Regulators today proposed a crackdown on hedge funds and other speculators who secretly build stakes in listed companies using derivatives to cover their tracks.

The Financial Services Authority said it wanted to secure greater disclosure of holdings in derivatives known as Contracts For Difference. The current regime risked 'creating market failures'.

The FSA proposed two alternative approaches to making CFD holdings more transparent. The first approach would require disclosure of all CFD positions giving the investor more than 3 per cent of the total voting rights of a company unless it was clear the holder could not exercise the votes and there were no arrangements in relation to the sale of the underlying shares by the CFD holder.

The second approach was to introduce a more general disclosure regime requiring CFD holders to disclose all economic interests above 5 per cent. This would be costlier to the CFD holder and wider equity market, adding £20-25 million to participants' costs, the FSA estimated.

Sally Dewar, the director of markets at the FSA, said: "This is not a clampdown on CFDs but a means, following extensive research, of addressing the concerns about their use on an undisclosed basis."

A consultation period on the new proposals, which would apply to AIM stocks as well as shares listed on the main market, will last until 12 February 2008.

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