[A-List] Financial regulatory crisis: spread betting

[Keaney Michael]

Call for shake-up in spread betting
By Gautam Malkani and John Kipphoff
Financial Times: March 22 2002

The chairman of City Index, the spread betting firm behind the
controversial £6m bet linked to a small company's flotation last
month, on Thursday called for a shake-up of disclosure rules for spread
betting.

Michael Spencer, non-executive chairman of City Index, said spread
betting should be subject to similar disclosure requirements to share
trading.

He said he was "taken aback" by the bet on the post-flotation share
price movement of Cyprotex, a biotechnology company, and had launched an
internal inquiry into why his company accepted it. "We are trying to get
to the bottom of this," he said.

Mr Spencer was speaking as it emerged Cyprotex's broker, Nigel Howe,
helped to place the bet on behalf of Cyprotex's major shareholder, Paul
Davidson. Mr Howe, known as "the Spaniard", confirmed he had power of
attorney over the City Index account in the name of Mr Davidson,
nicknamed "the Plumber".

However, Mr Howe yesterday argued an investigation would find the bet
had been irregular but not illegal. "The Financial Services Authority
will find no evidence of wrongdoing."

The £6m bet prompted City Index to cover its risk by entering a
"contract for difference" with Dresdner Kleinwort Wasserstein, the
investment bank. The bank in turn hedged itself by buying £5.16m worth
of Cyprotex shares, representing 80 per cent of the placing.

"I don't know whether I'm a hero or villain in the City . . . I suspect
it's the former because we've done something immensely clever," said Mr
Howe.

Mr Howe has been suspended by his firm, Gilbert Eliott, over the affair
and was yesterday planning a return to the City for a drink with friends
and colleagues at the City Tup. There may be "banners out for me at the
pub".

However, Mr Spencer conceded that the incident would prompt a change in
spread betting practices. "If I had been on the trading desk at the
time, I personally would not have accepted the bet," he said.

"Disclosure has to change," said Mr Spencer. "There's an argument there
should be a similar level of disclosure for spread betting as for
conventional equity trading. I would not be surprised if out of this
came a different disclosure environment."

There is no requirement for participants in over-the-counter trades such
as spread bets to make their identity public.

Mr Spencer confirmed Mr Howe had power of attorney for Mr Davidson. "He
used that in this deal. It was not the first time. But Davidson paid his
margin for the bet," he said.

"Mr Howe has his own issues to resolve I suspect. I do not know the
motive of the bet."

Full article at:
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT31TSW33ZC&live=true&tagid=IXLI0L9Z1BC

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney at mbs.fi