UK Imposes Strict Rules on Derivatives Disclosure, Perhaps Setting the Stage for More Hedge Fund Regulation in the US

In a policy statement due later this month, the FSA is expected to propose that so-called contracts for difference (CFDs) must be disclosed as if they were common shares. CFDs are equity derivatives that enable traders to obtain exposure to the price performance of a wide variety of assets – including equity shares, indices and commodities – without directly owning the underlying assets. The new UK disclosure regime would be consistent with the recent decision in the US case of CSX v. TCI & 3G (which was covered in the June 19, 2008 issue of the Hedge Fund Law Report). According to the FSA, such a general disclosure regime for long CFD positions will be “the most effective way of addressing concerns in relation to voting rights and corporate influence.” However, hedge fund industry participants have criticized the move as “heavy-handed” and unnecessary. Also, hedge fund professionals have expressed a concern that the new disclosure regime could reduce trading volumes and increase the cost of capital.

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