The U.K. Takeover Panel will call for derivatives houses' proprietary desks and hedge funds to disclose synthetic long positions of more than 1% in U.K. corporates. This is a blow for market officials and the International Swaps and Derivatives Association, which objected to the Panel's January consultation paper on the grounds it will jeopardize the use of equity derivatives for legitimate risk management purposes (DW, 1/14). Charles Crawshay, secretary to the Panel, confirmed the rule changes would go ahead with little change from the consultation paper. Louise Marshall, spokeswoman for ISDA in New York, declined comment on whether the trade association will take its objections further.
The rule changes will likely mean a whole-scale reorganization of dealers' trading desks because market making will be exempt from the disclosure requirements, but proprietary positions will be hit. Dealers said disclosing long positions built up through cash or contracts for difference is straight forward, but calculating the size of a position using equity options will mean more work and will increase the costs of their business. One fund manager agreed, adding the Panel will need to introduce clear guidelines for how option positions will be calculated. It is not clear, for example, if the Panel will look at the full notional exposure gained through an option, or if it will take delta hedging into account.
Hedge funds will also be forced to show their hands and officials say the compliance costs will hit smaller funds in particular. One solution is for funds to outsource this to prime brokers. But a hedge fund lawyer said it will be a headache because most funds have more than one prime broker and could hold a position in a single company through trades with two or more brokers.
The response to the consultation paper will likely be published at the end of May. Crawshay said the panel is now focusing on the details of the rules and will be working with each house to discuss how it aggregates trading positions in companies and separates these from market making positions.
