FSA Update on Disclosure for Contracts for Difference (CfDs)

As advised previously in July the FSA has decided to implement a general disclosure regime for long CfD positions as the most effective way of addressing concerns in relation to voting rights and corporate influence. Investors whose aggregate stake in a company exceeds 3% need to disclose their holding, whether the stake is held via shares or CfDs, in line with existing disclosure rules.

The Feedback Statement contains draft rules to implement the position.  Although the position has now been finalised, the FSA will accept technical comments on the rules to ensure the new rules are workable. The deadline for such comments will be 23 January 2009 with the aim of issuing the final rules in February 2009.

Firms will then have up to a further six months to implement the necessary process and systems changes, with the new rules still coming into force on 1 September 2009.

The FSA originally proposed that there should be no aggregation of CfD holdings with shareholdings, with CfD holdings becoming disclosable at a threshold of 5%. This was on the basis that the risks of non-disclosure were not the same for CfDs as for shares, and therefore there was a less strong argument for super-equivalence to the Transparency Directive. There was significant support from respondents for aggregation, principally because otherwise it would allow a potential interest of nearly 8% to be built up without disclosure (i.e. up to 3% in shares and 5% in CfDs). There were also concerns that a lack of aggregation could also lead to a parallel disclosure regime, which some respondents thought would be more costly.

The FSA is proposing an exemption which will have similar effect to the Takeover Panel Recognised Intermediary (RI) exemption because the rules, as drafted, would require disclosures where CfD writers were effectively simply acting as intermediaries and providing liquidity, which would not provide useful information to the market about corporate control (e.g. where a CfD writer writes a short CfD for a client, it effectively takes a long CfD position itself.)

The rule follows the FSA’s decision to maintain its ban on increasing net short positions, as the FSA increases its power to force disclosure of positions.

If you would like to discuss further how we can assist please contact Scott Wilson, Stephen Burke, Chris Rexworthy, Peter Moore or your usual IMS Consultant.

24 October 2008

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