The UK Financial Services Authority (“FSA”) has published a Policy Statement (PS09/3), including Final Rules, in relation to the disclosure of Contracts for Difference (“CfDs”) and similar financial instruments.
The new rules, which will become effective 1 June 2009 (and not 1 September 2009, as originally indicated), are designed to prevent CfDs and other similar financial instruments being used to build positions of influence in a company on an undisclosed basis. Although the existing Disclosure and Transparency Rules require the disclosure of major holdings of qualifying financial instruments (ie, shares and financial instruments, such as options, giving the right to acquire shares), they do not currently require disclosure of cash-settled derivatives, such as CfDs.
Under the new rules, disclosure is required of financial instruments which are themselves qualifying financial instruments (as above) and instruments that have similar economic effects but which are not themselves qualifying financial instruments. The disclosure thresholds (3% and each 1% thereafter) remain unchanged and the new rules only apply where the relevant company is a UK-incorporated issuer that is traded on a regulated or a prescribed market.
The FSA provides guidance on what is meant by a “similar economic effect” but does not set out a definitive list of instruments which would be covered. CfDs and similar financial instruments will now generally be disclosable. A similar economic effect to a qualifying financial instrument exists where the instrument in question is referenced in whole or in part to an issuer’s shares and the holder of the instrument has in effect a long position on the economic performance of the shares. The lack of a definitive list of instruments reflects the FSA’s principles-based approach which is aimed at reducing the scope for avoidance as well as covering new market developments.
Derivatives which are referenced to a basket or index of securities will not be disclosable unless, at the time of dealing, the relevant securities in the basket or index represent more than 1% of the class in issue and more than 20% of the value of the securities in the basket or index, and the use of the derivative is connected to the avoidance of notification.
For financial instruments having similar economic effects to (but which are not) qualifying financial instruments, the disclosure will need to be made on a delta-adjusted basis (ie, in relation to the underlying shares referenced by the instrument) so as to be a more accurate reflection of the actual exposure. However, in certain instances, it will be possible to make a disclosure on a nominal basis during the period 1 June 2009 to 31 December 2009, provided that additional information is made available which would allow the delta-adjusted position to be calculated.
Disclosure must be made to the FSA and to the issuer within two business days of acquiring a position that exceeds the 3% threshold. On receipt of the notice, the issuer must notify the market by means of a Regulatory Information Service (“RIS”) by no later than the end of the trading day following receipt. Beyond the 3% threshold, a holder will need to report all changes in their position of 1% or greater. Disclosures through an RIS are publicly available.
There are various exemptions available, although these will not generally apply to funds/investment managers.
The Policy Statement, including the Final Rules, is available at http://www.fsa.gov.uk/pubs/policy/ps09_03.pdf.