The Association of Investment Companies (AIC), the recently re-named Association of Investment Trust Companies (AITC), has called for improved disclosure of Contracts for Difference (CFDs) to “protect investors and maintain a fair and orderly market.”
The AIC argues that CFDs are used by market participants to build stakes in companies in a less transparent manner than if they had simply bought shares through the market. It argues that this means that sellers might be led to sell their shares more cheaply than if they knew that stake building was taking place. To prevent this, the AIC believes that CFDs should be disclosed when the buyer of the CFD may subsequently buy the actual shares.
The AITC’s concern arises where a prospective stake builder buys a CFD and then can subsequently purchase the related shares in large blocks from the contract counterparty or another market participant. This process can allow the stake builder to acquire very substantial amounts of shares without making a disclosure until they reach their target level, which may be well in excess of the normal disclosure limits of 3% of a company’s share capital, says AIC.
The AIC believes that the market abuse rules should be amended to address this practice, which has arisen because of a gap in disclosure which can allow a false market to be created. To take the debate forward, the AIC is proposing that the FSA conduct research into the extent of the problem and devise a proportionate regulatory response.
“We have been following the use of CFDs and believe the situation merits further attention by the FSA,” says Daniel Godfrey, Director General of the AITC. “The Takeover Panel already requires CFDs to be disclosed during offer periods so it is logical that their use in stake building ahead of a formal offer period, and which therefore falls outside the scope of the Panel’s rules, should also be addressed. Our aim on CFDs is to improve transparency through appropriate market disclosures so that investors are able to make fully-informed decisions. We believe the market abuse framework provides the best route to address this concern and we want to work with the FSA and other stakeholders on this issue in the best interests of all shareholders.”
The FSA invited views on CFDs in the Consultation Paper 06/4
Robert Talbut,Chief Investment Officer, RLAM, has rejected the AIC call. “We believe that simply focusing upon the market abuse legislation will only address part of the issue at best,” he says. “Defining which CFDs should be disclosed and which held secret will be open to debate and potentially ‘abuse’itself. I believe that we should instead be considering the wider issue of market transparency. Why should investors who don’t use CFDs have to disclose their positions when those that do can avoid the obligation? It should be an issue of concern if the only way in which some investors can make money is by not having their activity open to the same degree of transparency as other market participants.”