FSA says derivatives transparency hard to enforce

July 24, 2007Andy No Comments »

LONDON (Reuters) – The Financial Services Authority faced fresh calls on Thursday to adjust rules on derivative positions used by investors to build stakes, but the watchdog said increased transparency could be hard to implement.

The admission came as the Association of British Insurers added its voice to the debate around contracts-for-difference (CFDs) on Thursday, saying it wanted greater disclosure.

Echoing other trade groups, the ABI said CFDs make ownership difficult to track, potentially harminging investors.

CFDs are special derivative instruments that allow a person or company to have exposure to a firm’s shares without physically owning them. The concern is that a hedge fund, for example, could build up a large stake in a company through CFDs without it immediately coming to light in the market.

The Financial Services Authority (FSA) is currently consulting on CFDs — after an initial analysis failed to yield a consensus — but Hector Sants, the incoming FSA head, said it could be difficult to shift from a regime of ownership disclosure based on voting rights to one based on economic interest.

“It is an easy statement to make, but very difficult to implement,” Sants told reporters after the FSA’s annual meeting, his last as head of the regulator’s wholesale and institutional markets unit before taking over as chief executive on Friday.

He said any change — unlikely now before 2008 — would have to pass a cost-benefit analysis and be practicable.

The Takeover Panel already requires CFDs to be disclosed during offer periods.

“It is not immediately obvious to us that this is scaleable,” Sants said.

Nedbank rattles CFD cages

07 February, 2007,

Johannesburg – The booming (and profitable) market for contracts for difference (CFD) will experience some competition with Nedbank Capital’s entry. Over the past few years CFDs have become very popular among South Africans because of the gearing and cost advantages they offer over conventional share trading. They are also deemed to be much easier to understand than other derivatives such as single-stock futures or warrants.

Currently, smaller companies such as Global Trader, Dealstream, Ideal CFDs and PSG dominate the CFD market. Nedbank’s entrance is bound to shake up the market, to the benefit of the consumer.

The bank’s name is bound to be its major selling point. CFDs are an unregulated industry and many punters are unwilling to hand their money over to a company they are unfamiliar with.

Nedbank’s pricing seems to confirm this, being roughly similar to its competitors. Brokerage is a maximum of 0,4% a trade (Global Trader is 0,5% and Dealstream is 0,3%).

Like other CFD brokers, Nedbank finances trades at an attractive interest rate. Here, it is priced the same as Global Trader, which lends money at the South African Futures Exchange Yield (Safey) plus 2%. Safey is currently 9,3%.

CFDs offer speculators exposure to most liquid JSE-listed shares. It allows them to bet on both upward and downward movements in share prices.

Like single-stock futures, CFDs offer traders strong gearing because a deposit of about 10% is required to enter a trade. Thus a 1% movement in the underlying share price translates to 10% on your capital outlay.

Nedbank’s trading platform is called NedTrade. It is a free system that can be downloaded once the trader has successfully completed an application and the bank has accepted the investor’s application.

Nedbank derivatives head Arthur Buchner says CFDs will appeal to savvy, risk-aware investors who are experienced in equity derivatives and are trading either directly online or via their stockbrokers.

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