Faced with the prospect of regulation in the wake of the Bankers Trust derivatives controversy, securities trade groups are circulating a voluntary code of ethics.

Drafted with the help of the Federal Reserve Bank of New York, the proposed "wholesale transaction code of conduct" is intended to supplement existing regulations and statutes for over-the-counter transactions.

The draft was written by the Emerging Markets Traders Association, the Foreign Exchange Committee of the Federal Reserve Bank of New York, the International Swaps and Derivatives Association, the New York Clearing House Association, the Public Securities Association, and the Securities Industry Association. It is out for comment until Feb. 10.

Although Bankers Trust New York Corp.'s disputes with Gibson Greetings Inc. and Procter & Gamble Co. are not mentioned, a copy obtained by American Banker reads as if it were written in reaction to those cases.

The cases hinged on whether the client was adequately informed and capable of understanding the risks.

Bankers Trust settled out of court with Gibson Greetings, which alleged the bank fraudulently failed to disclose the risks of the company's derivatives contracts.

A similar suit by Procter & Gamble is still pending.

As a result of the Gibson case, the bank also entered a consent decree with banking and securities regulators in which it admitted no wrongdoing, but agreed to pay $10 million in fines and revamp its sales practices.

The proposed code "is intended to cover only transactions of active parties and it stresses that counterparties should have the independent capability to analyze the risks involved in the transactions," said a spokesman for the international swaps group.

The code also stresses that parties to over the counter transactions should operate under the assumption that the counterparty is acting at "arm's length" and not as an investment adviser, unless noted otherwise in writing.

" A participant should assume that each counterparty deals at arm's length for its own account. A participant should not treat or construe communications ... from another participant as recommendations of investment advice and should not rely on them as such," the code states.

In Bankers Trust's lawsuit with Gibson, the greeting card manufacturer contended that it had a relationship with the bank of more than a decade, and that its derivatives dealings with Bankers Trust were more than just arm's-length transactions. Bankers Trust denied this claim in its settlement with the company.

A number of the provisions in the proposed code deal with counterparty suitability, an area Congress has been threatening to regulate for years.

Ernest T. Patrikis, general counsel and executive vice president of the New York Fed, emphasized that the voluntary guidelines cover more than just derivatives dealing.

"It's a code of conduct covering all OTC transactions, not just derivatives," he said. "It's an important distinction."

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