CFD Anonymity Loophole to be Closed

Investors who use CFDs (contracts for difference) will soon be required to disclose details of their shareholdings, as regulations governing CFDs are to be amended. There currently exists a loophole whereby investors can hold stakes in companies anonymously. This is considered to be highly anti-competitive and allows many individuals to build up large stakes in companies before deciding to declare them publicly.

CFDs have become extremely popular with Irish investors in recent years and they are also commonly used by hedge funds who surreptitiously gain control of shares in companies. Some say that contracts for difference account for as much as 0.25 – 0.50 of daily trading on the stock exchange here. Much of the reason for this is the convenience they offer to investors, as they provide a means of borrowing and purchasing through the one financial instrument. Many institutions are nervous about lending to finance investment in volatile markets, so these instruments offer a welcome alternative to investors.

CFDs require investors to personally lay down a deposit, also known as a margin. Borrowing through the CFD is to finance the rest of the sum that is being used to purchase shares. The risk with these types of packages is that dips in the markets will diminish the deposit amount. This amount must then be replenished, and this often results in increased borrowing or liquidation of assets in order to finance this.

Currently ordinary shareholders cannot remain anonymous, while investors in CFDs can avoid public acknowledgement of their involvement. The Irish Takeover Panel wishes to change this situation and plans to introduce disclosure requirements to investors wishing to make use of CFDs.

The loophole has come under increased scrutiny in recent weeks as it was publicized that CFDs were involved in such high-profile shareholding revelations as Sean Quinn’s percentage holding in AIB and Liam Carroll’s share in Irish Continental Group (ICG). Using the CFD as a smoke-screen, investors are not required to divulge shareholding details. Rather the intermediary responsible for the CFD is required to declare their own involvement. Essentially investors have full control of voting rights through the intermediary, without actually owning the shares. The new amendments are hoped to bring increased transparency to markets and may be introduced within months.

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