Brussels, 01/07/2013 (Agence Europe) - On 1 July 2013, the European Commission sent a statement of objections to 13 investment banks as well as to the International Swaps and Derivatives Association (ISDA) and data service provider Markit, accusing them of colluding to prevent exchanges from entering the credit derivatives business.
After an investigation launched in April 2011, the European Commission says that the banks in question (Bank of America-Merrill Lynch, Barclays, Bear Stearns, BNP Paribas, Citigroup, Morgan Stanley, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Royal Bank of Scotland and UBS) “acted collectively to shut out exchanges from the market because they feared that exchange trading would have reduced their revenues from acting as intermediaries in the OTC market”.
Between 2006 and 2009, Deutsche Börse and the Chicago Mercantile Exchange tried to enter the credit derivatives business. In the period under investigation (2006-2009), CDS were traded over-the-counter (OTC), that is to say, they were privately and bilaterally negotiated. In OTC trading an investment bank typically acts as intermediary between supply and demand in the market for credit derivatives by promising to be a seller to every buyer and to be a buyer to every seller. Exchange trading, on the contrary, matches supply and demand on an exchange's trading platform. 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” trading purposes and not for exchange trading. Several of the investment banks also sought to shut out exchanges in other ways, for example, by coordinating the choice of their preferred clearing house.
The parties may now submit comments. If they admit guilt, they will be fined up to 10% of turnover. EU Competition Commissioner Joaquin Almunia says that the Commission will recommend a gradual transfer of CDS dealing from OTC to organised exchanges and central clearing houses in order to reduce risk and boost transparency, a process that the banks are accusing of delaying in order to protect their profits on the OTC market. The Commissioner says that some of the banks in question are also being investigated for fiddling the Libor and Euribor benchmarks, an investigation where the Commission is hoping to reach an out-of-court settlement. (FG/transl.fl)