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Supporting change for CfD disclosure regime
The CFA UK’s Investment Professional Advocacy Committee (IPAC)
together with the CFA Institute Centre for Financial Market Integrity
has submitted a response to the FSA’s consultation paper on Disclosure
of contracts for difference (CfDs).
The paper put forward three options:
- No change to the current disclosure regime
- the disclosure of substantial economic interest unless the holder has taken specific steps to preclude themselves from exercising influence over the underlying shares.
- disclosure by all holders of substantial economic interests above a 5% threshold held through CfDs and other derivatives.
Before formulating its response, the society surveyed members on some of the issues raised. Over 300 individuals responded and the message received was clear – change was long overdue. 81% or respondents support change to the current disclosure and an overwhelming 87% believe that all economic interests held through CfDs and other derivatives above a 5% threshold should be disclosed.
The society, therefore, supports the FSA’s initiative and agreed with the issues raised but, with the benefit of members’ comments received in the survey, was able to draw the regulator’s attention to factors that they had not considered such as:
- the disproportionate power given to other large shareholders when, say, 20% of the equity is held through CfDs with a non voting agreement, and
- the potential inability of companies to discuss strategic options with large shareholders when they are unable to identify the ownership of claims of CfD holders.
Contrary to the FSA’s stated preference for option 2, the society supports option 3. Clearly, costs must not outweigh the benefits of regulatory change, but the committee was unconvinced that the cost of implementing option 3 would be significantly higher than for option 2. Furthermore, option 3 offers considerable additional benefits: it would be more legally watertight, more coherent and also consistent with the regulatory regime recently adopted by the Takeover Panel for options and futures. However, if option 2 were to be implemented, the society expressed the view that market-makers should be required to declare any part of their trading book holdings hedged to a CfD and which exceeds 3%.
The society also proposes that the FSA should require the disclosure of both long and short position separately, once a relevant threshold had been passed. This would then address the risk of market abuse arising from the ability of investors to hide the true nature of their interests by either simultaneously establishing long voting and short economic interests, or by their failure to disclose large short economic positions.
To see the society’s full response click here.