Financial Services Authority unveils new disclosure rules for contracts for difference

The FSA says that after receiving extensive feedback from a broad spectrum of interested parties on its November 2007 CfDs Consultation Paper, it has decided that a general disclosure regime for long CfD positions is the most effective way of addressing the problem of investors who hold substantial positions in companies through CfDs but until now have not been subject to disclosure requirements in the same way as ordinary shareholdings.

The regulator says that existing share and CfD holdings in the same company should be aggregated for disclosure purposes. The disclosure threshold will be at 3 per cent, in line with the existing disclosure rules. The FSA will draw up an exemption for CfD writers, who act as intermediaries, similar to the Takeover Panel’s Recognised Intermediary exemption to reduce unnecessary disclosures.

The FSA says it will publish a policy statement in September with a feedback statement on the consultation responses, along with draft rules to implement the new rules. Although its position has now been finalised, the regulator will accept technical comments on the new rules to ensure they are workable. The final rules will be issued in February 2009.

‘Our goal is to provide an effective and proportionate disclosure regime that works for all involved, and sustains market confidence and efficiency,’ says FSA director of markets Alexander Justham.

‘We have received extensive feedback on this issue and we recognise that views differ widely across the market. Taking this into account we have devised a solution that meets the concerns and issues raised.’

The FSA’s announcement has prompted criticism from the asset management sector. Andrew Shrimpton, a member at Kinetic Partners, which provides compliance services to hedge funds, says: ‘This is another burdensome disclosure regulation that will disproportionately affect hedge funds, and comes hard on the heels of the recent requirement to disclose large short positions. Together, these interventions will make the UK a less attractive place to do business and raise capital.’

However, the UK’s Association of Investment Companies has expressed full support for the FSA’s decision. ‘We are delighted that the FSA has opted for broad disclosure of CfDs,’ says director general Daniel Godfrey. ‘Holders of CfDs have been able to secure stakes and voting powers in companies at arm’s length without the knowledge of other shareholders and the management of those companies.

‘These undisclosed interests are contrary to good governance, where managers are fully accountable to their shareholders and investors are able to see who else may have an influence over the company which they own. CfD disclosure will support investor confidence in the quality of UK markets and governance standards.’

Godfrey says the AIC has been waging a lonely battle on this issue for more than two years. ‘When we first raised this issue, we faced an uphill struggle as there was little appetite for change,’ he says. ‘However, the FSA has been rigorous in gathering evidence and consulting with interested parties to get to the right result.

‘The care it has shown is particularly apparent in the adjustments it has made to the original proposals. Contrary to its original suggestion, CfD disclosure will now be required alongside existing obligations to disclose shares and options. Disclosure will therefore be made at a more appropriate level, at 3 per cent of the value of the company’s share capital, regardless of how the interest in the stock is held.

‘Aggregation will also mean that only one administrative system will be required to deliver required disclosures. These are all sensible and welcome adjustments that the AIC had proposed.  We share the FSA’s desire to try and introduce the disclosure regime before September next year if possible, and will provide all the support we can to achieve this outcome.’