FSA acts on disclosure of contracts for difference

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LONDON – The UK Financial Services Authority has announced it will implement a general disclosure regime for long contracts for difference (CFD) positions – derivatives that allow for investors to speculate on share price movements.

Under the new regime, existing share and CFD holdings in the same company should be aggregated for disclosure purposes and the initial disclosure threshold will be maintained at 3%. This, the FSA says, is the most effective way of addressing concerns in relation to voting rights and corporate influence. The regulator is proposing an exemption for CFD writers, which act as intermediaries, to reduce unnecessary disclosures.

The FSA Feedback Statement, which responds to its consultation paper issued in November 2007, contains draft rules to implement the position but the FSA will accept technical comments on the rules to ensure they are effective. The deadline for comments is January 23, 2009 and the FSA aims to issue final rules in February 2009 that will come into effect on September 1, 2009.

Alexander Justham, FSA director of markets, said: “Our goal is to provide an effective and proportionate disclosure regime that works for all involved, and sustains market confidence and efficiency. We have received extensive support for the approach we are taking, since we announced it in July. We would like to thank all those who provided feedback."

Peter Green and Jeremy Jennings-Mares, capital markets partners at the law firm, Morrison & Foerster, commented:

“It is questionable how useful this information will be to companies. Arguably, this level of disclosure gives them more information than they need. It will be difficult to establish which disclosing parties are ‘pure’ economic investors and which are quasi shareholders, which means the intentions of the investing parties will not be known.

“At least at the outset, it is likely the information disclosed on holdings will be confusing and duplicative, as there is likely to be more than one disclosure in respect of the same major shareholding - one in respect of the share itself and at least one other in respect of a synthetic long position on that share. There could even be disclosure of CFD positions in aggregate in excess of 100% of the shares, since a CFD writer is not compelled to acquire the shares as a hedge.

“However, there is no doubt the rules provide more clarity at a time when the market is in most need of it. Other countries have yet to be as decisive on transparency and disclosure. Given the global nature of the capital and derivatives markets, a uniform approach to disclosure of these instruments is highly desirable. Time will tell if the SEC and other European authorities follow the FSA’s lead.”

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