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.