Markit Group Ltd., the data provider controlled by Wall Street firms including JPMorgan Chase & Co. (JPM:US) and Bank of America Corp. (BAC:US), probably won’t face U.S. sanctions for impeding competition in the $22 trillion credit-derivatives market, according to two people with direct knowledge of the four-year investigation.
The Justice Department’s antitrust division isn’t planning to press London-based Markit, led by Chief Executive Officer Lance Uggla, to alter business practices because investigators’ concerns are being addressed by the 2010 Dodd-Frank Act, the people said. The European Commission is still preparing penalties in a parallel probe, said the people, who asked not to be identified because the reviews aren’t public.
Markit provides customers with derivative and bond data and sells licenses to companies seeking to offer clients its credit-swap indexes, the most actively traded contracts. Authorities have been examining whether banks controlling the firm colluded to withhold that information to block the development of exchange trading, a shift that could have crimped their profits from handling client transactions. Dodd-Frank is opening the swaps market to competition and making it easier for new users to participate.
“Dodd-Frank has made a significant difference, and it’s therefore understandable that this is not so much on the front burner for the Department of Justice as it once was,” said Darrell Duffie, a finance professor at Stanford University in California, who researches the structure of over-the-counter derivatives markets. “The grip of the major dealers on the over-the-counter market is dramatically loosened by Dodd-Frank.”
The Justice Department examined whether banks conspired to use Markit to maintain their dominance in credit-default swaps and prevent new players from gaining a foothold, said the people. The probe was civil, according to one of the people. That means if the government were to pursue a case, the goal would be to end anticompetitive practices rather than imposing criminal penalties.
Dodd-Frank and Commodity Futures Trading Commission rules created under the law have weakened Markit’s ability to limit which companies can obtain its licenses to trade the contracts or offer clearing services, Duffie said.
The Justice Department hasn’t ended its probe, is monitoring Europe’s push for sanctions and could reverse its position on whether U.S. intervention is needed, the people said.
Adora Jenkins, a Justice Department spokeswoman, and Alex Paidas at Markit declined to comment on the Justice Department’s plans. Bloomberg LP, the parent of Bloomberg News, competes with Markit in selling information to the financial-services industry.
The European Commission signaled in a July press release that it may bring claims against targets of its probe. The competition authority said it sent Markit, 13 banks and the International Swaps & Derivatives Association a statement of objections, giving them a chance to dispute allegations before the commission issues a ruling or imposes penalties.
Citigroup Inc. (C:US), UBS AG (UBSN), Royal Bank of Scotland Group Plc (RBS), Deutsche Bank AG (DBK) and Goldman Sachs Group Inc. also are among banks with the largest stakes in Markit, according to a list of voting shares in a 2012 filing with the U.K.’s Companies House.
Spokesmen for the banks, all of which were named in the commission’s July news release, and for the ISDA, which sets standards for credit-default swaps, declined to comment. Antoine Colombani, a spokesman for Joaquin Almunia, the EU’s antitrust chief, also declined to discuss the inquiries. Goldman Sachs, Citigroup and Morgan Stanley, all based in New York, have said in regulatory filings this year that they are cooperating with U.S. investigators.
The European Commission has said it examined difficulties faced by Deutsche Boerse AG (DB1) and Chicago-based CME Group Inc. (CME:US), two of the world’s largest derivatives clearinghouses, as they sought to start a central clearing platform for instruments including credit-default swaps from 2006 to 2009. Credit derivatives with a notional value of more than $22 trillion were outstanding as of the week ended Sept. 27, according to the Depository Trust & Clearing Corp., which runs a data repository for the contracts. The value outstanding of credit-default swaps surged almost 100-fold from 2000 to 2007 to $62 trillion, ISDA estimates show.
That market has been a boon to Wall Street. JPMorgan, Citigroup, Goldman Sachs and Bank of America, the top four U.S. derivative-dealer banks, generated $11.2 billion in revenue in the first half of 2013 from trading both cash and derivative contracts according to the Office of the Comptroller of the Currency. Similar revenue figures for non-U.S. banks active in the global market aren’t available.
The exchanges’ plan threatened to reduce fees that Wall Street firms reaped for arranging over-the-counter trades with their customers. To thwart the shift, banks instructed Markit and the ISDA to deny the exchanges licenses needed to obtain data and index benchmarks, Europe’s competition authority wrote in the July announcement.
“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 authority wrote.
The Justice Department investigation began in 2009 after clearinghouses owned by CME Group and Atlanta-based IntercontinentalExchange Inc. negotiated with Markit to obtain licenses to guarantee trades based on its credit-swap indexes, people familiar with the situation said at the time. The potentially anticompetitive practices included requiring clearinghouses to buy bundled services and restricting which trades can be cleared, the people said then.
The divergence in how the European Union and the U.S. are ending the inquiries spotlights different approaches to policing anti-competitive behavior on either side of the Atlantic.
“Europe tends to be more aggressive on antitrust issues than the U.S. due to the more business-friendly free-market approach in the U.S.,” said Michael A. Carrier, a professor at Rutgers School of Law in New Jersey. Almunia’s office “has shown a willingness to really push big companies and get more out of them on antitrust violations.”
Once European authorities issue a statement of objections, “the target typically faces an uphill battle,” said Edward B. Schwartz, a partner at law firm Steptoe & Johnson LLP in Washington, who specializes in antitrust cases. He didn’t speak specifically about the Markit probe.
In the U.S., the Justice Department staff generally “knows upfront if the conduct is criminal or civil,” Schwartz said. “Criminal conduct includes hard-core antitrust violations such as price-fixing.”
While such criminal cases can lead to fines in the U.S., civil complaints usually seek court injunctions forcing companies to alter practices.
Dodd-Frank, passed in response to the financial crisis, includes provisions designed to move swaps that helped fuel the 2008 credit crisis from largely unregulated trading off exchanges to more transparent systems including swap-execution facilities, or SEFs, overseen by the CFTC and Securities and Exchange Commission. As the rules took shape, the Justice Department opted to hold back on bringing a case, according to the people with knowledge of the investigation.
Bloomberg LP created a SEF that is among new systems to have been granted a license to offer trading of Markit credit-swap indexes, Markit said in an Oct. 3 statement.
“Derivatives markets are changing and we remain focused on helping market participants migrate from bilateral trading to an electronic, multilateral market,” Armins Rusis, managing director and global head of information at Markit, said in the statement.
Markit also is changing how it offers licenses on its products. When the only way to buy or sell a swap was from a dealer bank, the firms bought licenses from Markit to trade credit-default swaps indexes with their clients, serving as the de facto venues, according to people familiar with the market.
Earlier this year, Markit began offering trading venues such as exchanges or swap-execution facilities an option to obtain a license by paying the company $10 per index trade, according to a copy of the terms reviewed by Bloomberg News. That includes dealer-to-customer trades, as well as transactions between two banks or two hedge funds, according to the term sheet.
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