Banks Hit with Class Action over Interest Rate Swap Fix

Zacks

Litigation issues seem to be far from over for major global banks. On Wednesday, 10 banking giants and two trading platforms were hit by a class action lawsuit for alleged conspiracy in order to restrict competition in the most commonly traded derivative – interest rate swaps – market. The news was first reported by Reuters.

The suit, filed in the U.S. District Court in Manhattan by The Public School Teachers' Pension and Retirement Fund of Chicago, alleged that the banks – The Goldman Sachs Group, Inc. GS, Bank of America Corporation BAC, Citigroup Inc. C, JPMorgan Chase & Co. JPM, Credit Suisse Group AG CS, Barclays PLC BCS, The Royal Bank of Scotland Group plc RBS, UBS Group AG UBS, Deutsche Bank AG DB and BNP Paribas SA BNPQY – colluded to thwart the trading of interest rate swaps on electronic exchanges.

Notably, since 2007 the banks have acted collectively to purge any firm or practice that had the possibility to bring exchange trading to buy-side investors in the $320 trillion interest rate swaps market in order to “preserve an extraordinary profit center”. Per the complaint, the banks "have been able to extract billions of dollars in monopoly rents, year after year, from the class members in this case.”

As a result of the collusive act, the Chicago school teachers’ pension fund, which bought interest rate swaps from several banks in order to hedge against interest rate risk on debt, were left with limited choice and paid excess for those swaps.

Among other defendants in the suit, trading platforms ICAP Capital Markets LLC and Tradeweb Markets LLC were alleged to have facilitated the antitrust violations by serving as a platform for cartel and taking business decisions on behalf of the banks. As most of the defendant banks own equity stakes in Tradeweb and hold positions on the board and governance committees of the company, the bankers influenced the direction of the Tradeweb and jointly prevented the development of swap exchanges by companies including – CME Group, TrueEX and Javelin Capital Markets – that are more investor friendly.

The latest suit follows 12 banks’ settlement to resolve charges pertaining to collusion of another type of derivative –credit default swaps (CDS), in September. The $1.87 billion settlement resolved investors’ claims of artificially inflating prices and restricting competition in the CDS market, which constituted a violation of the U.S. antitrust law. (Read more: CDS Market Manipulated; 12 Major Global Banks to Pay $1.9B )

The global banking giants are encountering numerous lawsuits with charges ranging from soured mortgage loans to rigging of interest rates. Many of the banks have paid billions of dollars as fines and compensation to settle such lawsuits and probes. The latest addition will further fuel their legal troubles. While regulators are striving to deliver justice to the affected investors and prevent further occurrence of such issues, we believe that it is high time that these banking behemoths realize that they cannot always find an easy escape to their wrong deeds.

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