Friday, 29 April 2011

European antitrust authorities have opened two investigations into the financial institutions and clearinghouse that operate the global market for credit-default swaps, the derivatives that act as insurance against a debt default.

European antitrust authorities have opened two investigations into the financial institutions and clearinghouse that operate the global market for credit-default swaps, the derivatives that act as insurance against a debt default.

The probes signal more scrutiny of the $23 trillion global credit-default-swaps market. European Union officials are investigating whether the relationships between large financial firms, market information providers and clearinghouses have distorted competition in the market. These instruments were blamed for exacerbating the financial crisis in 2008 and the European sovereign-debt crisis last year.

"[Credit-default swaps] play a useful role for financial markets and for the economy," EU antitrust chief Joaquin Almunia said in a statement Friday announcing the investigations. "Recent developments have shown, however, that the trading of this asset class suffers from a number of inefficiencies that cannot be solved through regulation alone."

EU legislation proposed last year would tighten scrutiny of credit-default-swaps trading, particularly for those investors who use the instruments to speculate rather than to hedge holdings of bonds. The new rules are being debated by the European Parliament and European Council, which represents national governments.

The first antitrust probe, which parallels an investigation begun by the U.S. Justice Department in 2009, will look at whether 16 investment banks and Markit Group Ltd., a provider of swaps prices, are blocking competitors who might disseminate information. The commission said it suspects that the banks are giving raw swaps data only to Markit, which is partly owned by the banks.

Markit said in a statement that it doesn't believe it has engaged in any inappropriate conduct. "Markit has no exclusive arrangements with any data provider and makes its data and related products widely available to global market participants," Markit said in the statement.

The 16 banks involved in the commission investigation are J.P. Morgan Chase & Co., Bank of America Corp., Barclays PLC , BNP Paribas SA, Citigroup Inc., Commerzbank AG, Credit Suisse Group, Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings PLC, Morgan Stanley, Royal Bank of Scotland Group PLC, UBS AG, Wells Fargo & Co., Crédit Agricole SA and Société Générale SA, the commission said.

All either declined to comment or didn't immediately return messages.

A spokeswoman for the Justice Department said Friday that the U.S. agency's investigation into the credit-derivatives sector is ongoing.

The other probe will examine whether agreements between clearinghouse ICE Clear Europe and nine investment banks create an incentive for these banks to route swaps trades through ICE Clear, blocking other clearinghouses from entering the market. ICE Clear Europe, a subsidiary of Atlanta-based IntercontinentalExchange Inc., is the dominant clearinghouse for credit-default-swaps trades in Europe.

IntercontinentalExchange spokeswoman Kelly Loeffler said the company has become the dominant European credit-default-swaps clearinghouse by offering better services and more products, not because of profit-sharing or discounts offered to the banks.

"We've invested hundreds of millions of dollars to make our system work," Ms. Loeffler said. "We first and foremost have made those investments to compete on the operational side."

The agreements stem from IntercontinentalExchange's purchase of Clearing Corp. in 2009 from the nine banks. Those agreements call for IntercontinentalExchange to split profits from swaps clearing with the banks and offer them lower fees to use its clearing services. The EU is examining whether the contracts give these banks an unfair advantage over other swaps dealers.

The global credit-default-swaps market is controlled by fewer than 20 of the world's largest financial institutions. These banks buy and sell swaps contracts on behalf of clients such as insurance companies that want to protect themselves against the default of bonds in their portfolios or hedge funds that want to speculate on the default risk of countries, companies or even homeowners.

The banks also trade contracts using their own money, both to hedge positions and to speculate.

The European Commission, the EU's executive arm and its antitrust watchdog, has been concerned for several years about the lack of competition in Europe among clearinghouses, which are entities that stand between buyers and sellers of securities, absorbing losses if either side can't fulfill their obligations under a contract. A number of European exchanges, most notably Deutsche Börse AG, own clearinghouses that are the exclusive clearers of trades on the exchange.

Since regulatory pressure prompted European swaps dealers to start clearing their trades in 2009, ICE Clear Europe has handled €5.3 trillion ($7.86 trillion) of contracts, nearly all the credit-default-swaps trades that have been cleared in Europe.

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