Comment: Gobbledygook, Chinese walls and the SIB

As an exercise in gobbledygook, yesterday's fifteen-pager from the Securities and Investments Board on the use of derivatives during takeover bids takes some beating. It fair makes the head spin, even for those of us who think we know a little about financial markets. The central finding reads thus: "A firm should not use derivatives to enable a customer to buy or sell an indirect stake where the firm knows or has reason to believe that, as a result of inside information, the customer could not properly buy or sell an indirect stake on the open market." So now we know.

Translated into plain English, what this appears to mean is that action taken by Swiss Bank Corporation in helping its client, Trafalgar House, defray the costs of bidding for Northern Electric nearly two years ago, is illegal - "is" being the operative word here for that is not what the law actually says, it is what SIB believes it should say. What makes this document doubly incomprehensible is that at no point does it refer to the Swiss Bank case. "No, no, no," says SIB. "The document does not relate to any particular case. It is merely meant as guidance for future reference". Dear, oh dear. The lawyers really have got to them, haven't they.

We're not subject to any such constraints so here's an attempt to decipher the SIB's pearls of wisdom. When Trafalgar House bid for Northern Electric, it helped pay the costs by having Swiss Bank set up "contracts for differences" in a number of electricity stocks. The question is whether this amounted to insider dealing. Corporate bidders are exempt from normal insider dealing rules. The law allows them to buy shares in a target company knowing that they are eventually going to bid at a higher price. What Swiss Bank did was construct some derivative instruments which gave Trafalgar an economic interest in the Northern share price and that of a number of other electricity companies, but it didn't actually buy the shares. The Takeover Panel considered the matter last year and concluded that this was not a case of insider dealing since buying a derivative is not much different from buying the physical stock. The SIB takes a different view. Buying a derivative is just a way of making money, says SIB, and in circumstances like these it is a one-way bet. As a consequence, the exemption shouldn't apply, claims SIB. A derivative doesn't help further the aim of control, the purpose of the insider dealing exemption.

There were a number of other related matters raised by the Northern bid. One is whether the Chinese walls used by integrated securities houses to separate highly price-sensitive corporate finance matters from the prying eyes of fast-buck traders actually mean very much. The suspicion is that in placing the contract for differences with market-makers, corporate finance effectively forewarned Swiss Bank's trading operation that something was afoot. Swiss Bank fiercely denies this but it did later transpire that its trading operation had built up substantial positions in a number of electricity companies. All of them were quite out of proportion to those that might be expected in the ordinary course of market-making. In effect the bank was proprietary trading in these stocks only it was using market-making privileges to forestall disclosure.

The SIB view of these related matters is that if you ban the original derivative transaction, or what it calls the root cause of the "mischief", then the Chinese walls issue becomes irrelevant since there would be no holes through which to peek. In so doing, however, it takes an interesting little dig at the whole idea of the integrated securities house. "We need to recognise that modern risk management systems, which are understandably designed to enable an integrated house to manage its risk in an integrated way, may cut across, and compromise, the ability of a Chinese wall to maintain a separation between different functions." Just what is the SIB saying here? If Chinese walls don't work, which is the implication, then the whole concept of the integrated securities house falls. Without effective barriers between corporate finance and trading operations, the integrated house becomes essentially corrupt. Privileged information becomes no more than the tool of a no-holds-barred trading operation.

No wonder the SIB feels the need to consult, which apparently it is not obliged to, on matters like these. While many smaller investment banks and pure corporate finance houses are going to find themselves wholeheartedly in support of the SIB's analysis and prescription, the big battalions of the City with their all-powerful securities trading operations will feel not a little threatened by SIB's strictures. The dovetailing of traded securities with corporate finance activity is not a phenomenon confined to Swiss Bank, however aggressive this particular house has been in its application. All the big players do it to some extent nowadays. Gobbledygook, this might be, but it is important gobbledygook none the less. It could provoke quite a fight.

Kissing - and not making up - on radio

Radio may still be a bit of an after-thought as far as the big media players are concerned but that doesn't stop it suffering from some of the industry's worst afflictions. It is just as riddled with big egos and false gossip as television and newspapers. No decision by a government quango will ever be accepted with grace. So it has proved with the Independent Radio Authority's award of the hotly-contested Yorkshire regional licence yesterday, which went to Kiss FM.

Rivals immediately cried foul - confidentially, of course, for many of them will be lining up again for the East Midlands licence and the hottest property of them all, the FM licence for London (no one wants to anger the authority just now). But this time they have a point. The winning consortium is going to use the MSM national sales house, which already controls 61 per cent of the national market. The Radio Authority has in the past expressed concern about MSM's market dominance, but plainly it was not enough to make an issue of when awarding the Yorkshire licence.

Still, the award to a youth-orientated dance station shows encouraging signs of development at the authority, once ridiculed as old-fashioned and lacking in market savvy. Dance was identified as the format that would broaden choice and be financially viable. We did not, thankfully, see a repeat of the Viva syndrome - the award of a licence to a format that didn't stand a chance. Nor did we see another example of awarding licences to small, local players, who have subsequently been bought out by the big players, anyway.

The authority still has its romantics, of course. There are still board members who don't like the big boys of the industry - Capital, GWR, Emap and Chrysalis. But they are beginning to see that enhancing "fair and effective competition" - one of their main criteria - does not necessary mean excluding those with the nous to succeed. Progress of sorts then, but it's a shame the authority didn't feel it necessary to consider the effects on fair competition of yet a further concentration of sales power at MSM.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Telesales Executive - OTE £25,000

£13000 - £25000 per annum: Recruitment Genius: Would you like to be part of a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Are you passionate about sale...

Ashdown Group: Graduate Developer (Trainee) - City, London

£25000 per annum + benefits: Ashdown Group: A large financial services company...

Ashdown Group: Marketing Assistant - Financial Services Sector - London

£20400 per annum: Ashdown Group: An established and highly reputable organisat...

Day In a Page

The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory
Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

Cook not the only one to be caught in The Oval mindwarp

Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

Can Benitez get the best out of Bale?

Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

Beijing witnesses new stage in the Jess and Kat rivalry

The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

Jeremy Corbyn interview: A shrewd operator desperate for power

His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

Isis executes Palmyra antiquities chief

Robert Fisk on the defender of the ancient city's past who was killed for protecting its future