On Friday, both the New York Times and Harbinger filed their preliminary proxy statements with the SEC. One thing that piques my interest in the Harbinger filing is the disclosure of an equity-swap deal Harbinger has made with a London company doing business as TradIndex.
On January 17, around the time the NYT price was hitting $15. "TradIndex agreed to pay the Special Fund an amount equal to any increase, and the Special Fund agreed to pay TradIndex an amount equal to any decrease, in the official market price of 320,455, 300,000 and 390,480 notional shares, respectively ...."
This sounds like a "contract for difference," a way of separating voting interest from the economic significance of stock ownership. I'm guessing (and that's all I'm doing at this point) that Harbinger entered into the deal to protect itself against the further decline in the value of Times' stock that it plans to use to get some seats on the Times board.
It certainly had reason to worry, based on the charts. In June of last year, the stock price of the New York Times was at $26. That was a gain of $4 per share from its value as of a year before. But it was not to last.
By August the stock (NYSE: NYT) was back at summer of 2006 levels. It continued to fall, right through them.
By mid-October, it was near $18, then rallied briefly, up to $21, before falling back to $18 at the start of November.
Once we were into the new year, the newspaper company reported a December revenue drop off of 22.4%, and the stock price quickly came to reflect this news, getting to below $15 in mid-January. That, as I say, was when Harbinger entered into this hedge.
There's been something of a rally since then, in part at least because the January revenue results were an improvement over those for December, and in part because of the interest Harbinger and Firebrand have show. The price is now back above $18. So it appears that Harbinger could close out its deal with TradIndex for a profit.
Nothing untoward about this -- it all seems to be a Marquis of Queensbury proxy fight, and civil enough so far to sound like some of the Clinton/Obama debates. Should somebody get Mr. Sulzberger a pillow?
Still, the whole idea of CFDs and the separation of economic from voting interest raises policy/regulatory issues.
Showing posts with label CFDs. Show all posts
Showing posts with label CFDs. Show all posts
Monday, March 3, 2008
Tuesday, November 13, 2007
UK Regulators Propose a Rule
The UK's Financial Services Authority published a "consultation paper" yesterday -- that is, a request for public comment on a proposed new regulation.
The subject of the proposal is an instrument known as a "contract for difference." This is a contract in which a party is paid when an underlying asset increases in value or perhaps pays out money when the asset falls in value (takes the long side), or vice versa (for the opposite party of course takes the short side). The significance of the CFD is that the speculator -- typically a hedge fund -- never acquires title of the underlying asset, so the transaction unbundles title from economic risk.
The FSA is concerned that undisclosed CFDs can mess up the system of corporate governance. Consider, for an easy case, a corporation's stockholder who has sold CFDs to a hedge fund. The hedge fund has the "long" position -- it has an interest in an increase in the value of that stock. The stockholder now has a "short" position -- it will receive money if the stock price falls. The stockholder still has title to the stock, though, and accordingly still has a vote in proxy contests.
Will the stockholder exercise that vote in such a way as to sabotage efforts of corporate management, or to help install an incompetent board, so as to benefit from the difference, the price fall, that will result?
That's an easy problem to imagine, but not the FSA's central concern. After all, look at the matter from the point of view of the hedge fund that bought the long position. It wouldn't be likely to do so if it thought the stockholder was about to sabotage the company so blatantly. Or, at least, it wouldn't make the same mistake twice. Can't the contracts between the long and short parties be trusted to ensure that the economic interest and the voting interest remain in some alliance?
Now we get to the real regulatory concern. The contracts can do that job all too well. The FSA is worried that hedge funds and others with CFD, but without titles to the stock, are exercising informal control over how the stock is voted, and that this makes the corporate governance system too opaque -- management and the other shareholders don't know who is pulling what strings.
Accordingly, the FSA's proposal focuses on disclosure. In essence, they want managements to be able to flush out all CFD holders with an economic interest of 5% of more of their equity.
There is a tax angle to this, too. CFDs are a flourishing part of the UK equity market, accounting for 30% of all trades, because in Britain there's a 0.5% stamp duty levied by the government on the sale of the actual shares, the underlying asset. CFDs are a way of playing the market without paying the tax, and the "unbundling" of votes from economic interest is more of a side effect than a positive benefit of these instruments.
The bottom line though is that if you want to comment on the FSA proposal, you've got three months. The clock is ticking.
The subject of the proposal is an instrument known as a "contract for difference." This is a contract in which a party is paid when an underlying asset increases in value or perhaps pays out money when the asset falls in value (takes the long side), or vice versa (for the opposite party of course takes the short side). The significance of the CFD is that the speculator -- typically a hedge fund -- never acquires title of the underlying asset, so the transaction unbundles title from economic risk.
The FSA is concerned that undisclosed CFDs can mess up the system of corporate governance. Consider, for an easy case, a corporation's stockholder who has sold CFDs to a hedge fund. The hedge fund has the "long" position -- it has an interest in an increase in the value of that stock. The stockholder now has a "short" position -- it will receive money if the stock price falls. The stockholder still has title to the stock, though, and accordingly still has a vote in proxy contests.
Will the stockholder exercise that vote in such a way as to sabotage efforts of corporate management, or to help install an incompetent board, so as to benefit from the difference, the price fall, that will result?
That's an easy problem to imagine, but not the FSA's central concern. After all, look at the matter from the point of view of the hedge fund that bought the long position. It wouldn't be likely to do so if it thought the stockholder was about to sabotage the company so blatantly. Or, at least, it wouldn't make the same mistake twice. Can't the contracts between the long and short parties be trusted to ensure that the economic interest and the voting interest remain in some alliance?
Now we get to the real regulatory concern. The contracts can do that job all too well. The FSA is worried that hedge funds and others with CFD, but without titles to the stock, are exercising informal control over how the stock is voted, and that this makes the corporate governance system too opaque -- management and the other shareholders don't know who is pulling what strings.
Accordingly, the FSA's proposal focuses on disclosure. In essence, they want managements to be able to flush out all CFD holders with an economic interest of 5% of more of their equity.
There is a tax angle to this, too. CFDs are a flourishing part of the UK equity market, accounting for 30% of all trades, because in Britain there's a 0.5% stamp duty levied by the government on the sale of the actual shares, the underlying asset. CFDs are a way of playing the market without paying the tax, and the "unbundling" of votes from economic interest is more of a side effect than a positive benefit of these instruments.
The bottom line though is that if you want to comment on the FSA proposal, you've got three months. The clock is ticking.
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