Communicating European debt risk

As reported today, the US Securities and Exchange Commission has introduced guidance for financial firms related to reporting of their European debt exposure.  The SEC issued its recommendations to address the inconsistent approach firms have used to disclose their risk to sovereign and private borrowers:

“In response to our comments on their disclosure documents, registrants have provided incremental improvements in disclosures of exposures to sovereign debt in several countries during the year. However, we find that expanded and enhanced disclosures are not consistent from registrant to registrant. Therefore, we determined that investors would benefit from our providing additional guidance to assist registrants in their assessment of what information about exposures to European countries they should consider disclosing and how they should disclose this information with the goal of greater clarity and comparability.”

The SEC gives very clear instructions as to the type of information it believes firms should disclose and the form it which it should be presented:

“We believe that disclosures should be provided separately by country, segregated between sovereign and non-sovereign exposures, and by financial statement category, to arrive at gross funded exposure, as appropriate. Registrants should also consider separately providing disclosure of the gross unfunded commitments made. Lastly, we suggest that registrants provide information regarding hedges in order to present an amount of net funded exposure.”

The SEC’s action will likely result in additional disclosures by financial firms in their 2011 annual report (10-K) filings.  It could also produce some surprises for investors and fresh volatility in stock prices for firms whose risks are seen as greater than previously thought.  These firms wiould be well advised to prepare a thorough communication plan for reporting their risk exposure – and not simply leave it to be discovered in the fine print of a regulatory filing.

 

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