But the practice was thrown into disarray recently when Swiss Banking Corporation was flushed out as a holder of shares in a number of regional electricity companies that could benefit from the £1.2bn takeover bid for Northern Electric by Trafalgar House, which it is advising.
In a formal report last night, the exchange cleared Swiss Bank of any improper action concerning share option contracts between the bank and Trafalgar House which includes shares of other electricity companies.
However, it also said it would look again at the rules related to such derivative-related contracts, which have allowed Trafalgar House to benefit from movements in the share price of Northern and other regional electricity companies.
In a statement, the Stock Exchange said: "On the basis of a review of information available to date, the exchange is satisfied that there are no reasonable grounds for action within its area of regulatory responsibility."
A spokeswoman said there would be consultation among member firms on the impact on the London market of the type of transaction entered into between Swiss Bank and Trafalgar House. One area to be examined is whether there should be additional disclosuresby market-makers in the public interest.
An adviser to Northern Electric said the exchange had taken a very narrow view of the issues involved, but he welcomed the recognition that the rules might need to be changed. He said: "It remains to be seen what view other regulators take."
Swiss Bank said it was pleased to be "exonerated".
"As a substantial participant in the UK equity and derivatives markets, Swiss Bank is delighted to continue to contribute to the refinement of the regulatory framework, sharing our experience of the world's other financial centres."
Rudolfo Bogni, chief executive, said it would be insensitive of the exchange not to look at the rules. But it would be "tragic" if hurdles were put in the way of the derivate market.
Separately, it emerged that Swiss Bank has increased its stake in Northern Electric to 4 per cent from 3.46 per cent. The stake was disclosed by Northern, which has been seeking clarification of Swiss Bank's position in the company on a daily basis underSection 212 of the Companies Act.
Yesterday the National Consumers Council called for the Trafalgar House bid to be referred to the Monopolies and Mergers Commission in the interests of the public.
Lady Wilcox, chairman of the NCC, said: "Questions about issues like cross-subsidy and disposal of assets must be fully explored by the MMC to safeguard customers."
She said the bid proved that electricity firms were among the safest and most lucrative investments in Britain and that more attempts at acquisitions would probably follow, adding: "We believe that this will become a major issue for consumers which needsto be tackled as soon as possible."
Lady Wilcox has written to Sir Bryan Carsberg, Director General of Fair Trading, asking him to ensure a full MMC inquiry takes place, and to Professor Stephen Littlechild, director general of electricity supply.