UK: CFDs come in for closer scrutiny

November 20, 2007Andy No Comments »

Shares Magazine

New rules may soon force holders of contracts for difference (CFDs) to reveal their hand. In proposals unveiled on Monday (12 September) the Financial Services Authority (FSA) says it may force disclosure of positions greater than 3%.

Private investors are often faced with inexplicable share price movements. These have been blamed on unofficial leaks of hidden CFD positions. Stockbrokers have called for a mirror of the rules for disclosing share positions so everyone is on a level playing field.

The FSA had initially said it would not introduce a disclosure regime for CFD positions. However, the watchdog later changed its position saying it would reexamine the case and this week’s consultation paper is a result of that investigation. Holders of CFDs can use the instruments to acquire shares by stealth. A bidder, for instance, can effectively build up a position undetected by having an agreement with the
CFD broker to purchase shares they own in relation to a contract.

When an investor takes out a CFD the broker may buy a corresponding amount of shares in the market as a hedge. Once the contract expires the broker may give the investor the option to acquire these hedge shares.

Alternatively, there may be an agreement between the investor and broker as to how to exercise the voting rights of the hedging shares. The FSA proposes holders of more than 3% would only have to disclose if they have such control over the underlying shares.

There is a second proposal to ensure disclosure of all CFD positions above 5%. This would be similar to the current major shareholder regime for shares, although the FSA says it will be a lot more expensive to implement.

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