A major story that got scant attention in the US is the European Union’s investigations into whether a financial technology vendor, a clearinghouse and major banks engaged in antitrust activities in the credit default swaps (CDS) market. The EU action is similar to one started by US authorities in 2009 and both efforts, along with the Dodd-Frank push for OTC clearing, will usher in a belated transparency to the CDS market.
The investigations are being led by Joaquín Almunia, EU Commission vice president in charge of competition policy. The CDS market has played “a useful role for financial markets and for the economy,” says Almunia in a prepared statement. “Recent developments have shown, however, that the trading of this asset class suffers a number of inefficiencies that cannot be solved through regulation alone. We are therefore opening two new cases to improve market transparency and fairness in the CDS market.”
In the first case, the EU in a public statement says it has “indications that the 16 banks that act as dealers in the CDS market give most of the pricing, indices and other essential daily data only to Markit [Group], the leading financial information company in the market concerned. This could be the consequence of collusion between them or an abuse of a possible collective dominance and may have the effect of foreclosing the access to the valuable raw data by other information service providers. If proven, such behavior would be in violation of EU antitrust rules.”
The 16 firms under investigation, which have partial ownership in Markit, are: JP Morgan Chase & Co., Bank of America, Barclays , BNP Paribas, Citigroup, Commerzbank, Credit Suisse Group, Deutsche Bank, Goldman Sachs Group, HSBC, Morgan Stanley, Royal Bank of Scotland Group, UBS, Wells Fargo & Co., Crédit Agricole and Société Générale. In statements to the press, Markit Group officials say they have not engaged in any inappropriate conduct and that Markit’s data offerings are made available to all market participants.
The second EU inquiry is focused on the relationship between nine of the aforementioned investment banks (BofA, Barclays, Citigroup, Crédit Suisse Group, Deutsche Bank, Goldman Sachs, JP Morgan Chase & Co., Morgan Stanley and UBS) and the dominant clearinghouse for the continent, ICE Clear Europe. The nine banks have a history with the subsidiary of IntercontinentalExchange because they once owned the Clearing Corp., which they sold to IntercontinentalExchange.
At issue are the clauses of the sales agreement, which allow IntercontinentalExchange to share profits from the clearing of CDS instruments with the banks, and to give them lower fees for clearing services. The EU says these clauses “might create an incentive for the banks to use only ICE as a clearing house. The effects of these agreements could be that other clearing houses have difficulties successfully entering the market and that other CDS players have no real choice where to clear their transactions.”
IntercontinentalExchange officials have responded by pointing out that major investments in superior services and offerings have given it the top spot and not its arrangements with the banks.
In defense of those highlighted by the EU action, it should be noted that all are innocent until proven guilty and that no formal charges have been lodged against them. These are only investigations at this point and may not yield any smoking gun evidence of collusion or wrongdoing. It also strikes me as interesting that now, after all these years, regulators are asking questions that might have been better asked more than a decade ago at the genesis of the CDS market. (The EU action is also likely to remind the industry that the US Justice Department also has a similar CDS probe underway.) If nothing else, these regulatory investigations serve as key evidence in the argument for greater transparency.
We are in a vastly different world since the birth of the CDS market and we have learned the hard way the consequences of bilateral darkness. We have to shine the light on the CDS market now, open it up to all players and let the chips fall where they may.
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