Exchange tightens rules on disclosure rules

The Stock Exchange is to tighten its disclosure rules shortly to prevent re-occurence of the sort of deals used by Swiss Bank Corporation as part of Trafalgar House's bid for Northern Electric, writes John Eisenhammer.

In a speedy response to demands for improvements from the Securities and Investments Board, the lead City regulator, the Stock Exchange is to remove the privilege enabling market makers to disguise large stakes taken for strategic purposes.

"Investor protection now requires the disclosure of such stakes in any event," said Michael Lawrence, chief executive of the Stock Exchange, in evidence to the Treasury and Civil Service Committee yesterday. "We are moving very fast on SIB recommendations, and will change the rules in the next few weeks."

SBC's role as adviser to Trafalgar House provoked controversy when it emerged that it had taken sizeable stakes under cover of market maker privileges to facilitate the bid, and had also used derivatives, as opposed to actual stocks in the company, to get round the disclosure rule of the Companies' Act.

In its wide-ranging review of the equity market published yesterday, the SIB called for changes to the rules to prevent a rerun of the SBC/Trafalgar House events. The SIB said market maker privileges must not be available to avoid disclosure of 3 per cent positions taken for strategic purposes.

Mr Lawrence said the original exemptions from disclosure were devised to assist market making in illiquid, usually small company, stocks. The use of such privileges to cover up trading in large company stocks amounted to abuse of these privileges, he said. "We do not think the 3 per cent blanket exception is necessary when dealing in liquid stocks," he told the committee.

Mr Lawrence also conceded that the Stock Exchange is hedging its bets on the future of its quote-driven dealing system, dominated by the market makers.

"There have been unsustainably low rates of return on capital in market making in recent years," said Mr Lawrence.