The Financial Services Authority has asked banks to clamp down on potential insider trading in the securities markets and warned those that fail to report suspicious trades could face penalties.

The UK regulator has met banks and fund managers that trade in credit default swaps and loans to determine whether traders are using inside information, and check whether banks have adequate controls to report suspicious trades. While it found no specific market abuse, the FSA has called on banks to remain vigilant. Dilwyn Griffiths, head of market monitoring at the FSA, said: "Banks should report any suspicious trades to us. They are at the coal face and best placed to pick up on any untoward trading in the CDS or loan markets." The CDS market, in which traders can buy protection against the likely default of a company, is opaque and swaps are traded over-the-counter, making the market difficult to police. The FSA has demonstrated its intention to cut down on insider trading opportunities by threatening to impose penalties on companies that fail to report suspicious trades. An FSA spokeswoman said the nature of the penalties had yet to be established as the reporting regime is relatively new. The threshold for suspicious transactions and how much reporting each bank is expected to do has yet to be confirmed, she said.
"We are visiting firms that are not reporting as many suspicious transactions as their peers to discuss the thresholds they employ and to see if the necessary controls are in place. We would consider taking action against banks if after discussions we saw continued failure to report or to implement adequate controls." Debt bankers have voiced fears that traders within hedge funds and investment banks have gained access to privileged information and used that knowledge to trade other securities, such as CDS, shares or secondary market loans. One said: "On a weekly, if not daily basis, you see examples of spikes in CDS prices followed a short while later by the announcement of a bond sale. That suggests the right controls are not in place." Concerns have increased with the explosive growth of the leveraged loan market in which hedge funds have emerged as the dominant lenders. According to Close Brothers, a UK corporate finance house, hedge funds and specialised debt funds are responsible for providing nearly three quarters of the money backing European leveraged loans. Holders of these loans have access to private information dictating the terms on which a company could breach its loan covenants and potentially default on its debt. If it is acquired by traders, the information can be used to gain a competitive and illegal advantage. The FSA called on securities firms to report suspicious trades when announcing the Markets Abuse Directive in July last year and has repeated its calls when publishing Market Watch, which looks at market conduct and transaction reporting issues.