Holders of 'contract for difference' packages should be required to disclose when they are selling their contracts in favour of buying the actual shares, the AITC is arguing.
CFDs allow the holder to effectively gamble against the price of a share going up (going short) or down (going long) – although they tend mainly to be used as a vehicle for hedging against share values falling – but the contract means only a fraction of the shares are actually held, in the region of 10-25% of a share.
The AITC acknowledges in its response to an FSA consultation paper – asking about the use of CFDs – the contracts can often be held for short periods simply as a hedge against the prospect of falling shares and should not be affected by fresh regulation in those situations.
But its particular request concerns situations where the investor actually has an intention to buy the shares at a later date and is using CFDs to build a stake in the company without needing to disclose it.
The AITC argues they should therefore disclose an interest, as CFDs can have such a negative impact on equity prices, to the advantage of the buyer.
CFDs are similar to spreadbets as they are contracts gambling on whether a price will go up or down. However, the key difference is CFDs can be sold at any time, unlike spreadbets which expire at a given date, and because of a difference in disclosure rules to normal share trading, the interest in a part stock is not transparent to the wider shareholders or investors.
The AITC is suggesting regulatory reforms may be needed to the market abuse regime, as it believes the impact of sold CFDs can led other shareholders to think the full shares – not CFDs – are being sold and may, in some cases, be forced to sell their own holdings more cheaply than is perhaps necessary, in order to protect their position.
The AITC says its concern is a prospective “stakebuilder” can buy a CFD and subsequently purchase a substantial holding of related shares in large blocks from a contract counterparty or another market participant, without needing to declare it under normal shareholder disclosure limits – which kick into play when they hold at least 3% of a company’s share capital but selling the CFD can force a share price down and give the buyer a cheaper deal as a result.
It’s a practice which the AITC wants the Financial Services Authority to investigate, to ascertain whether the use of CFDs does distort or create “a false market” in the equity sector, and act on if it finds the use of CFDs could contribute to a major sell-off in the recent bear markets.
Daniel Godfrey, director general of the AITC – soon to rebrand as the Association of Investment Companies - believes market abuse rules should be amended.
“We have been following the use of CFDs and believe the situation merits further attention by the FSA. 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.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Julie Henderson on 020 7968 4571 or email [email protected].IFAonline
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