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Takeover Panel pushes for transparency in use of CFDs

Under proposed new rules hedge funds and investment banks in the UK will have to disclose their dealings in derivatives such as CFDs during takeovers.

The UK's Takeover Panel is concerned that CFDs often give the holder virtual voting rights because the investment banks that provide them hedge their exposure by buying the shares to which CFDs are linked. They are often prepared to vote these shares in line with the wishes of hedge funds that buy the CFDs.

The Takeover Panel believes that the code (on takeovers and mergers) needs to be amended to take into account that in recent years the amount of trading in derivatives and options has increased both by the parties to an offer and the other market participants.

It has put out a consultation document on the subject (see full document at

Currently, any institution or individual with more than a 1pc stake in a company's shares has to declare its dealings when it is subject to a takeover.

Under the panel's proposals, any party holding derivatives which would provide them with an equivalent to a 1pc stake will have to declare all dealings.

The UK's Takeover Panel is proposing to introduce the new rules in late summer amid mounting controversy over the use of such derivatives in recent takeover battles.

The panel said in a consultation document that it was concerned that derivatives such as CFDs often gave the holder voting rights.

The panel highlighted the case of UK retailer Marks & Spencer when retail entrepreneur Philip Green launched a virtual bid last summer.

A number of hedge funds sought to pressure the retailer's board to give Green access its books through voting rights attached to CFDs. Green, who eventually walked away from the deal, said he would not table a formal offer unless he was allowed to do due diligence on M&S.

The panel said: "In recent years, there has been a significant increase in the volume of trading in derivatives and options both by parties to an offer (and persons acting in concert with them) and by other market participants. The code committee believes the code (on takeovers and mergers) needs to be amended to take account of this development."

The use of derivatives has mushroomed partly because they do not carry disclosure requirements but also because they give investors exposure to a share without having to pay Britain's 0.5pc stamp duty on share trading.

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