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Hedgeweek Comment: Too much regulation can spoil the broth

Yesterday saw another new rule announced by the Financial Services Authority but, in contrast to its earlier clampdown on short selling, this time the UK financial watchdog has done a full consultation. In its second new rule announced in a month, the FSA has said that long positions that use contracts for difference must be included and made public when aggregate holdings reach 3 per cent or more.

The regulator will produce a policy statement in September and draft rules to implement the new position. It will accept technical comments on the rules to ensure they are workable and the final rules will be issued in February next year.

Last month the FSA issued new rules under which, at barely a week's notice, hedge funds and other investors were required to reveal their positions when shorting the stock of companies that are in the process of raising capital through rights issues. The rule was imposed by the following accusations that speculative investors were responsible for the fall in share prices of several banks that had launched rights issues.

Now it's the turn of long positions. CfDs can at present be used to build stakes and voting rights at companies without the disclosure that is required for direct shareholdings, allowing investors to build large positions anonymously. These instruments account for about 30 per cent of electronic trading on the London Stock Exchange.

Andrew Baker, deputy chief executive of the Alternative Investment Management Association, believes lighter regulation of CfDs is warranted. He says: 'The FSA states that it found no compelling evidence of market failure in respect of inefficient price formation caused by a lack of transparency due to use of CFDs, and that excessive disclosure can cause market inefficiencies.'

One consultant says: '[The new rules] make London a less attractive financial market. It gives hedge funds another reason to move to Geneva.' Is this a case of unsystematically implementing regulatory measures when times are bad?

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