The Financial Services Authority has unveiled plans for a crackdown on the contracts for difference (CfD) industry, outlining proposals which could see CfD investors forced to declare their exposure to a stock, in the same way as direct investors.
Launching a new consultation paper into the sector yesterday, the regulator proposed two different ways of increasing disclosure, claiming a change to the rules was needed to ensure "market confidence and efficiency" were maintained.
CfDs are financial instruments which in effect allow investors to borrow stock from other institutions for a short period of time. The CfD holder is then paid the difference if the stock rises in value during the time of the contract – or pays the owner the difference if the stock falls. They have become increasingly popular with investors over the past few years, particularly hedge funds, as they provide a way of getting full exposure to stock price movements, but for a fraction of the cost of owning it outright.
Under the current rules, owners of CfDs are only obliged to declare their holdings if they own equivalent to more than 1 per cent of a company during a period where it is under offer.
The FSA's first proposal is to force all CfD investors to disclose their holdings once they own more than 3 per cent of a company, but only if they also have control of the shares' voting rights. Furthermore, companies would be able to demand disclosure if a CfD holder held more than 5 per cent of the value of a business. The second proposal is that all holdings of more than 5 per cent are disclosed.
The regulator tried to play down the significance of its proposals. "This is not a clampdown on CfDs but a means, following extensive research, of addressing the concerns about their use on an undisclosed basis," said Sally Dewar, the FSA director of markets. "While the behaviour that concerns us is not widespread, it is important enough to require a tightening of the existing regime to ensure fair and orderly markets. Our goal is to provide an effective and proportionate disclosure regime that works for all involved, and sustains market confidence and efficiency."
Investment groups broadly welcomed the proposals. Guy Rainbird, the public affairs director of the Association of Investment Companies, said: "We have been concerned about the level of CfD disclosure and urged the FSA to look carefully at this area. Without transparency through appropriate market disclosure there is a risk that some investors could be in the dark about the true demand for the shares. This could weaken the market's ability to accurately price the stock and compromise investors' ability to make fully informed investment decisions."Reuse content