Bloomberg News

Swaps Probe Stalled on Secrets as EU Readies Libor Fines

November 08, 2013

The European Union’s antitrust probe into credit derivatives trading by 13 of the world’s biggest banks stalled after the lenders’ lawyers won the right to see confidential information compiled by investigators.

The banks asked to see business secrets about their rivals in EU files to help them fight a formal antitrust complaint sent in July, according to five people familiar with the probe who asked not to be identified because the process isn’t public.

Meeting the requests may add about four months to the investigation, after the EU extended its deadline for responses to the so-called statement of objections, two people said.

“A decision before the end of Competition Commissioner Joaquin Almunia’s term would be possible, but in reality pretty difficult,” said Jacquelyn MacLennan, a lawyer at White & Case LLP in Brussels, who’s not involved in the case. “This is not a settlement case but a full procedure,” so wrapping it up before Oct. 31 next year “is a challenge.”

The credit-default swaps probe, which includes HSBC Holdings Plc (HSBA), JPMorgan Chase & Co. (JPM:US) and Royal Bank of Scotland Group Plc. (RBS), is one of two priority EU investigations into financial institutions. Almunia is poised to fine many of the same banks for rigging benchmarks including the London interbank offered rate in a scandal that’s tarnished the reputation of lenders seeking to recover from the biggest financial crisis since the Great Depression.

Confidential Data

Antoine Colombani, Almunia’s spokesman at the European Commission in Brussels, declined to comment.

The commission was required to grant access to potentially confidential data after lawyers in the CDS probe argued the information was vital given the complexity of the case, the people said. Such data would be evidence in the commission’s file, such as e-mails and other messages for which business secrecy was claimed, one person said.

After lengthy discussions, the EU agreed to distribute DVDs to lawyers with the sensitive data in exchange for pledges to protect the information. This process, known as a virtual data-room, is used only in exceptional circumstances, according to EU guidelines.

Once lawyers have finished reviewing the information they would go back to the commission and seek further permission for parts of it to be shared with their clients, said the person. It’s then up to the commission to allow this or not.

“If the commission has agreed to provide additional access to file to one party, it will need to provide the same access to all the other parties,” MacLennan said. “That could delay the case substantially, since the commission needs to identify what it plans to provide. All the addressees will need sufficient time to receive and review the new information and respond.”

Second Time

The delays are the second time the investigation has been thrown off track by confidential-data issues.

Earlier in the case, business secrets were disclosed when the EU regulator shared information on the antitrust file with the lenders in the probe, plus the International Swaps & Derivatives Association and Markit Group Ltd., the data provider controlled by Wall Street banks.

Company lawyers failed to redact the private information, the commission said. After the unintended data leak was discovered, recipients were told by the EU to destroy the information without reading it.

In the underlying probe, the EU accused the 13 banks as well as Markit and ISDA of working together to prevent Deutsche Boerse AG (DB1) and the Chicago Mercantile Exchange from entering the credit-derivatives business from 2006 to 2009.

Index Benchmarks

The EU authority said it suspected that “the banks controlling” ISDA and Markit instructed them to prevent the two exchanges from obtaining licenses for data and index benchmarks in order to keep derivatives business in the over-the-counter market.

The entry of exchanges would have reduced banks’ revenues from acting as intermediaries in the over-the-counter market, the regulator said.

The EU announced the CDS probe on April 29, 2011, -- the same day that U.K. staff at British banks Barclays, HSBC and RBS had a public holiday to celebrate the wedding of Prince William and Catherine Middleton.

European lenders Deutsche Bank AG (DBK), Credit Suisse Group AG (CSGN), BNP Paribas SA (BNP) and UBS AG (UBSN) are also under investigation by the EU, along with U.S. banks Citigroup Inc. (C:US), Morgan Stanley (MS:US), Bank of America Corp. (BAC:US) and Bear Stearns Cos., which JPMorgan acquired in 2008.

Separate Probe

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

In a separate probe in the U.S., Markit probably won’t face sanctions for impeding competition in the $22 trillion credit-derivatives market, two people with direct knowledge of the four-year probe said last month.

The Justice Department’s antitrust division isn’t planning to press Markit to alter business practices because investigators’ concerns are being addressed by the 2010 Dodd-Frank Act, the people said.

To contact the reporters on this story: Gaspard Sebag in Brussels at gsebag@bloomberg.net; Stephanie Bodoni in Brussels at sbodoni@bloomberg.net

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


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