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EU Accuses 13 Banks of Hampering CDS Competition

July 01, 2013

EU Accuses 13 Investment Banks of Hampering CDS Competition

Goldman Sachs Group Inc. signage is displayed on the floor of the New York Stock Exchange in New York. Photographer: Jin Lee/Bloomberg

Thirteen of the world’s biggest investment banks were accused by the European Union of colluding to curb competition in the $10 trillion credit derivatives industry.

The EU sent a complaint, or statement of objections, to 13 banks, data provider Markit Group Ltd. and the International Swaps & Derivatives Association over allegations they sought “to prevent exchanges from entering the credit derivatives business between 2006 and 2009,” the European Commission said.

The probe is one of several by the Brussels-based commission into the financial industry, including whether banks colluded to manipulate U.K. and European benchmark interest rates. Joaquin Almunia, the EU antitrust chief, said he’s seeking to settle the probes into Libor and Euribor with some of the same banks in the CDS case by the end of the year.

The EU in April 2011 opened a probe into whether banks colluded by giving market information to Markit, a data provider majority-owned by Wall Street’s largest banks. Earlier this year, the EU extended its investigation to include ISDA, having found indications that it “may have been involved in a coordinated effort of investment banks to delay or prevent exchanges” from entering the credit swaps business.

The banks in the CDS probe are Goldman Sachs Group Inc., JPMorgan Chase & Co. (JPM:US), Citigroup Inc. (C:US), Credit Suisse Group AG (CSGN), Deutsche Bank AG (DBK), Morgan Stanley, Barclays Plc (BARC), Bank of America Corp. (BAC:US), HSBC Holdings Plc (HSBA), Royal Bank of Scotland Group Plc (RBS), BNP Paribas SA (BNP) and UBS AG (UBSN), the commission said. Bear Stearns, which is now a unit of JPMorgan, was also named by the EU authority.

‘Desperate’ Banks

“I’m sure banks are desperate to keep these products from going on exchange and keep as much of the pie to themselves as they can, that sort of stands to reason,” said Robert Kendrick, a credit analyst at Legal & General in London. “As an investor in banks, I’d be surprised if it makes a huge difference. As an investor in CDS more generally, I’d like to see more transparency.”

ISDA is cooperating with the EU and “is confident that it has acted properly at all times,” the New York-based organization said in an e-mailed statement.

Officials at Deutsche Bank, Goldman Sachs, HSBC, RBS, Bank of America, Morgan Stanley (MS:US), JPMorgan, Credit Suisse and Citigroup declined to comment. Officials at Markit couldn’t be immediately reached to comment on the statement of objections.

U.S. Probe

The EU investigation follows a similar probe by the U.S. Justice Department into potentially anticompetitive practices at Markit that began in 2009 and has since been expanded to include other companies. The Justice Department declined to comment beyond confirming that it is conducting the probe.

Markit, which administers credit-default swap indexes, is working with IntercontinentalExchange Inc., which owns the world’s largest clearinghouse for default swaps, to create a futures market linked to its benchmarks.

Difficulties faced by Deutsche Boerse AG (DB1) and CME Group Inc. as they tried to enter the industry sparked the EU investigation. The two companies were unable to obtain CDS exchange-trading licenses from Markit and ISDA, who were acting on instructions from investment banks, according to findings by the EU investigating team.

“The commission takes the preliminary view that the banks acted collectively to shut out exchanges from the market because they feared that exchange trading would have reduced their revenues from acting as intermediaries in the OTC market,” the EU’s executive arm said.

Global Regulators

Global regulators are seeking to toughen regulation of the credit-default swap market, saying the trades helped fuel the financial crisis. The EU’s swaps probes add to separate investigations into whether banks colluded to manipulate the London interbank offered rate and oil benchmarks.

“Perhaps one of the outcomes of this sort of inquiry will be to speed up the process of standardizing contracts in the market in order to facilitate more activity on the exchanges,” Richard Reid, an economist at the University of Dundee in Scotland, said in an e-mailed statement. “This in turn would also help to allay some concerns about the stability risks emanating from the derivatives business.”

While fines for antitrust violations can reach 10 percent of global sales, only about a tenth of recent punishments have approached that ceiling, according to EU data updated in March. About half of penalties amount to less than 1 percent, according to the commission.

Too Soon

Almunia declined to speculate on the size of possible penalties against the companies and said regulators gave the parties “some general orientation on how to estimate and calculate the fines.”

“Today, it is still very soon to elaborate on this issue,” he said.

About 2 million CDS contracts have been traded so far this year, with a notional value of $10 trillion, the commission said, citing data from the Depository Trust & Clearing Corporation.

Bloomberg LP, the owner of Bloomberg News, competes with Markit in selling information to the financial-services industry.

To contact the reporter on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net Abigail Moses in London at amoses5@bloomberg.net Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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