The Association of Investment Companies (AIC) has urged the Financial Services Authority (FSA) to introduce a general disclosure regime for contracts for difference (CFDs).

This will tackle problems caused where CFDs are used to take an economic interest in a particular company share but where shareholders in that company are not made aware of the existence of those CFDs.

The FSA has recognised the need for disclosure and put some options forward. One is to require all CFD holdings over a certain threshold to be disclosed. The other creates a ‘safe harbour’ where disclosure will not be required if the CFD meets certain conditions – including an undertaking not to acquire the relevant shares from the CFD counterparty and an agreement not to try and influence any voting rights associated with the shares.

Daniel Godfrey, director general of the Association of Investment Companies, explains, ‘Investors are already required to tell the market when they own a significant amount of shares or have an option to buy them. This allows the market to understand the level of demand for that stock, gain a good understanding of how much the shares are worth and establish whether a third party is building a stake, perhaps as a prelude to a takeover.

‘At the moment, investors in CFDs do not have to tell the market of their interest. However, as the market for CFDs has grown, so the potential for abuse has also increased.’

CFDs can be used, for instance, to support stake building without informing shareholders or the wider market that it is going on. This can create problems for investors, for example, in depriving them of information they need to make an effective assessment of the ‘right’ price at which to buy or sell. This is why the AIC believes CFDs should now be disclosed alongside shares and options when the aggregate interest reaches three per cent.

‘While a partial disclosure may look attractive at first sight, it is clear that it will not work. It creates too many loopholes that will allow abuses to persist. It is also inherently complicated and these complications will create costs,’ comments Godfrey. ‘The most effective and cheapest option will be to require all CFDs to be disclosed once they represent a significant proportion of a company’s issued shares. CFDs should be counted alongside shares and options so that the market knows the full extent of a particular investor’s interest in a company.’