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Capital Markets

Equity derivatives: London turns its attention to CFDs

FSA gets mixed response to proposals on disclosure while LSE plans to trade the instruments on its orderbook.

The UK Financial Services Authority’s proposals to increase disclosure of positions in contracts for difference has so far met with a mixed response.

On the back of concerns that some market players, namely hedge funds, are using CFDs to secretly build up substantial positions in companies, the regulator issued a consultation paper in November in which it proposed two possible frameworks for increasing CFD disclosure. CFDs are a type of equity derivative, which means they fall outside normal equity market disclosure rules. The FSA invited the industry to give feedback on its two proposals by February 12.

CFDs and financial betting account growth in Europe

Source: Celent

One option would involve the introduction of a general disclosure regime that would require CFD holders to reveal all economic interests of 5% or more in any company’s shares. The alternative proposal is more targeted; it would require disclosure of any CFDs written in reference to 3% or more of total voting rights attached to a company’s shares, unless it is clear that the CFD holder cannot exercise or seek to exercise voting rights, that this is made clear in a statement, and that there are no arrangements or understandings in relation to the potential sale of the underlying shares by the CFD holder.

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