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fsa, contracts for differences, and transparency (empty voting) November 12, 2007

Posted by Bradley in : Uncategorized , trackback

Today the FSA published a long consultative document on the question whether to extend existing disclosure arrangements with respect to interests in shares to contracts which do not transfer voting rights. According to the press release, Sally Dewar of the FSA said:

This is not a clampdown on CfDs but a means, following extensive research, of addressing the concerns about their use on an undisclosed basis. 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.

I’m always a bit suspicious of this “fair and orderly” language in financial regulation.

This is an issue on which regulators around the world are focusing. ISDA recently wrote to IOSCO stating its opposition to such moves:

It is entirely appropriate that anyone who has entered into an agreement to acquire shares should disclose that fact to the market at the appropriate time. To treat cash-settled derivatives, however, as though they entail such an agreement is an unhelpful in two ways: it ‘second-guesses’ the contractual terms (which do not provide for delivery of shares or voting rights) and risks providing misleading information to the market as to the true state of affairs (since the possession of a cash-settled derivative cannot be said to be a shareholding). Furthermore, as a consequence of the economic purpose and nature of cash-settled derivatives being fundamentally different from that of equity, blunt requirements to disclose cash-settled derivative positions indiscriminately are fraught with technical difficulties. Ultimately, such measures have the potential to be damaging to the market in equity derivatives and consequently to firms wishing to manage risk efficiently.


1. lessne - November 13, 2007

I agree with the ISDA that derivative disclosure should follow these basic principles: 1) Disclosure should only be required where they affect the voting rights in publicly traded shares and 2) Disclosure should be based on end of day net positions. These rules ensure investor awareness of derivative impact on their stocks by monitoring when their voting rights are affected and when their stock is actually traded. Any additional disclosure that does not affect other shareholders seems excessive and immaterial.