The UK FSA's deadline for responses to its consultative paper on disclosure of contracts for difference is 12 December and hedge fund managers are among those urged to participate in responding.

On Tuesday 14 November the FSA published consultation paper CP07/20 'Disclosure of Contracts for Difference (CfD)' in response to its recent review of the CfD Market.

The FSA recognises that CfDs are the instrument most widely used for holding economic interest and in its consultation looks at those CfDs which are UK shares admitted to trading on regulated or prescribed markets, including shares admitted to UK Recognised Investment Exchanges and UK shares on the LSE's AIM market.

The FSA has seen significant growth in the CfD market in the last five years and estimates that 30% of equity trades are in some way driven by CfD transactions referenced to the underlying shares; however it also identifies that CfDs currently fall out of its regulatory frame work, which, they believe, can lead to the lack of transparency within the markets, particularly in respect to substantial economic interests. They consider that this can lead to the exerting of influence over and the gaining of control of the voting rights attached to the underlying shares.

Consequently issuers of shares may not know who has significant economic exposure to the shares, which has the potential to lead to abuse, misleading representation, access to voting rights and ultimately disadvantage to individuals investing in the markets. Following two of its statutory requirements - market confidence and consumer protection - the FSA has undertaken a review of the disclosure requirements for CfDs.

From its review of the markets the FSA has identified three potential market failures accountable to the non-disclosure of CfD significant economic ownership: 1. inefficient price information, 2. a distorted market for takeovers, and 3. diminished market confidence.

To analyse these market failures the FSA is undertaking analysis of Major Shareholding Notification disclosure, a survey of the practices of the most active CfD writing banks and market participants and a study on the patterns of CfD trades inside and outside of takeover periods for selected stocks, as well as its consultation paper CP07/20.

Closing date for responses is 12 February 2007. The FSA will collate the responses and publish a policy statement and feedback statement, together with draft handbook text (new Rules) later in 2008. It currently expects the finalised rules to come into effect from September 2008.


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