With effect from 1 June 2009, contracts for difference (CFDs) and other synthetic holdings in listed companies will be subject to the same disclosure and notification requirements as apply to direct holdings of shares. The changes are included in amendments to the Disclosure and Transparency Rules (DTRs) and bring forward the implementation of the changes from 1 September 2009 to 1 June 2009.

SCOPE OF THE CHANGES

The changes will apply to companies with their shares listed on a regulated market (such as the London Stock Exchange's main market) which have the UK as their home member state as well as to UK companies listed on a prescribed market (such as AIM).

DTR 5 has been amended so that the disclosure requirements in the DTRs now include CFDs and similar instruments. This means that all economic interests in 3% or more of the total voting rights held (directly or indirectly) through CFDs, aggregated with holdings of other shares and qualifying financial instruments, must be disclosed. This brings the rules for CFDs and other synthetic holdings into line with the existing disclosure requirements under DTR 5 for shares and other qualifying financial instruments.

The required notifications must be made to the company concerned no later than two trading days for UK issuers and four trading days for non-UK issuers after the date on which the holder's interest reaches or falls below 3% for holdings in UK incorporated companies and 5% for non-UK incorporated companies. Further sales or purchases in relation to UK issuers which result in the percentage of voting rights held moving through a whole percentage integer (i.e. at 4%, 5%, 6%, etc.) will give rise to a notification obligation in the same manner as set out above. For non-UK issuers, further notifications must be made when the holdings exceed or fall below 10%, 15%, 20%, 25%, 30%, 50% and 75% of the total voting rights in the company.

The FSA has stated that its objective is to prevent the use of CFDs and other synthetic holdings to build stakes and/or seek to influence corporate governance in companies, without such a position having to be disclosed. Gross long CFD positions cannot be "netted" off against short positions.

WHAT INSTRUMENTS WILL NOW BE CAUGHT?

The new rules extend the existing disclosure provisions to financial instruments "having a similar economic effect" to shares or other qualifying financial instruments. The FSA has stated that it regards a financial instrument as having a similar economic effect to a qualifying financial instrument if its terms are referenced, in whole or in part, to an issuer's shares and, generally the holder of the financial instrument has, in effect, a long position on the economic performance of the shares, whether the instrument is settled physically in shares or in cash. The FSA has deliberately chosen a wide definition in order to reduce the scope for avoidance.

A financial instrument which is referenced to a basket or index of shares will only fall under the new regime if (i) the shares in the basket represent both 1% or more of the class in issue and 20% or more of the value of the securities in the basket or index; and (ii) use of the financial instrument is connected to avoiding the notification obligations.

The FSA specifically considered the impact on cash-settled options which do not have a linear pay-off structure in line with the relevant underlying share. To avoid disclosure of the full nominal amount, which may be misleading to the market, the new rules require disclosure on a delta-adjusted basis.

TRANSITIONAL PROVISIONS

In recognition of the practical issues of reporting on a delta-adjusted basis, from 1 June 2009 until 31 December 2009, disclosure can be made either on a delta-adjusted or nominal basis. Investors choosing to report on a nominal basis will however have to include details of the strike or exercise price of each financial instrument and the total number of voting rights relating to shares referenced by each financial instrument in their notifications.

ARE THERE ANY EXEMPTIONS?

There is an exemption for financial instruments held by a "client serving intermediary" which includes an institution authorised by its home state under the Markets in Financial Instruments Directive (MiFID) or the Banking Co-ordination Directive (BCD) to deal as a principal. Non-EEA institutions may also qualify for the exemption as long as they have equivalent authorisation from their national regulator and fall into the same group as those authorised under MiFID or the BCD.

A client serving intermediary satisfying the above conditions must also (i) have in place appropriate systems and controls in order to identify, distinguish between and monitor its client serving-deals and interests and its proprietary trading dealing and interests; (ii) when acting in a client-serving capacity, not intervene in or exert influence on the management of the issuer concerned; and (iii) certify in writing to the FSA that it qualifies for client serving intermediary status and satisfies the conditions contained in the exemption. Proprietary trading will not be exempt, even if such trading is with a view to potential future client assistance.

The existing exemption for shares and other qualifying financial instruments held within the trading book of a credit institution or investment firm continues to apply provided the voting rights do not exceed 5%.

PRACTICAL STEPS

If you invest in CFDs or other synthetic holdings, from 1 June 2009 you must ensure that your compliance systems are updated to enable disclosure of CFDs and other synthetic positions not previously caught by the DTR requirements. The FSA has issued a revised TR-1 Form which is available on its website and should be used after that time. The use of the TR-1 Form in respect of companies traded on a prescribed market (such as AIM) remains optional though many investors find it easier to use the TR-1 Form in any event.

If you carry out proprietary as well as client serving trading in CFDs and other synthetic holdings, then you must have sufficient systems in place to distinguish between such proprietary activity and client serving deals. Failure to do so will mean you will not be able to take advantage of the client serving intermediary exemption referred to above.

Notifications of interests in companies listed on regulated markets (such as the London Stock Exchange's main market for listed securities) should be sent to the issuer and the FSA using the TR-1 Form. Notifications in respect of companies on prescribed markets (such as AIM) should only be sent to the issuer.