J Hughes, Financial Times,
UK – The City watchdog has brought forward plans to make investors disclose positions based on derivatives in a bid to prevent the instruments being used to silently build holdings in a company.
The Financial Services Authority said on Tuesday that from June 1, investors will have to disclose their holdings of contracts for difference when they reach 3 per cent of a company’s outstanding stock.
The new rules are the same as the requirements for anyone holding plain stock and represent a push for greater market transparency.
CFDs allow the holder to gain exposure to the stock for a fraction of the full price. Although they do not involve the holder gaining the voting rights of the underlying shares, CFD holders can usually switch the contracts into the stock itself, allowing the holder to appear without warning on a company’s share register.
‘This can only be good for investors,’ said Daniel Godfrey, director-general of the Association of Investment Companies, which praised the expedited introduction of the new rules.
The FSA’s new scheme was scheduled to begin in September, but the regulator said on Tuesday it had decided to bring the new rules forward because of the ongoing market turmoil.
‘This is a very significant step in improving market transparency and we have brought the implementation date forward to reflect that,’ said Alexander Justham, director of markets at the FSA.
The new rules are the result of a long process and the FSA had initially proposed a scheme involving complex opt-outs for CFD holders in certain situations. However, the regulator surprised the markets last summer when it instead plumped for the simpler system it is now introducing. The new rules are broadly in line with those of the Takeover Panel, which demands disclosure of positions equivalent to more than 1 per cent of the outstanding stock.
Secret stakebuilding has come under fire from regulators and many investors following high-profile examples, the most spectacular of which was Porsche’s revelation in October that it held the equivalent of 31.5 per cent of Volkswagen stock in cash-settled options. The news triggered a massive short squeeze.