European Commission Accuses 13 Banks Of Blocking CDS Market

By Mani
Updated on

European Commission has charged 13 investment banks, ISDA and Markit Group of blocking entrants into the credit default swap market.

European Commission Accuses 13 Banks Of Blocking CDS Market

In its today’s press statement, the European Commission indicated that it has sent its statement of objections to the large banks as a step towards its ongoing antitrust investigation into the opaque but lucrative credit default swaps, which the commission opened in April 2011.

The 13 banks covered in the CDS probe are Goldman Sachs Group Inc (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc (NYSE:C), Citigroup Inc. (NYSE:C), Deutsche Bank AG (NYSE:DB) (ETR:DBK) (FRA:DBK), Morgan Stanley (NYSE:MS), Barclays PLC (NYSE:BCS) (LON:BARC), Bank of America Corp (NYSE:BAC), HSBC Holdings Plc (LON:HSBA), Royal Bank of Scotland Group plc (NYSE:RBS) (AMS:RBS) (LON:RBS), BNP PARIBAS (BIT:BNP) (EPA:BNP) and UBS AG (NYSE:UBS), the commission said. Bear Stearns, which is now a unit of JPMorgan, was also named by the EU authority.

€10 Trillion Notional Amount

Credit Default Swaps (CDS) are contracts to facilitate investors to reduce or eliminate the risk that a borrower will default on a loan or a bond. As they were traded over the counter, and negotiated privately and bilaterally, exchanges did try to enter this lucrative segment.

According to the commission, there are currently almost 2 million active CDS contracts with a joint notional amount of 10 trillion euros worldwide.

Deutsche Borse and Chicago Mercantile Exchange Group tried to launch central clearing and exchange trading of credit derivatives. However, they couldn’t obtain a license from Markit and ISDA.

Findings Of European Commission

Based on its investigation, the commission has reached a preliminary conclusion that these 15 entities may have breached EU antitrust rules that prohibit anticompetitive agreements. The commission also feels the entities may have coordinated their behavior in order to jointly prevent exchanges from entering the CDS market between 2006 and 2009.

Ben Moshinsky, Abigail Moses and Stephanie Bodoni of Bloomberg observe the Brussels-based European Commission’s probe is one of several into the financial industry, including whether banks colluded to manipulate U.K. and European benchmark interest rates.

As reported earlier, three lenders were fined about $2.5 billion for rigging the London interbank offered rate, or Libor. The regulators have found that in an attempt to rig Libor, traders at Barclays PLC (NYSE:BCS) (LON:BARC), Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) and UBS AG (NYSE:UBS) misstated their firms’ cost of borrowing and colluded with counterparts at other banks to profit from bets on derivatives. The regulators are also investigating benchmarks for the crude-oil and swaps markets.

The European Commission indicated that if it is confirmed that banks breached the prohibition of anticompetitive agreements, the commission could impose sanctions.

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