Exchange wants tighter market rules

The Stock Exchange yesterday proposed tightening the rules on market- makers to provide for added disclosure on trades and more vigorous monitoring by the Exchange.

Stressing the need to redefine the activities of market-making to take account of the considerable changes in the way the City operates, the Exchange yesterday issued a consultative document to its members.

The pressure for curbs on disclosure exemptions for market-makers was raised by the controversy surrounding Swiss Bank Corporation's role in Trafalgar House's recent takeover bid for Northern Electric.

The Exchange was obliged to react to strong expressions of concern from companies that market-makers can build a substantial stake in a takeover target firm under cover of non-disclosure privileges, with a view to selling it on to predators. The Exchange expressed its view that companies should have the right, on a confidential basis, to be informed of all significant holdings in their share capital.

Swiss Bank's use of derivatives during the takeover also highlighted the potential for buying a substantial interest in a target company on behalf of a predator, getting around the need to buy the actual shares that would have forced a disclosure under the Companies Act.

Swiss Bank is still under investigation by the Securities and Futures Authority over concerns that Chinese walls between its market-makers and its corporate finance people advising Trafalgar House were breached during the takeover bid.

While the Exchange said it found no evidence of widespread abuse of market- makers' exemptions from disclosure, the consultative document shows strong concern that the definition and rules of the job have not kept pace with the rapid evolution of financial markets. The Exchange is worried that the privileges, which date from pre-Big Bang days of single capacity jobbing, have now been extended to a far greater range of securities business, as market-makers trade extensively on their own books, backed by vast integrated investment houses.

The size of positions taken and the increasingly sophisticated use of derivatives trading are going beyond what the disclosure privileges were intended for, the Exchange suggests.

Three options for change are proposed. One would make a clear distinction between proprietary trading and traditional market-making, with only the latter exempt from disclosure. A second would oblige market-makers to publicise all positions of 3 per cent or more in FT-SE 100 companies within five days, and to notify confidentially smaller companies of similar stakes after five days.

Option three would require market-makers to disclose any position of 3 per cent or more held on their account that is the subject of a customer's real or "economic" interest. A final option is to do nothing. Market-makers' stakes Notification to the Stock Exchange of stakes of 3 per cent or more by market-makers Year 1986 1992 1993 1994 No. of holdings 21 89 107 135 Value of holding Up to £100,000 29 12 24 £100,000-£1m 43 58 69 £1m-£5m 9 23 17 £5m-plus 8 14 15

Comment, page 25

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