Fund managers press City watchdog to postpone tougher disclosure rules

Date: Wednesday, June 18, 2008
Author: Jill Treanor, The Guardian.co.uk

Hedge funds will today lobby the Financial Services Authority to delay its new rules for disclosing trading positions during rights issues.

The Alternative Investment Management Association (AIMA), whose members control over 75% of global hedge fund assets, is intending to put its concerns in writing to the City regulator following Friday's shock announcement of the implementation of a new stricter regime during rights issues.

The rule change, which comes into force this Friday, means that all "short" positions of 0.25% or more of the shares of a company conducting a rights issue must be disclosed to the market.

Such short positions are usually achieved by a trader borrowing shares from a conventional fund manager to sell them in anticipation of a fall in the share price which then allows the trader to make a profit by buying the shares back more cheaply.

The FSA last night provided further information about how its regime would work and surprised the City by saying that such short positions need only be disclosed once - which means a trader could increase his short position without needing to inform the stock market.

The FSA said, though, that it would "keep this approach under review and may consider the introduction of an incremental disclosure requirement should experience suggest that this would add value to the regime".

It is thought the City regulator decided to demand disclosure only once because of the unusual speed with which it has implemented the rule change, which are more ordinarily made after extensive consultation with market participants. However, the FSA has made it clear that it regards the volatility of the shares of those companies which have been conducting rights issues - most likely banking group HBOS - as potentially damaging the "overall fairness and quality of the UK market".

It also revealed yesterday that traders need only report net positions in a company - so any conventional position is a stock that can be used to negate any short position. Clients of fund managers may also have to reveal their identities instead of remaining anonymous.

Andrew Baker, deputy chief executive of the AlMA, said he would be writing to the FSA today to call for the new regime to be postponed and for the regulator to provide further clarity on technical issues about how such a wide range of complex financial instruments should be accurately reported.

"There is still a question mark about certain types of derivatives," said Baker. Instruments such as options, convertible bonds and contracts for difference all appear to be included.

Despite protestations from some market participants, the FSA is determined to press on with the new regime, which chancellor Alistair Darling has indicated is temporary and will be reviewed by a new industry consultation body.

"It will come into effect on Friday," an FSA spokesman said.