The Association of Investment Trust Companies (AITC) has called for improved disclosure of Contracts for Difference (CFDs) to protect investors and maintain a fair and orderly market.

CFDs can be used by market participants to stake build in a less transparent manner than if they had simply bought shares through the market. This means that sellers might be led to sell their shares more cheaply than if they knew that stake building was taking place. To prevent this, the AITC believes that CFDs should be disclosed when the buyer of the CFD may subsequently buy the actual shares.

The AITC’s concern arises where a prospective stake builder buys a CFD and then can subsequently purchase the related shares in large blocks from the contract counterparty or another market participant. This process can allow the stake builder to acquire very substantial amounts of shares without making a disclosure until they reach their target level, which may be well in excess of the normal disclosure limits of 3% of a company’s share capital.

The AITC believes that the market abuse rules should be amended to address this practice, which has arisen because of a gap in disclosure which can allow a false market to be created. To take the debate forward, the AITC is proposing that the FSA conduct research into the extent of the problem and devise a proportionate regulatory response.

Daniel Godfrey, Director General of the AITC, said, “We have been following the use of CFDs and believe the situation merits further attention by the FSA. The Takeover Panel already requires CFDs to be disclosed during offer periods so it is logical that their use in stake building ahead of a formal offer period, and which therefore falls outside the scope of the Panel’s rules, should also be addressed.

“Our aim on CFDs is to improve transparency through appropriate market disclosures so that investors are able to make fully-informed decisions. We believe the market abuse framework provides the best route to address this concern and we want to work with the FSA and other stakeholders on this issue in the best interests of all shareholders.”