June 5, 2009
The UK Financial Services Authority’s new regime for disclosure of positions in contracts for difference (CfDs) came into force on 1 June 2009. Investors in financial instruments in UK issuers including CfDs should ensure that their compliance policies, systems and procedures have been updated to accommodate the new regime and (if they have not already done so) publicly disclose all holdings of qualifying instruments and holdings which have a similar economic effect, which when aggregated have reached or crossed the relevant thresholds described below.
To whom does the extended new regime apply?
The obligation to disclose when holdings in financial instruments crosses certain thresholds applies to direct and indirect holders of qualifying financial instruments (including equities, debt, options, swaps and futures in UK incorporated issuers whose securities are admitted to trading on an EU regulated market (if the UK is the home state) or on a prescribed market in the UK), and now to (i) financial instruments which are referenced to the shares of an issuer and (ii) financial instruments with similar economic effects (including but not only, contracts for difference) and the regime will therefore apply to any investor who invests in CfDs or other instruments of a similar nature.
What instruments are covered?
The new regime in relation to CfDs extends the existing disclosure regime to cover not only qualifying financial instruments (being instruments which give the holder the legal right to acquire the shares together with their voting rights) but also:
When is the disclosure obligation triggered?
The holder must notify the issuer of the relevant securities when the percentage of their aggregate holdings in CfDs and any holdings in the related listed securities reaches, exceeds or falls below: 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10% of the voting rights in the issuer and each 1% threshold thereafter up to 100% as a result of an acquisition or disposal of shares or CfDs (or other financial instruments).
This aggregation is of all financial instruments giving access to voting rights or that are referenced, in whole or in part, to an issuer’s shares and, in effect, give a long position in the economic performance of the shares, have to be aggregated across the categories of instruments held. All long positions have to be disclosed on a gross basis, irrespective of an offsetting short position.
To facilitate the new disclosure regime, on 28 May 2009, the FSA published a new Form TR-1: Notification of major interest in shares (www.practicallaw.com/9-386-1940) incorporating financial instruments with a similar effect to qualifying financial instruments, to be used for notifications from investors from 1 June 2009 onwards.
The issuer must then notify the market via a public disclosure on a Regulated Information Service (such as RNS) in accordance with the issuer’s obligations in accordance with their existing obligations under the DTRs.
What exemptions are there?
Other than the exemption for financial instruments which are referenced to the shares of non-UK issuers, (to which the new regime does not apply) there are the following specific exemptions:
Intra-day holdings: The FSA does not expect a holding acquired during a day, but disposed of prior to the end of the day to be disclosed (as is also the case for qualifying financial instruments).
Client serving: The regime does not apply to financial instruments held by a client-serving intermediary as long as the intermediary is:
However, this exemption only applies to financial instruments having a similar economic effect as defined in the rules. The concept is designed to exempt persons from the disclosure obligation where they hold financial instruments having similar economic effect to qualifying instruments, in order to satisfy client needs and where they themselves have no interest in using their holding to exert influence over the issuer in question.
Other exemptions within DTR 5: The partial exemptions within DTR for market-making, trading books and investment management potentially apply under the extended regime for holdings in CfDs. A person should first consider whether they can use the client-serving intermediary exemption for financial instruments with a similar economic effect as defined in the rules. If not, they have to aggregate their position across all financial instruments. If the aggregated holding reaches or crosses a relevant threshold, they need to establish whether reliance can be placed on any of the other exemptions on an aggregated basis.
For access to the new TR-1 form, click here
For access to the FSA’s Q&As on Disclosure of contracts for difference, click here http://www.fsa.gov.uk/pubs/ukla/disclosure.pdf
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn attorney with whom you work, or Selina Sagayam (+44 20 7071 4263, firstname.lastname@example.org) or Eleanor Shanks (+44 20 7071 4279, email@example.com) in the firm’s London office.
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