The FSA is to demand greater disclosure of significant economic interests in a company’s shares held through derivatives such as Contracts for Difference.
In a consultation paper published today, the FSA argues potential market failures could occur from using CfDs on an undisclosed basis to influence corporate governance and build up stakes in companies.
The paper says although these failures are not widespread they need to be addressed to ensure market confidence and efficiency are maintained.
It proposes two alternative approaches. The first would require a disclosure of any CfDs written in reference to 3 per cent or more of total voting rights attached to a company’s share unless it was clear the CfD holder could not exercise or seek to exercise voting rights and had made a clear statement to that effect, or there were no arrangements or understandings in relation to the potential sale of the underlying shares by the CfD holder.
The alternative approach is a general disclosure regime which would achieve the same objectives by requiring CfD holders to reveal all economic interests of stakes of 5 per cent or more in a company’s shares.
FSA director of markets Sally Dewar says: “This is not a clampdown on CfDs but a means, following extensive research, of addressing the concerns about their use on an undisclosed basis. While the behaviour that concerns us is not widespread, it is important enough to require a tightening of the existing regime to ensure fair and orderly markets.
“Our goal is to provide an effective and proportionate disclosure regime that works for all involved, and sustains market confidence and efficiency.”
Association of Investment Companies public affairs director Guy Rainbird says: “These proposals are extremely welcome, representing a significant step forward and the AIC is looking forward to working with the FSA on their thoughtful and timely intervention into this debate.
“We have been concerned for some years about the level of CFD disclosure and urged the FSA to look carefully at this area. The options set out today are a confirmation that there is scope to enhance the quality of information made available to shareholders.
“Without transparency through appropriate market disclosure there is a risk that some investors could be in the dark about the true demand for the shares. This could weaken the market’s ability to accurately price the stock and compromise investors’ ability to make fully-informed investment decisions.”