EU To Investigate CDS Manipulation by Major Banks

Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and 14 other investment banks face a European Union antitrust probe into credit-default swaps (CDS) for companies and sovereign debt, Bloomberg.com reports. Well, at the moment no one can say for sure who’s manipulating who.

“I hope our investigation will contribute to a better functioning of financial markets.”

 Joaquin Almunia

CEO Lloyd Blankfein of Goldman Sachs

It may just be my twisted, suspicious mind, but there’s some red lights flashing in the back of my head. Just a few week’s ago about 200 European economist’s and financial experts made a formal request to the EU parliament to conduct an investigation of the Greek national debt. This was followed by a suggestion by the Greek government to probe the financial markets instead.

“Blame the speculators,” have also become like a mantra to the EU leaders during the crisis that they have no idea on how to manage.

In that particular light, this new investigation comes as no surprise.

I have just asked Markit to comment on the allegations, and are still waiting for their reply.

In the meantime, this is what Bloomberg reports:

The European Commission said today it opened two antitrust probes. It will check whether 16 bank dealers colluded by giving market information to Markit, a financial information provider.

It will also examine whether nine of the firms struck deals with ICE Clear Europe, a clearinghouse for derivatives, that block other clearinghouses from entering the market and give rivals “no real choice where to clear their transactions.”

“Lack of transparency in markets can lead to abusive behavior and facilitate violations of competition rules,” said Joaquin Almunia, the EU’s antitrust chief, in an e-mailed statement. “I hope our investigation will contribute to a better functioning of financial markets.”

Global regulators have sought to toughen regulation of credit-default swaps saying the trades helped fuel the financial crisis.

Lawmakers in the EU plan to encourage the use of clearinghouses and transparent trading systems. CDS are derivatives that pay the buyer face value if a borrower defaults.

Possible Collusion

JPMorgan, Bank of America Corp. (BAC), Barclays Plc (BARC), BNP Paribas (BNP) SA, Citigroup Inc. (C), Commerzbank AG (CBK), Credit Suisse Group AG (CSGN), Deutsche Bank AG (DBK), Goldman Sachs, HSBC Holdings Plc (HSBA), Morgan Stanley, Royal Bank of Scotland Group Plc (RBS), UBS AG (UBSN), Wells Fargo & Co. (WFC), Credit Agricole SA (ACA) and Societe Generale (GLE) SA will be investigated for possible collusion in giving “most of the pricing, indices and other essential daily data only to Markit.”

The commission said this “may have the effect of foreclosing the access to the valuable raw data by other information service providers.” It said some of the 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 EU will also separately investigate credit default swap clearing and deals struck by ICE Clear Europe with Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley (MS) and UBS.

These agreements have clauses on preferential fees and profit sharing arrangements “which might create an incentive for the banks to use only ICE as a clearinghouse,” the EU said. That may block other clearinghouses from starting up and limit choice for CDS dealers, it said.

Giles Croot, a spokesman for Barclays, wasn’t immediately available for comment when contacted by Bloomberg.

Deutsche Bank spokesman Ronald Weichert declined to comment as did Commerzbank spokesman Reiner Rossmann.

The probe will also cover fee structures used by ICE to check if they give “an unfair advantage to the nine banks by discriminating against other CDS dealers.”

Stay tuned for updates!

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5 responses to “EU To Investigate CDS Manipulation by Major Banks

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