Banks charged with blocking credit default swaps market


By Alex Barker
Financial Times, London
Monday, July 1, 2013

Brussels charged the world's biggest investment banks on Monday with colluding to restrict vital market information so rivals could not set up competing derivatives trading platforms.

Joaquín Almunia, the EU's competition chief, served a formal antitrust complaint against 13 banks that dominate the market for credit default swaps, a form of insurance. The statement of objections was also sent to the International Swaps and Derivatives Association (ISDA), a derivatives trade body, and Markit, a group part owned by banks that provides financial information for CDS trading.

CDS are contracts that provide insurance against a default on bond payments and are used by investors to insure against risk and speculate on creditworthiness. As many of the swaps are bespoke deals, they are typically traded between banks rather than on an exchange.

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A two-year European Commission probe concluded that the banks colluded to maintain an anti-competitive grip on the market from 2006 to 2009 through their use of Markit and Isda.

Investigators allege the relationship with Markit, which received most of the banks raw data, stopped Deutsche Börse and CME Group of the US starting rival services and ensured the banks remained indispensable dealers of CDS.

Mr Almunia said: "It would be unacceptable if banks collectively blocked exchanges to protect their revenues from over-the-counter trading of credit derivatives. Over-the-counter trading is not only more expensive for investors than exchange trading, it is also prone to systemic risks."

"The exchanges turned to ISDA and Markit to obtain necessary licences for data and index benchmarks, but, according to the preliminary findings of the commission, the banks controlling these bodies instructed them to license only for 'over-the-counter'(OTC) trading purposes and not for exchange trading," the commission said. "Several of the investment banks also sought to shut out exchanges in other ways, for example by co-ordinating the choice of their preferred clearing house."

The statement of objections is addressed to Bank of America Merrill Lynch, Barclays, Bear Stearns, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, Royal Bank of Scotland, UBS, the ISDA, and data service provider Markit.

ISDA confirmed in a statement it had received the objections notification from the commission but said it was confident it had acted properly at all times and had not infringed EU competition rules.

New global rules coming into effect will require most swaps deals to be processed through clearing houses. Many OTC swaps, such as interest rate swaps, have already made the switch but the CDS market has been relatively untouched.

According to ISDA only about 10 per cent of a market with an adjusted average outstanding notional value of $22tn was cleared last year. Many trades in Europe are cleared via IntercontinentalExchange, a US exchanges operator. A second leg of a commission investigation into the allegations was suspended last year owing to lack of evidence.

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