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Thursday, December 31, 1998 Published at 15:53 GMT

Business: The Economy

Derivatives firms shut down

Shades of Leeson: A new crisis for the options and futures exchange

Big losses incurred by a London futures and options trader are believed to be behind the forced closure of two derivatives trading firms by the UK's Securities and Futures Authority (SFA).

GLH Derivatives and the London arm of Chicago's Griffin Trading Company, responsible for clearing the local trades of GLH, were told to cease investment business on Wednesday.

The action was taken because the two firms were in default after a single trader lost £6.2m on German derivative investments, the Financial Times has reported. The trader had exceeded - by ten times - the amount to which he was limited to trading, the paper said.

The defaults are the first in the industry since the collapse of Barings in 1995 in the wake of massive losses incurred by rogue trader Nick Leeson.

The SFA said in a statement: "Both firms may not be fit and proper to carry on investment business, that they had committed acts of misconduct under SFA rules and that SFA intervention was desirable for the protection of investors."

Derivatives are options and futures investments, which see investors betting on the future levels of the markets for commodities, shares and other financial instruments. This financial tool can be used to hedge against risks like currency fluctuations, but also attracts speculators.

Wider fallout

The SFA action has also seen more than 100 other unrelated traders at the London International Financial Futures and Options Exchange (Liffe) having their capital frozen and they could lose half of it, the Financial Times newspaper said.

This secondary action suggests the Griffin clearing house may not have adequately separated the accounts of different traders.

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