Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Banks receive statements of objections from European Commission in credit default swap investigation, (Jul 1, 2013)

By Jeffrey May, J.D.

The European Commission (EC) has reached a preliminary conclusion that 13 of the world's largest investment banks colluded to prevent exchanges from entering the credit derivatives business between 2006 and 2009. The EC announced today that it has sent statements of objections (SOs) to the banks, as well as two bodies that they control—Markit Group Ltd. and the International Swaps and Derivatives Association (ISDA)—informing them of its preliminary view that the banks violated European Union antitrust rules with respect to credit default swaps. The EC will now hear from the banks, Markit, and ISDA before taking any decision on whether to impose sanctions.

The EC identified the recipients of the SOs. In addition to Market and ISDA, the 13 bank recipients are: Bank of America Merrill Lynch, Barclays, Bear Stearns, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, Royal Bank of Scotland, and UBS.

“If it is confirmed that banks collectively blocked exchanges from the CDS market, breaching the prohibition of anticompetitive agreements enshrined in the Treaty, it would be unacceptable and the Commission could decide to impose sanctions,” said Joaquin Almunia, EC Vice President responsible for Competition Policy, in a prepared statement.

“A credit default swap (CDS) is a derivative contract designed to transfer the credit risk (the risk of default), linked to a debt obligation referenced in the contract. CDS are used by investors for hedging and investing,” the EC explained. A CDS provides protection against the credit risk arising from holding debt instruments.

Exchanges, such as Deutsche Borse and the Chicago Mercantile Exchange, had unsuccessfully attempted to launch central clearing and exchange trading of credit derivatives, according to the EC’s preliminary findings. However, ISDA and Markit allegedly refused to provide licenses for data and index benchmarks, at the urging of the banks. Some investment banks also purportedly sought to shut out exchanges by coordinating among themselves the choice of their preferred clearing house.

According to Almunia, it appears that the banks acted collectively to delay the emergence of exchange trading of credit derivatives because they feared that it would reduce their revenues. Exchange-trading of credit derivatives could have improved transparency and market stability, it was asserted.

“This case illustrates that financial markets must remain open, competitive and fair so that they work at the service of the real economy and of society,” said Almunia. “This is particularly important for CDS, given the role that these products play in the financial sector—indeed, there are currently almost 2 million active CDS contracts with a joint notional amount of 10 trillion euros worldwide.”

The EC opened its investigation in April 2011 and extended its scope to ISDA in March 2013, according to the announcement.

The U.S. Department of Justice also is conducting an investigation into anticompetitive practices in the credit derivatives market. The Justice Department reportedly opened its investigation in 2009. At that time, London-based Markit acknowledged the inquiry and pledged to cooperate in the investigation.

Companies: Bank of America Merrill Lynch; Barclays; Bear Stearns; BNP Paribas; Citigroup; Credit Suisse; Deutsche Bank; Goldman Sachs; HSBC; JP Morgan; Morgan Stanley; Royal Bank of Scotland; UBS; Markit Group Ltd.; International Swaps and Derivatives Assn.

News: Antitrust