Isda complains about FSA treatment of CFDs

The UK Financial Services Authority (FSA), in a consultation paper issued in March this year, hinted it could require investors to disclose their interests in companies through contracts for difference on the company's stock. Holding a CFD does not normally transfer voting rights from the shareowner to the contract holder. But the UK regulator said: "To the extent that CFD brokers have no ‘real’ use for the stock held to hedge a CFD position, it is likely that they will be mindful of the wishes of their underlying clients (the CFD holders)."

Under current takeover rules, derivatives holders must disclose their interests during the offer period. The FSA said it could require disclosure at all other times as well.

Isda, the derivatives trade association, argues that even disclosure during takeovers is unnecessary. Many derivatives are not simply proxies for shares, it said, adding they can be used as part of a volatility strategy or to emulate limit orders. The body said the FSA should concentrate on side arrangements, which allow derivatives holders to influence votes, if such arrangements exist - anything else would be "an unnecessary and unjustified burden".

The FSA is in any case unlikely to implement its plan soon. "We believe it is neither practical nor appropriate to consult on draft rules for a mandatory disclosure of major CFD holdings regime in this consultation," it said, adding that it would carry out a market-failure analysis and cost-benefit analysis before putting such rules forward.