SIB bans derivative use to pay for takeovers

The Securities and Investments Board yesterday moved to ban the use of complex derivative instruments as a way of helping bidders pay for takeover costs.

In a parallel move, the Takeover Panel said that any party to a takeover bid would have to disclose derivatives holdings as if they were shares.

The move is aimed at preventing a repeat of last year's furore over Swiss Bank Corporation's use of options to build stakes in Northern Electric and other electricity companies when advising on a takeover bid by its client, Trafalgar House.

When Trafalgar announced it was bidding for Northern, SBC was able to offset its costs through use of "contracts for differences" in Northern shares and a number of other electricity companies.

Although the takeover bid subsequently failed, Northern complained bitterly to the Takeover Panel, sparking a 15-month inquiry into the use and disclosure of derivatives trading.

SIB's involvement as the leading City regulator follows its role in helping to determine the rules it hopes other watchdogs, principally the SFA, will adopt in relation to the use of derivatives by their members.

The regulator yesterday issued a consultation document which it claimed would introduce greater clarity in the market. Andrew Large, SIB chairman, said: "In the fast-moving and innovative derivatives market, it is important for firms to know what they can and cannot do.

"Our aim in producing this guidance is to protect the integrity of the markets and provide valuable predictability for firms and their clients. All of us are concerned to avoid the abuse of markets, inadvertent as well as deliberate.

"By clarifying the regulation of this area, we aim to underpin the market integrity which regulators and the industry are keen to maintain."

The new roles mean that bidders must disclose any pre-existing indirect stakes under new Takover Panel requirements when an offer is announced, even if they may not be disclosable under the Companies Act.

A SIB spokeswoman yesterday declined to say whether the consultative paper was aimed at preventing a repeat of the Swiss Bank episode. The document was "forward-looking rather than dwelling on the past". The matter of whether any disciplinary action could or would be taken against SBC was a matter for its own regulator, the Securities and Futures Authority.

Regulatory sources said that had this document been approved prior to Trafalgar's bid for Northern Electric, it would not have been possible for SBC's use of futures to go ahead in the same way.

It is understood, however, that concern over the way derivatives have been used affects a number of other firms which have complained to the SIB in the past year or so.

An SFA spokesman said: "This is an area that we wanted to clarify and does not just concern one company. We are at the moment in a dialogue with SBC which is continuing and I am not in a position to go into details at the moment."

SBC said it would study the document carefully before responding directly to the SIB.

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