FSA cracks down on CFD use

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LONDON – The UK Financial Services Authority (FSA) is seeking to tighten its disclosure rules on contracts for difference (CFDs), which it says could be used to "influence corporate governance".

Under the FSA's proposed new rules, holders of CFDs equivalent to 5% of the company's shares would have to reveal their interests if asked to do so. The threshold would drop to 3% if the holder had voting rights attached to the CFDs. The FSA commented that it believes most CFD investors would fall short of the disclosure threshold.

Alternatively, the FSA could require general disclosure of any economic interests equivalent to 5% or more of shares - a disclosure that is already required during a takeover period.

The first approach would entail "minimal" costs, the FSA said. The second would be simpler to implement but could cost between £20 million and £50 million.

The FSA said 30% of UK equity trades are "in some way driven by CFD transactions referenced to the underlying shares". But the growth in CFDs has opened up the possibility of market failures, the regulator warned, by concealing economic interests in equities.

"Hedge funds might outflank traditional institutional investors by using economic interests to influence companies, and some investors might be disadvantaged by investing in a market where others have better information, such as who holds significant undisclosed economic interests," the regulator wrote in a consultation paper issued yesterday. "Inefficient price formation, distorted market for takeovers and diminished market confidence" could all result, it added.