Robert Orr and Neil Hume – FT
The City regulator has been urged to crack down on investors who use derivative positions to secretly build company stakes.
The Association of Investment Trust Companies (AITC), the industry trade body, wants investors who use contracts-for-difference (CFD) positions as a way of amassing large stakes in companies to be charged with market abuse. It has written to the Financial Services Authority urging it to amend its rules.
The call comes amid growing concern about CFDs and worries that their lack of transparency leaves them open to misuse.
The Association of British Insurers is also believed to be in favour of making CFDs subject to the same disclosure rules as ordinary shares. CFDs are derivative instruments that give an exposure to a company’s share price without requiring the holder to buy the stock.
It is estimated that 40 per cent of the equities traded in London are hedges for CFD positions.
They have gained popularity because they avoid stamp duty. They also provide anonymity because the position is registered under the CFD counterparty, usually a financial institution.
The AITC has expressed concerns about the ease with which investors can convert CFDs into underlying shares courtesy of the counterparty, which holds the stock to hedge its exposure.
In this way, investors can build a significant stake in a company in secret and at a lower cost than if their intentions were known to the market.
These concerns were behind the Takeover Panel’s decision to bring in new requirements to force CFD holders to disclose their identity during an offer period if they have a holding of more than 1 per cent.
Ordinarily there is no such requirement.
The FSA was sufficiently concerned to launch a three-month consultation exercise this year, and it will report its findings next month. Daniel Godfrey, director-general of the AITC, said CFDs could be used to build a stake in a company away from the glare of the public eye. “Out of the blue, you could suddenly find you have a shareholder who has a 15 per cent stake.”
Mr Godfrey said that only shareholders who intended to purchase the underlying shares at a later date should have to notify their interest.
If they failed to do so, he said that they should be charged with market abuse.
Investors who bought a CFD as a short-term bet would not be required to reveal their identity.
The FSA’s role in policing disclosure will be bolstered in January when it takes on new powers under the Transparency Directive, designed to create harmonised disclosure requirements across the EU.
The FSA will take on some of the powers currently exercised by the Department of Trade and Industry, including the requirement for investors to disclose holdings of 3 per cent or more.
