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden memorandum by Mr. Breheny and Andrew J. Brady.

On Friday, January 6, 2012, the staff of the SEC’s Division of Corporation Finance issued the fourth installment in its new Disclosure Guidance Topic series. Topic No. 4 focuses on the exposures of registrants to the debt of certain European countries. The staff specifically highlighted its concern about “the risks to financial institutions that are SEC registrants from direct and indirect exposures to” European sovereign debt.

Enhanced Disclosures

The goal of this new guidance is to expand and enhance the disclosures that registrants provide related to sovereign debt exposures, to ensure that investors have transparent and comparable information about the uncertainties of these exposures. This information generally is included in registrants’ disclosures about risk factors, qualitative and quantitative market risks, and management’s discussion and analysis. Bank holding companies and other registrants engaging in similar lending and deposit activities also are required to make the disclosures required by the SEC’s Industry Guide 3 (Statistical Disclosure by Banking Holding Companies).

In particular, the staff is requesting enhanced disclosures, on a country-by-country basis, of the following information:

  • gross sovereign, financial institutions and non-financial corporations’ exposure;
  • quantified disclosure explaining how gross exposures are hedged; and
  • a discussion of the circumstances under which losses may not be covered by purchased credit protection.

In determining which countries registrants should consider covering in their disclosures on this topic, the staff stated that the focus should be on countries “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.” The staff acknowledged that the countries covered in the disclosures on this topic will change over time. Registrants are encouraged to disclose the basis for why particular countries are covered in the disclosures.

Detailed Considerations

The guidance in the new disclosure topic includes a list of detailed factors that registrants should consider when determining any additional information that should be disclosed regarding their exposures to sovereign debt, including the gross funded and unfunded exposures, total gross exposures, effects of credit default protection, other risk management considerations and post-reporting date developments.

A copy of the disclosure topic is available here.

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