European regulators to charge banks over derivatives


By Vanessa Mock, Matthew Dalton, and Katy Burne
The Wall Street Journal
Wednesday, March 27, 2013

BRUSSELS -- European antitrust authorities are moving soon to bring a case against some of the world's largest banks alleging collusion in the $27 trillion market for credit derivatives, people familiar with the investigation said.

The probe by the European Commission involves 16 financial groups. It focuses on whether they sought to stifle competition from exchanges in the market for credit-default swaps, which pay out when a country or a company defaults on its debts.

If the European regulators press ahead with their administrative case and win, some or all of the banks could face fines.

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Also under investigation is Markit Group, a credit derivatives data provider that is partly owned by the dealers, and ICE Clear Europe, a unit of Intercontinental Exchange Inc. Markit and ICE declined to comment.

The commission said Tuesday it also had "preliminary indications" a derivatives trade body, the International Swaps and Derivatives Association, might have been part of an alleged effort to limit access to the credit-derivatives market.

ISDA said it "is aware that it has been made subject to these proceedings" and is "confident that it has acted properly at all times and has not infringed EU competition rules."

Markit and ISDA are likely to be part of the commission's case, a person familiar with the investigation said.

The probe is part of U.S. and European efforts to bring more competition to the opaque markets for CDS. The contracts came under fire during the 2008 financial turmoil and, more recently, the European debt crisis. Critics complained that some investors used them to speculate on the health of a country or company, not just as insurance against defaults.

The U.S. Department of Justice has launched a probe into the possibility of anticompetitive activity in credit-derivatives trading and clearing, and in information services industries supporting the activities. That probe is ongoing, a DOJ spokesman said, declining to elaborate.

Among those the European Commission probe has focused on are such industry giants as J.P. Morgan Chase, Goldman Sachs Group Inc., and Deutsche Bank, the commission has said.

Others potentially involved, it has said, are Bank of America, Citigroup Inc., Barclays, BNP Paribas SA, Commerzbank AG, Credit Suisse Group, HSBC Holdings PLC, Morgan Stanley, Royal Bank of Scotland Group, UBS AG, Wells Fargo & Co., Credit Agricole, and Societe Generale.

The banks either declined to comment or didn't immediately reply to requests for comment.

The European Commission, the European Union's executive arm, said in 2011 it was investigating whether there was a coordinated effort among banks to prevent exchanges from getting a piece of the CDS market.

Unlike other financial instruments, these are traded privately between two parties, away from regulated exchanges where prices are displayed—meaning that customers aren't able to see whether they are getting the best prices.

The probe is part of a push by European officials to wrest control of the market from a relative handful of global derivatives dealers and move swaps trading onto exchanges, where pricing is more transparent.

The U.S. Dodd-Frank law and new EU legislation both called for derivatives, with some exceptions, to be traded on exchanges.

Officials hope that moving trading onto exchanges would help regulators monitor risks in the market and help prevent a repeat of the 2008 credit debacle.

A reshaping of credit-derivatives markets, and a move to open futures exchanges, poses a threat to profits dealers have long made in that market by dominating it. Profits for financial institutions that act as the intermediaries could shrink because of a smaller spread between bid and ask prices.

European regulators in April 2011 began looking into whether a number of investment banks had used Markit Group, the leading provider of financial information in the CDS market, to block the development of certain CDS trading platforms.

The commission said it was looking at whether dealers were providing raw swaps data only to Markit. The banks at the time either declined to comment or didn't respond to requests for comment.

Markit runs auctions to determine the price at which CDS holders can settle when a default occurs, but it does so on behalf of ISDA, which owns the intellectual property on the swaps auctions.

European authorities are looking into whether ISDA refused to allow exchanges to license CDS auction data that would be necessary to determine the payout on an exchange-traded CDS contract, according to two people familiar with the probe.

According to a person familiar with the matter, the commission's investigation of CDS trading is at a more advanced stage than another probe it is conducting—into whether banks colluded in the fixing of the Libor and Euribor benchmark lending rates.

Under EU rules, the European Commission's antitrust department first sends a so-called "statement of objections" laying out the charges. Companies are given a chance to respond to any charges levied.

If the commission decides to sanction a company, it can fine a firm up to 10% of its annual global revenue, though penalties that big are rare.

Regulators also take into consideration the market impact a violation has had, as well as its duration.

Companies that cooperate with a probe can be dealt with more leniently than others.

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