FSA Proposes Extension of UK Major Shareholder Notification Requirements to Equity Contracts for Differences (Including Equity Swaps and Other Equity Derivatives)

In the light of responses to its 2007 consultation paper on the disclosure of Contracts for Differences (CP07/20), the United Kingdom’s Financial Services Authority (FSA) has decided to implement a general disclosure regime for long equity Contract for Differences (CFD) positions, which will include long equity swap positions and other equity derivatives (FSA Policy Update 2 July 2008). The proposed rules contemplate that reporting will be required regardless of whether the holder has control over voting of the underlying shares or the right to receive or elect to receive physical settlement.

As a result, the proposed rules should significantly increase the circumstances in which reporting by an investor or derivatives counterparty is required. This FSA policy update announcement comes shortly after the recent introduction of new provisions in the FSA Code of Market Conduct, which have been effective since June 20, 2008, and which require the disclosure of short positions of 0.25% or more in stocks of companies that are undertaking rights issues. It also follows on the heels of a closely watched litigation in the United States involving two activist hedge funds (The Children’s Investment Fund and 3G Fund) and CSX Corporation, in which a federal judge found that the hedge fund defendants had violated Section 13(d) of the U.S. Securities Exchange Act of 1934 by using total return swaps with the purpose and intent of preventing the vesting of beneficial ownership in the hedge funds as part of a plan or scheme to evade the reporting requirements of Section 13(d). See CSX Corporation v .The Children’s Investment Fund (UK) LLP, et al., Case No. 08 Civ. 2764 (S.D.N.Y. June 11, 2008).

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