EU CDS Probe Targets 16 Large Banks Over Alleged Collusion

04/29/2011 08:51 am ET | Updated Jun 29, 2011

BRUSSELS -- The EU's competition watchdog is investigating the practices of some the world's biggest banks, as well as a market data firm and a clearing house, in the market for credit default swaps.

The two probes home in on a market that has come under fire for lacking transparency and allegedly worsening debt market turmoil during the financial crisis. While the investigations focus on competition issues, they accompany a broader regulatory crackdown in Europe on credit default swaps and other derivatives.

The European Commission said it has "indications" that the 16 banks acting as dealers in the CDS market – practically all the big players in global investment banking – give essential information on pricing and other daily activities only to Markit, the leading financial data provider for that market.

Such preferential treatment "could be the consequence of collusion between them or an abuse of a possible collective dominance" and could lock other data providers out of the CDS business, the Commission said.

The 16 firms targeted are JP Morgan, Bank of America Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, Wells Fargo, Credit Agricole and Societe Generale.

Credit default swaps were invented to help investors insure themselves against the default of a company or a state whose bonds they hold. However, they have also been used for speculation and the profits some banks and hedge funds make from such transactions have come under scrutiny during the financial crisis.

"CDS play a useful role for financial markets and for the economy," said Joaquin Almunia, the EU's competition commissioner, said in a 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."

In a second case, the Commission is also investigating whether nine of those banks received preferential treatment – such as lower fees and profit-sharing deals – from ICE Clear Europe, the biggest CDS clearing house in the EU.

"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," the Commission said.

The banks targeted in the second probe are Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley and UBS.

Almunia said he hoped that the "investigation will contribute to a better functioning of financial markets and, therefore, to a more sustainable recovery."