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World's major banks find themselves in new trouble
Bank executives and investors weren't looking for another reason to fret. But they have one - a European Commission accusation that 13 banks, plus derivatives trade body ISDA and data provider Markit, colluded illegally for three years to stop two exchanges from breaking into the credit default swaps market.
The industry has long said that these accusations are groundless. Exchanges, they say, need more volume than the CDS market can provide to set fair prices. Investment banks dominate the market because only they have the requisite knowledge.
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World's major banks find themselves in new trouble
But the argument is a bit circular. OTC transactions are often based on data collected by Markit, which is part-owned by several banks; ISDA, which provides rules for the market, is governed by the industry.
If the market's suppliers were not under the banks' control, exchanges might be able to thrive. Banks' share prices barely moved in response to the Commission's statement, perhaps because charges were expected and perhaps because the direct financial damage is unlikely to be large.
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World's major banks find themselves in new trouble
If the charges cannot be rebutted - it may take three years to find out - any fines are likely to be a tiny fraction of the potential maximum of 10 per cent of revenue. The indirect damage could be larger. CDS is a big market with a notional value last year of more than $20 trillion and cleared transactions of $2.5 trillion, according to the Bank for International Settlements.
And it is almost all OTC, despite regulators' best efforts to force all varieties of derivatives onto exchanges. A move to exchanges would presumably make the business less lucrative for banks.
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World's major banks find themselves in new trouble
Markit, which first built its business as a font of CDS data, has a particular problem. Its bank investors are among the shareholders planning a public listing that could value the company at up to $5 billion. They may have to wait until the legal fog clears.
The largest indirect damage could be reputational, even if no embarrassing emails surface. The Commission's complaint amounts to a claim that the banks put their own interests well ahead of their clients'. That sounds depressingly familiar.
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World's major banks find themselves in new trouble
Context news
i) European Union regulators on July 1 charged financial data company Markit, the International Swaps and Derivatives Association and 13 banks with breach of EU antitrust rules for their efforts to block exchanges in the credit derivatives business. The European Commission said it had sent the companies a statement of objections, which sets out suspected anti-competitive activities.
ii) The charges followed a two-year investigation. The banks charged are Bank of America Merrill Lynch, Barclays, Bear Stearns, BNP Paribas, Citigroup, Morgan Stanley, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, RBS and UBS.
iii) The companies can reply in writing to the charges and request an oral hearing to present their comments on the case in front of European Commission representatives and national competition authorities.
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