On 3 March 2009, the Financial Services Authority (the FSA) published its feedback and policy statement, including the final rules (the Rules) on disclosure of cash-settled contracts for difference and other financial instruments having a “similar economic effect” (together, CFDs). The overall objective of this disclosure regime is to prevent the use of CFDs on an undisclosed basis to seek to influence corporate decision-making and/or build up stakes in companies.
These changes are relevant to UK companies with shares listed on a regulated market (such as the LSE’s Main Market) or a prescribed market (such as AIM). The changes do not apply to non-UK issuers.
The Rules will introduce a disclosure regime for CFDs on the following basis:
- subject to exemptions, long CFD positions (aggregated with other holdings of shares and qualifying financial instruments) will become disclosable under Chapter 5 of the Disclosure and Transparency Rules (DTRs) at an initial threshold, for UK issuers, of three per cent of total voting rights with further disclosures at increments of one per cent (in the same way as shares currently are);
- the FSA has clarified that instruments, such as convertibles, that give a legal right to acquire shares which have not yet been issued are, in their view, covered by the Rules and therefore are also disclosable;
- a new exemption for CFD transactions executed in a client-serving capacity will apply along with the existing market maker and trading book exemptions under the DTRs (as they currently do for shares);
- disclosures will be calculated on a delta-adjusted basis to give a more accurate reflection of the actual exposure;
- the FSA has decided not to introduce a similar regime to section 793 of the Companies Act 2006, which gives UK companies the power to require disclosure of interests in shares;
- the new requirement to disclose CFD positions will apply alongside the disclosure regime under the Takeover Code during an offer period, so separate notifications will be required.
Timing and next steps
The Rules will come into force on 1 June 2009 and any CFDs which are already held at or exceed the threshold need to be disclosed by the holder to a relevant issuer, and if CFDs relate to shares listed on a regulated market, a copy of the notification must also be filed by the holder with the FSA. Issuers should note their ongoing disclosure obligations under DTR 5.6. There is no transitional period for existing CFD positions.
There will, however, be transitional provisions in place with respect to the basis on which disclosures of cash-settled options should be calculated. The FSA has decided that disclosures of cash-settled options can be made on either a nominal or delta-adjusted basis for a transitional period of seven months from 1 June 2009 to 31 December 2009. However, where firms decide to report on a nominal basis during this period, the FSA will require the disclosure of the strike or exercise price of each financial instrument reported and the total number of voting rights relating to shares referenced by each financial instrument reported, in addition to disclosures made under the DTRs, to allow market participants the ability to calculate the underlying exposure more accurately. After 31 December 2009, disclosures should be made only on a delta-adjusted basis.
The FSA has confirmed that instruments giving a right to acquire unissued shares such as convertibles will be covered by the Rules. This is not consistent with the current DTR disclosure regime which does not require disclosure of convertibles in respect of unissued shares. The FSA noted that the test for disclosure, that is, whether a financial instrument referenced to certain shares has a “similar economic effect” to a financial instrument giving a legal right to acquire those shares, is a broad test that would capture instruments such as convertibles. The FSA’s rationale for this is twofold. First, in light of the implicit connection with and potential impact on, already issued shares, convertibles are effectively already referenced to issued shares. Secondly, a legal right to acquire unissued shares has a “similar economic effect” to having the right to acquire already issued shares. The FSA’s view is that in either case the effect is the same, as such an instrument could be used to build a stake in a company and as such should therefore be included in the scope.
The Rules significantly tighten the UK disclosure regime and make it more difficult for investors to build economic stakes in UK-listed companies using cashsettled derivatives without disclosure. The Rules also go beyond the current requirements of the DTRs.