Post by Kettunen Ringe on Jun 2, 2011 23:45:34 GMT 4
Disclosure Regulation of Cash-Settled Equity Derivatives - An Intentions-Based Approach
Maiju Kettunen
Cleary Gottlieb Steen & Hamilton LLP
Wolf-Georg Ringe
University of Oxford - Faculty of Law; University of Oxford - Oxford-Man Institute of Quantitative Finance
May 17, 2011
Oxford Legal Studies Research Paper No. 36/2011
Abstract:
In capital markets around the world, calls for greater transparency regarding holdings of cash-settled equity derivatives (in particular Contracts for Difference, CfDs) have arisen due to the increased use of CfDs to gain control or to influence the management of prominent companies on all major European stock exchanges. They have been used in this manner due to an emerging practice that permits a CfD holder to capture the shares to which the CfD arrangement relates (without entering into any further express or implied agreements to do so), thereby acquiring a de facto control position in the target company.
The UK was among the first countries to extend its shareholder disclosure regime to cover CfDs. Positions above the trigger threshold of 3 per cent must be disclosed as if they were shares entitling the holder to voting rights in the target company. Two alternatives were considered when preparing this new regulation: firstly, a general disclosure obligation of all economic long positions and secondly, a safe harbour regulation with exemptions from the requirement to disclose certain CfD transactions. Ultimately, the first option was preferred, yet not on the basis of its own merits but because the safe harbour alternative was considered too complicated and difficult to enforce.
This paper evaluates disclosure regulation of cash-settled equity derivatives and assesses the effectiveness and suitability of the disclosure regulation under chapter 5 of Disclosure and Transparency Rules (DTR) in the UK with comparison to the relevant US rules and case law. We argue that the UK made the wrong choice of disclosure regime for CfDs. It fundamentally misunderstood the nature of the underlying problem relating to CfDs. As this article explains, the key problem related to CfDs is not the economic interest which CfDs convey per se, but rather the hedging structures that market participants have developed to facilitate the use of CfDs to acquire control of companies by stealth. This particular mischief would have been better targeted by an intentions-based disclosure regulation requiring disclosure of CfD positions only in cases where the CfD holder intends to launch a takeover or to otherwise influence the target company’s strategy and operations.
Instead, the UK market is saddled with a general disclosure obligation with only very limited exceptions. This disclosure obligation is too wide in scope, places an undue burden on market participants and ultimately acts as a deterrent to CfD transactions. This article argues that the UK should move away from the current general disclosure obligation towards intentions-based disclosure to re-move the current fetter on the CfD market, while still tackling the underlying mischief.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1844886_code836081.pdf?abstractid=1844886&mirid=1
Maiju Kettunen
Cleary Gottlieb Steen & Hamilton LLP
Wolf-Georg Ringe
University of Oxford - Faculty of Law; University of Oxford - Oxford-Man Institute of Quantitative Finance
May 17, 2011
Oxford Legal Studies Research Paper No. 36/2011
Abstract:
In capital markets around the world, calls for greater transparency regarding holdings of cash-settled equity derivatives (in particular Contracts for Difference, CfDs) have arisen due to the increased use of CfDs to gain control or to influence the management of prominent companies on all major European stock exchanges. They have been used in this manner due to an emerging practice that permits a CfD holder to capture the shares to which the CfD arrangement relates (without entering into any further express or implied agreements to do so), thereby acquiring a de facto control position in the target company.
The UK was among the first countries to extend its shareholder disclosure regime to cover CfDs. Positions above the trigger threshold of 3 per cent must be disclosed as if they were shares entitling the holder to voting rights in the target company. Two alternatives were considered when preparing this new regulation: firstly, a general disclosure obligation of all economic long positions and secondly, a safe harbour regulation with exemptions from the requirement to disclose certain CfD transactions. Ultimately, the first option was preferred, yet not on the basis of its own merits but because the safe harbour alternative was considered too complicated and difficult to enforce.
This paper evaluates disclosure regulation of cash-settled equity derivatives and assesses the effectiveness and suitability of the disclosure regulation under chapter 5 of Disclosure and Transparency Rules (DTR) in the UK with comparison to the relevant US rules and case law. We argue that the UK made the wrong choice of disclosure regime for CfDs. It fundamentally misunderstood the nature of the underlying problem relating to CfDs. As this article explains, the key problem related to CfDs is not the economic interest which CfDs convey per se, but rather the hedging structures that market participants have developed to facilitate the use of CfDs to acquire control of companies by stealth. This particular mischief would have been better targeted by an intentions-based disclosure regulation requiring disclosure of CfD positions only in cases where the CfD holder intends to launch a takeover or to otherwise influence the target company’s strategy and operations.
Instead, the UK market is saddled with a general disclosure obligation with only very limited exceptions. This disclosure obligation is too wide in scope, places an undue burden on market participants and ultimately acts as a deterrent to CfD transactions. This article argues that the UK should move away from the current general disclosure obligation towards intentions-based disclosure to re-move the current fetter on the CfD market, while still tackling the underlying mischief.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1844886_code836081.pdf?abstractid=1844886&mirid=1
