Contracts for Differences ("CFDs") have become a popular means for hedge funds to access the UK stock market. This allows investors to buy UK stocks on margin and, secondly, avoids UK stamp duty taxation (after all, there is nothing a rational economic decision maker weighs more highly than the opportunity to avoid taxes that everyone else pays.)
The Wall Street Journal reports this morning that the UK FSA may now require new disclosure, such that investors who hold an economic interest in excess of 5% of the share capital of an investee company will have to disclose, even if that interest is held partly or wholly through CFD structures.
"The FSA said the lack of transparency around CFDs could contribute to three potential market failures: inefficient pricing, distorted markets for takeovers and diminished market confidence."
This seems like a very good idea - if hedge funds own assets that mirror equity securities (and are priced identically to them) it is not unreasonable to see the regulators wanting to level the playing field.
Overall, investors should always be sensitive to the use of synthetic securities - sometimes they can simply be too good to be true. If derivative loopholes become "too popular", it seems pretty likely that, eventually at least, the regulators will act - as we have seen recently with the more heavyhanded actions in India over "P Notes". Next on the list - perhaps total return swaps in the US designed to allow offshore investors (such as offshore hedge funds) to avoid the 30% withholding tax? Now (for the accountants out there) that would be a good FIN 48 question.