Bloomberg News

FSA Rules on Derivative Disclosure Will Begin in June

March 03, 2009

New rules from Britain’s financial regulator covering derivatives will come into effect in June, three months earlier than planned.

The Financial Services Authority said today that its disclosure rules for so-called contracts for difference, which can be used to build large and covert stakes in companies, would be introduced early to “help improve transparency in current market conditions.”

The rules, which require long positions that use CFDs to be made public when holdings reach 3 percent, are part of a package of measures by the FSA designed to improve market transparency in the wake of the financial crisis. The regulator is currently considering whether short-selling of any U.K. stock should carry a reporting requirement.

“This is a very significant step in improving market transparency and we have brought the implementation date forward to reflect that,” said Alexander Justham, the FSA’s director of markets, in a statement. “The new rules will resolve some of the concerns raised about the risks of market players devising ways to avoid disclosure or over-disclosing.”

A CFD is a financial instrument that enables investors to bet on share-price performance, without owning the shares. CFDs account for about 40 percent of equity trading volume in the U.K., according to Sanford C. Bernstein & Co. The securities are traded over the counter and investors use the underlying stock to hedge their position.

‘Un-coordinated Boom’

“The current un-coordinated boom in both long and short market disclosure requirements around the world is eating up a lot of legal and compliance resource” at hedge-fund managers, said Andrew Shrimpton, a former FSA official who oversaw hedge funds and now advises them on regulatory matters at Kinetic Partners LLP in London.

The new disclosure requirements bring investors who use CFDs in line with rules for normal shareholders, who must reveal their shares if they hold more than 3 percent of a publicly traded company’s total stock.

The FSA said the disclosure rules won’t apply to CFD writers, as planned. The regulator first started consulting on the new rules in November 2007. France’s markets regulator also proposed similar rules last year.

Without Delay

The Association of Investment Companies, which represents closed-ended investment companies traded on the London Stock Exchange, said that the FSA was to be congratulated on its decision to implement changes without delay.

“There is one wrinkle as the rules on CFD disclosure will only apply to interests in U.K. companies,” the AIC said in a statement. “Investors in overseas companies listed in London will remain exposed to the market failures identified by the FSA.” It said it would discuss this with the FSA.

The new rules include convertibles, instruments that give a right to buy shares that have not yet been issued.

“I’m not sure that that was clear from previous consultations,” said Sarah Bowles, a London-based lawyer who advises hedge funds at Simmons & Simmons. “And bringing the timing forward to June clearly gives firms less time to set up systems.”

Short-selling is when hedge funds and other investors borrow shares then sell them in the hope that their price will fall. If it does, they buy back the shares at the cheaper price, return them to their owners, and pocket the difference. Taking a long position means buying a security in the expectation that its price will rise.

To contact the reporters on this story: Caroline Binham in London at

To contact the editor responsible for this story: Anthony Aarons at

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