Comment & Analysis

The Children's Investment Fund (TCI), the London-based activist hedge fund, is at the sharp end of the fight over disclosure of covert stakes in companies built up through derivatives.

TCI, run by the secretive Chris Hohn, lost a court battle against the US rail network CSX last month, with the judge ruling that the fund should have announced a holding via derivatives that peaked at almost 14 per cent - even though the Securities and Exchange Commission backed the fund's view that disclosure was not required under US law.

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The SEC labelled the eventual result "novel" - officialese for disastrous - in a view backed by the International Swaps and Derivatives Association, which said it could "chill legitimate and desirable commercial activity".

Yesterday the Financial Services Authority dismissed such views, calling for derivatives that give exposure to moves in the shares of London-listed companies to be disclosed just as the underlying shares are above 3 per cent of a company.

Contracts for difference - the most popular such derivative - now account for almost a third of UK equity trading, it estimates.

"Our goal is to provide an effective and proportionate disclosure regime that works for all involved, and sustains market confidence and efficiency," said Alexander Justham, director of markets at the regulator.

The new rules chime with international moves for disclosure of derivatives, demands for more transparency at hedge funds, the main users of equity derivatives, and increased political pressure on short-sellers, again hedge funds.

Traditional investors welcomed the regime while hedge funds warned of increased bureaucracy. But hedge funds are not universally against the rules. Many of the biggest are supportive of greater disclosure, albeit preferring a different method of applying them.

Colin Kingsnorth, head of Laxey Partners, a $2bn (£1bn) activist hedge fund in London, said the "vast, vast, vast bulk" of CFD trading was nothing to do with activism. "I'm absolutely in favour of more disclosure," he said.

Laxey's willingness to disclose might come as a surprise to many: the fund is notorious for its attempt to break up British Land (LSE: BLND.L - news) in 2003, where it took a stake of almost 9 per cent, the majority held through CFDs.

Laxey was attacked this year by Swiss regulators, who recommended criminal action against the fund for failing to disclose a holding in Implenia (IMPN.SW - news) , the country's biggest building services company, built up through CFDs. Laxey, which took 22 per cent of Implenia, plans to appeal against the ruling and denies breaching Swiss rules, which were later tightened to demand disclosure of significant CFD holdings.

The FSA's move required more openness than the option it previously said it preferred - the second time in three weeks that it had surprised markets with demands for transparency.

Last month it introduced a disclosure regime for short positions in stocks during rights issues, after anecdotal evidence of abusive short-selling.

Those rules met with protest from the hedge fund industry and criticism of a confusing lack of detail. This time there was more praise.

"The shorting rule was ill-informed and they didn't get the wording right. The CFD regime is the FSA showing itself in a more favourable light," said Simon Morris at CMS Cameron McKenna. "You can argue with the policy, but the FSA's approach on this cannot be faulted."

Others contrasted the speed of action: the short-selling rules were introduced under emergency powers with just a week's notice.

CFD disclosure has been under discussion for two years and the rules will not take effect until late next year - although the FSA said it would try to introduce them earlier if possible.

Observers linked both moves to a greater decisiveness at the regulator, given the market turmoil.

"It seems like there is a desire to be tough and it does seem related to the current circumstances," said Andrew Shrimpton, a partner at hedge fund consultancy Kinetic Partners and a former FSA official.

"That is the only explanation for this move, given that we hadn't got the evidence from the market studies to lead us to this option."