European Sovereign Debt Exposures

The Securities and Exchange Commission’s Division of Corporate Finance issued Disclosure Guidance Topic number 4 on January 6, 2012 regarding European sovereign debt exposures. This guidance was precipitated by the inconsistent disclosure “in both substance and presentation” provided by registrants, both domestic and foreign private issuers.

The Division of Corporate Finance was particularly concerned with the exposure risks to financial institutions and referenced Industry Guide 3 which addresses disclosure requirements of bank holding companies. The Division highlighted the disclosure requirements where “current conditions in a foreign country give rise to liquidity problems which are expected to have a material impact on the timely repayment of principal or interest on the country’s private or public sector debt”.  The Disclosure Guidance indicated that the use of tabular disclosure within the Management’s Discussion & Analysis (MD&A) should be included as well as the exposure impacts within the risk factors.

Though the Division of Corporate Finance did not indicate which particular European countries are covered in the guidance, noting “We expect that the countries covered by this analysis would vary and thus the disclosures should be sufficiently flexible to capture those risks as they change over time”; it did request that registrants disclose the basis for why they were identifying specific countries included in their disclosures.

The Disclosure Guidance emphasized three specific areas for enhanced disclosure the Division of Corporate Finance had previously commented on:

  • Gross sovereign, financial institutions, and non-financial corporations’ exposure, separately by country;
  • 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 its 11/16/2011 comments to Bank of Nova Scotia regarding the 6-K filed 8/30/2011, the Division of Corporate Finance requested almost exactly the same disclosure as above regarding Bank of Nova Scotia’s reported exposure to banks in Portugal, Ireland, Spain and Italy. This enhanced disclosure can be seen on the 12/2/2011 Bank of Nova Scotia 40-F with tabular disclosure by country within the MD&A.


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