The FSA’s call for the disclosure of secret stakes in companies built up through derivatives is not before time.
Contracts for Difference, the most popular form of such derivatives, account for a third of equity trading in the UK, presenting significant opportunities for activist investors and hedge funds to build hidden stakes in companies without detection.
The FSA is calling for stakes in London-listed companies, amounting to more than 3 per cent of a company’s shares, which have been built up through derivatives to be disclosed.
The previous situation, whereby investors could establish covert stakes in companies through CFDs without having to disclose them, allowed activist hedge funds and companies planning to launch bids on rivals, to do so by stealth. To add insult to injury, CFD investors in the UK don’t have to pay stamp duty.
The FSA was right to have backed away from its previous proposals requiring only minimal disclosure of CFDs, after it became clear that they would be insufficient to clamp down on abusive practices.
The new rules are also in line with international moves for the disclosure of derivatives, demands for more transparency in hedge funds and increased pressure on short sellers.
Surprisingly, even some hedge fund are in favour of the new rules. Colin Kingsnorth, head of Laxey Partners, the £1bn London-based activist hedge fund, said he was “absolutely in favour of more disclosure,” even though his fund is well known for its attempt to break up British Land in 2003 through a near 9 per cent stake in the company, built up largely through CFDs.
Others were less enthusiastic. Andrew Shrimpton of hedge fund consultancy, Kinetic Partners, said the new disclosure regime had been prompted by current market turmoil, rather than evidence of market abuse.
Northern Electric, Moss Bros and Marks & Spencer have all been the target of takeover bids from investors who employed CFDs to establish hidden stakes in these companies.
But the CFD disclosure rules are likely to be better received than the FSA’s recent clamp down on short selling during rights issues.
CFD disclosure has been mulled for two years and the rules will not take effective until late 2009, although the FSA has indicated that it would like to introduce them earlier.
Rules introduced last month requiring the disclosure of the shorting of stocks amounting to 0.25 per cent of a company’s shares during a rights issue, were introduced without consultation and at a week’s notice, prompting uproar among hedge funds.
Posted by Pamela Atherton
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