The reason for the regulation of contracts for difference and its impact on hedge fund activism

Abstract

The Financial Service Authority (FSA) introduced a new regime requiring the disclosure of synthetic holdings equally to shares with effect of September 2009. The disclosure of shares assists identifying dominant investors; however, the disclosure of synthetic holdings does not serve the same purpose and therefore logic suggests that the new regime does not satisfy the rationale of shareholder disclosure. The motivation of current research is to analyse the implications of this regime. It generates extensive costs which has inevitably detrimental effects on the UK financial market. The focus of this research will be on hedge funds engaging in the influence of companies, so-called activist hedge funds, for which the negative effect is most evident. The approach is as follows. First existing alternatives under the market abuse regime (MAR) will be analysed which ought to govern misconducts by exploring relevant cases. Second, it will be investigated whether the new regime is market or regulator induced. For this purpose a collection of market responses will be analysed which are representative for the market concern. Second, a literature review on the regulators framework will be conducted to investigate the reliability of FSA's argumentation on the raison d’etre of the regime. In addition, guidance on the disclosure of financial instruments will be scrutinised inter alia in a comparative study. The findings suggest that base for the current regime is faulty and the costs exceed the benefits. It will be recommended that the regime needs revision and should approximate the US regime.