In March 2006, the FSA published Consultation Paper 06/4: Implementation of the Transparency Directive/Investment Entities Listing Review (CP06/4). In CP06/4 the FSA explained that responsibility for overseeing the major shareholders notification regime would pass from the (then) Department of Trade and Industry to the FSA. This would mean that the (then) Companies Bill would give the FSA powers to extend the regime beyond the disclosure of ownership of substantial equity positions to require the disclosure of substantial economic interests in shares held through derivatives such as contracts for difference (CfDs).
In Policy Statement 06/11:Implementation of the Transparency Directive - Feedback on CP06/4, the FSA stated that there was no consensus from respondents on the need for disclosure. Following this the FSA conducted further analysis to assess possible market failures arising from the current general position of non-disclosure.
The FSA has now published Consultation Paper 07/20: Disclosure of Contracts for Difference (CP07/20). In CP07/20 the FSA sets out the results of its analysis and its proposals for addressing the market failures that it has identified.
In CP07/20 the FSA states that its main focus is on CfDs although the measures proposed are framed in a way which covers other financial instruments that raise the same issues. However, CP07/20 does not cover issues relating to a person voting equities they have borrowed. According to the FSA such stock borrowing and lending issues are currently being considered by various bodies including the Takeover Panel and the European Commission.
Overall the FSA states that CfDs are not a substitute for the shares on a systematic basis. However, it does recognise that there are some instances of CfDs being used in ways that are not fully caught by the requirements of the Takeover Panel regime. The FSA also concludes that CfDs are sometimes being used, firstly, to seek to influence votes and other corporate governance matters on an undisclosed basis and, secondly, to build up stakes in companies, without disclosure. The FSA has therefore decided to address these failures through proposals to increase the disclosure requirements on CfDs either in specific circumstances or as a general requirement. In CP07/20 the FSA discusses the following policy options:
- Leave the current disclosure regime as it stands.
- Strengthen the current regime by requiring the disclosure of substantial economic interests unless the holder has taken specific steps to preclude themselves from exercising influence over the underlying shares.
- Introduce a comprehensive regime, similar to the major shareholder notification regime, which would require disclosure by all holders of substantial economic interests in shares.
The FSA also states that it has discussed how each option would interact with the rules of the Takeover Code during offer periods. The FSA believes that this could be dealt with in two ways. The FSA could state in its rules that the notification requirements do not apply if the transaction has already been disclosed pursuant to the Panel’s rules or the FSA could ‘turn off’ its rules when an offer period starts. The FSA’s preference is for the former and its proposals have been drafted on this basis. Comments on CP07/20 are invited by 12 February 2008.
View CP07/20: Disclosure of Contracts for Difference, 12 November 2007