Global Securities Markets: Navigating the World's Exchanges and OTC Markets

LEGAL AND REGULATORY FRAMEWORK OF CFDS

In the United Kingdom, CFDs have until recently remained outside the regulatory framework governing stock holdings disclosure requirements under the Financial Services Authority's (FSA) Disclosure and Transparency Rules (DTR). As in the case of single-stock futures, long CFD holders could, if the contract allows, convert their CFD holdings into physical ownership of the underlying stock on closing of the contract. As a result of this happenstance, the FSA identified three issues that might arise from nondisclosure by investors of CFDs that they hold. These are the occurrence of:

• Inefficient price formation
• A distorted market for takeovers
• Diminished market confidence

To this end, the FSA has been eager to ensure that holders of long CFD positions, especially by institutional investors, abide by measures that will, among other things, bring transparency and enhance investor protection in the capital markets.

Following back-and-forth consultations by the FSA with the wider financial services industry, amid concerns on the part of the FSA that CFD holders could potentially stealthily build up equity stakes in a company without the company in question knowing, the FSA has promulgated new rules which would require disclosure of long CFD positions, which aggregate a total holding of 3 percent or more of the issuer company's total shareholding. This new disclosure regime for long-held CFDs amends the DTR and is enshrined in the Disclosure and Transparency ...