13 global banking giants got some relief as the European Commission closed antitrust proceedings against the banks over alleged collusion in the credit-derivatives market owing to lack of evidence.
Two years back, the European Union’s (EU) anti-trust body charged the 13 banks along with International Swaps and Derivatives Association (ISDA) and Markit – a financial data provider– for preventing exchanges from entering the lucrative credit derivatives market during 2006–2009.
The banks involved are – Bank of America Corp. BAC , Citigroup Inc. C The Goldman Sachs Group, Inc. GS , JPMorgan Chase & Co. JPM along with the Bear Stearns Co. business that it purchased , Morgan Stanley MS, Barclays PLC BCS , The Royal Bank of Scotland Group plc RBS, UBS Group AG UBS, HSBC Holdings plc HSBC, BNP Paribas SA BNPQY and Credit Suisse Group AG CS and Deutsche Bank AG DB.
While the commission dropped charges against the banks, it will continue to pursue its investigations against Markit and ISDA.
According to the latest statement by the commission, “Today’s closure decision regarding the 13 investment banks is based on a thorough analysis of all information received from the parties in their replies and during the oral hearing of May 2014, as well as on documents obtained through additional fact finding. The evidence was not sufficiently conclusive to confirm the Commission's concerns with regards to the 13 investment banks.”
Allegations
It was alleged that the banks taking advantage of their position in the internal committees of ISDA and Markit, prevented Deutsche Boerse Group and CME Group Inc.'s CME Chicago Mercantile Exchange from entering the credit default swaps (CDS) business during 2006–2009.
CDS permits an investor to place a bet on whether a company or country will default on its bonds within a fixed time period. Basically, it serves as protection against the credit risk stemming from holding the debt instrument. CDS were initially traded over-the-counter (OTC) and investment banks usually served as intermediary between supply and demand in credit derivatives market. Gradually, given the regulatory efforts to improve transparency, CDS have been shifting to exchanges.
The EU alleged that the banks were against the CDS move from OTC to the exchanges, as their bottom lines would have suffered, since exchange-traded CDS are less expensive. Hence, the banks instructed ISDA and Markit to refuse the stock exchanges licenses to use their data for creating exchange traded CDS. They were only given licenses to use data for OTC products.
Further, OTC trading of CDS lacked transparency and regulatory oversight, thereby weakening the financial markets. This was more exposed when Lehman Brothers Inc. collapsed in 2008. Since then, efforts from regulators across the globe continue in an attempt to make derivatives trading more transparent.
Bottom Line
The global banking giants are encountering numerous lawsuits with charges ranging from soured mortgage loans, rigging of interest rates to collusion in derivatives market. Many of the banks have paid billions of dollars as fines and compensation to settle such lawsuits and probes. We remain encouraged as regulators are expediting efforts to deliver justice to the affected investors and it has made banks cautious of engaging in any kind of malpractice.
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