The FSA has published its feedback and further consultation on disclosure of contracts for difference (CP 08/17). It is available on the FSA website at http://www.fsa.gov.uk/pubs/cp/cp08_17.pdf.
The consultation period ends on 23 January 2009. The FSA intends to finalise the rules with the aim of making them in February 2009, and for them to come into force on 1 September 2009.
The paper contains draft rules to implement the position announced in general terms in the FSA's policy update published in July 2008 which in summary is:
- a general disclosure regime for long CfD positions which will apply to CfDs referenced to shares of UK incorporated issuers currently covered by the DTR 5 regime;
- aggregation of all existing share and CfD holdings in the same company for DTR 5 disclosure purposes. In contrast, the separate CfD disclosure category originally contemplated under Option 3 set out in the November 2007 consultation paper would have allowed a holding of up to 3% in shares and up to 5% in CfDs (ie, a total holding of nearly 8%) to have been built up without disclosure;
- a single threshold for both shares and CfDs at the existing DTR initial threshold of 3% and then at every 1% thereafter, consistent with existing DTR 5; and
- the introduction of an additional exemption for CfD writers, similar in nature to the Takeover Panel's Recognised Intermediary exemption, where they are acting in a client-serving intermediary capacity, to reduce the amount of meaningless disclosures.
Although the consultation process has focussed on CfDs, the rules are intended to cover disclosure of other derivative positions having a similar economic effect to shares. In relation to cash settled derivatives, the FSA's proposal is that these instruments be disclosed on a delta-adjusted basis. In broad terms, the delta measure is representative of the number of shares the derivative writer would need to hold to hedge its exposure under the derivative. It is therefore representative of the "potential" shareholding the holder may be taken to have implied access to. Requiring disclosure on a delta-adjusted basis would mean that holders would need to monitor delta changes over time to establish whether they had a disclosure obligation. The FSA also makes proposals with respect to derivatives over or in baskets of shares and is seeking input on its proposed approach.
The FSA intends that only gross long CfD positions be brought within the scope of the new rules. This reflects the FSA's focus on voting rights and the potential for holders to acquire the underlying shares. The FSA considers that allowing disclosure on the basis of net positions would provide too great an opportunity to avoid disclosure, with investors having the possibility to offset long positions, which they are planning to convert into underlying shares, with short positions that they will settle in cash. The FSA has recognised that requiring disclosure on the basis of gross positions, rather than net positions, may be at the risk of overstatement of positions. It does not, however, expect internal "secondary transactions", where a firm moves a relevant position to another company in its group of companies, generally for book-keeping purposes (ie, accounting or tax), to be additionally disclosed.
The FSA's proposal concerning the application of the market maker exemption and the trading book exemption in the existing DTR 5 is that CfDs should be able to benefit from the trading book exemption, but not the market maker exemption.
As is the case with the current DTR 5 disclosure regime, the proposed new rules will run in parallel with the Takeover Code regime, meaning that during a Takeover Code offer period, disclosure of positions will need to be made under both DTR 5 and the Takeover Code.
The FSA has stated that it is not seeking any further policy comments on the rules, but will accept technical comments on the effectiveness of the rules in meeting the intended outcomes. However, in the paper the FSA has invited comments that are not strictly technical comments, including in relation to the proposal that disclosure of cash settled derivatives be on a delta-adjusted basis.
The market abuse rules and FSA guidance on insider dealing currently treat CfDs differently to shares, allowing certain dealings in shares to benefit from exemptions from certain offences. Once the disclosure of CfDs is required, it will be interesting to see if the FSA will revisit these rules and its guidance.