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Industry Spotlight > Broker Dealers

First Fine of Its Kind: FSA Penalizes Unreported CFDs

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LONDON (–The United Kingdom’s Financial Services Authority has fined Bear Stearns International Ltd., the European operation of the global broker-dealer Bear Stearns, 40,000 pounds (US$71,000) for failure to report its transactions in a controversial financial vehicle, the contract for difference (CFD).

In a CFD, first introduced in 2001, the holder of a contract benefits from a rise (long) or a fall (short) in the price of the referenced asset without acquiring legal title and such attendant rights as a vote in proxy contests. Use of the contract became controversial in the United Kingdom in the summer of 2004 when retail entrepreneur Philip Green sought to acquire the venerable clothing chain Marks & Spencer.

Some observers, including the government’s Takeovers Panel, became concerned that, in separating the legal and voting interest in a stock from the economic interest, CFDs can help potential acquirers circumvent statutory requirements.

It isn’t clear whether the unreported trades were on Bear Stearns’ own “prop” account or whether they were in its capacity as broker. A spokeswoman for the FSA would say Wednesday morning only that the release and final notice provided all the information the FSA believes it appropriate to provide.

The final notice of the FSA’s fine, in stating the factual background, says that the FSA asked Bear Stearns for details of all its trades undertaken on Jan. 7 “to assist with the routine checking of data integrity.” In March, the FSA brought it to Bear Stearns’ attention that no CFDs appeared on this transaction list. Bear Stearns then discovered “that it had failed to make any transaction reports of CFD transactions” since it had begun trading therewith, in 2001.

These facts became the basis of the fine levied Aug. 1. The FSA noted that it had never “previously taken action against another firm for a breach of this nature.” It considered that fact a mitigating circumstance; i.e., had it not been for the novelty, the fine might have been higher. On the other side of its balance, though, it took into account that Bear Stearns’ “failure to make transaction reports of CFD transactions could have had an impact on the ability of the FSA to investigate market misconduct.”

The penalty must be paid no later than Aug. 5.

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