EU opens antitrust probes into credit default swaps
(BRUSSELS) - European regulators opened on Friday two antritrust probes into the credit default swap market, targeting US and European banking giants over instruments used as insurance against national debt default.
The European Commission said it will examine whether 16 investment banks and Markit, the leading provider of CDS market information, colluded or abused a dominant position to control financial information.
In the second case, the commission will look at whether preferential tariffs nine of the banks received from ICE Clear Europe, the leading clearing house for CDS, locked their competitors out of the market.
"CDS play a useful role for financial markets and for the economy," said European competition commission Joaquin Almunia.
"Recent developments have shown, however, that the trading of this asset class suffers a number of inefficiencies that cannot be solved through regulation alone," he said.
A niche market that provides investors protection against the risk of default, CDS derivatives have become for their critics a symbol of reckless speculation in the wake of the Greek sovereign debt crisis.
"Lack of transparency in markets can lead to abusive behaviour and facilitate violations of competition rules and the commission should react accordingly," Almunia said.
"I hope our investigation will contribute to a better functioning of financial markets and, therefore, to a more sustainable recovery," he said.
The 16 banks under investigation are JP Morgan, Bank of America Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, Wells Fargo Bank/Wachovia, Credit Agricole and Societe Generale.
The commission said it had indications that the banks, which act as dealers in the CDS market, give most of the pricing, indices and other essential daily data "only to Markit."
"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," it said.
"If proven, such behaviour would be in violation of EU antitrust rules," the commission said.
The probe will also look into the behaviour of Britain-based Markit, a company which the commission said was created to enhance the transparency of the CDS market.
The commission said it was concerned that certain clauses in Markit's licence and distribution agreements "could be abusive and impede the development of competition in the market for the provision of CDS information."
The second investigation is looking at preferential fees and profit sharing agreements between nine banks and ICE.
"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," it said.
"The commission will also investigate whether the fee structures used by ICE give an unfair advantage to the nine banks, by discriminating against other CDS dealers."