ESMA Calls on Firms to Improve Financial Statement Disclosures

The European Securities and Markets Authority (ESMA) has published its review of the comparability and quality of disclosures in 2012 International Financial Reporting Standards (IFRS) financial statements of listed financial institutions (FIs).

The review makes recommendations aimed at enhancing the transparency of financial statements through the improvement of disclosures in certain key areas including: credit risk and impact of forbearance practices; liquidity and funding risk; asset encumbrance and fair value measurement of financial instruments.

ESMA, while finding that the required disclosures under IFRS were generally observed, also identified broad variations in the quality of the information provided, and found some cases where that was insufficient or insufficiently structured to allow comparability among financial institutions.

“ESMA has identified a number of areas where financial institutions can improve the information that they provide in their financial statements, particularly on issues such as credit risk and forbearance,” said ESMA chair Steven Maijoor. “We expect that FIs and their auditors will take into account our recommendations when preparing and auditing the IFRS financial statements for 2013.

“ESMA believes that accurate and comparable financial statements play a key role in maintaining both investor and market confidence, which in turn contributes to financial stability and promotes sound economic growth.”
ESMA decided to undertake a review of some of the key areas of the financial statements prepared by listed FIs across the European Union (EU) in order to assess their comparability and the quality of disclosures. The review was based on a sample of 39 large European FIs from 16 jurisdictions, mostly consisting of banks that were included in the latest European Banking Authority (EBA) stress-test exercise, most of which will move under the European Central Bank (ECB) supervision in 2014.

Separately, ESMA has issued final draft regulatory technical standards (RTS) related to derivative transactions by non-EU counterparties. The RTS implement provisions of the European Market Infrastructure Regulation (EMIR) on over the counter (OTC) derivatives, central counterparties and trade repositories.

EMIR provisions regarding central clearing and risk mitigation techniques also apply to those OTC derivatives entered into by two non-EU counterparties which have a direct, substantial and foreseeable impact on EU financial markets. Ensuring that risks posed to the EU’s financial markets by non-EU transactions are addressed by regulation and supervision is key in ensuring safer markets.

ESMA’s draft RTS clarify that OTC derivative contracts entered into by two counterparties established in one or more non-EU countries, for which a decision on equivalence of the jurisdiction’s regulatory regime has not been adopted, will be subject to EMIR where one of the following conditions are met:

  • One of the two non-EU counterparties to the OTC derivative contract is guaranteed by an EU financial for a total gross notional amount of at least €8bn, and for an amount of at least 5% of the OTC derivatives exposures of the EU financial guarantor; or
  • The two non-EU counterparties execute their transactions via their EU branches and would qualify as a financial counterparty if established in the EU.

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