FSA cracks down on CFD use

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.

See also: Contracting out 
FSA's CFD proposal will hamper growth, says Isda

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here