Understanding CFDs

[barjon]

I was bemused to read in the press that the authorities are concerned about people building up hidden and substantial stakes in companies via CFDs, thereby circumventing the disclosure rules.

Can that be right? I didn't think CFDs conferred any form of share ownership either directly or indirectly.

jon

 

[Robertral]

I was bemused to read in the press that the authorities are concerned about people building up hidden and substantial stakes in companies via CFDs, thereby circumventing the disclosure rules.

Can that be right? I didn't think CFDs conferred any form of share ownership either directly or indirectly.

jon

The company that you tarde the CFD with will hedge your positon 1-1 in the underlyign market, so there is the chance that the holding compnay can build up a substantial position within a stock.

 

[ns1000]

The company that you tarde the CFD with will hedge your positon 1-1 in the underlyign market, so there is the chance that the holding compnay can build up a substantial position within a stock.

It's true that CFD providers will build up substantial positions in some stocks (others have internal rules limiting their exposure), but the CFD and the beneficial ownership of the underlying stock are legally held by different entities. If you have a CFD you have no voting rights, nor are you entitled to attend the AGM etc. A CFD is just a contract to swap the the monetary difference on a trade. Whoever is the beneficial owner of the stock keeps these rights.

There is concern about substantial positions being built as CFDs, but these positions should be divorced form the rights so there should be no concern in this arena.

However, where there should be concern IMHO is the percentage of a stock owned by CFD holders as a gross amount. Last week's massive sell-off of Regal Petroleum was caused in part by margin calls on one notorious individual, sparking a run on other stocks held by him. Would knowledge of CFD holdings have affected anyone's decision whether or not to invest in the stock? In this respect I would say that there should be some CFD holding reporting requirement, irrespective of the voting rights.