Credit default probe
April 29, 2011
The European Commission said it was probing whether the 16 banks active in the so-called CDS (credit default swap) market colluded to pass on insider data to one particular firm. In a second case, the EU is also investigating whether nine of the banks involved received preferential treatment from ICE Clear Europe, the largest CDS clearing house in Europe.
The probe, announced by EU Competition Commissioner Joaquin Almunia reads like a Who's Who of the global banking community and includes JP Morgan, Goldman Sachs, Bank of America, Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, Credit Suisse, First Boston, Deutsche Bank, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, Wells Fargo/Wachovia, Credit Agricole and Societe Generale.
Lack of transparency
Almunia said the 16 banks may have colluded with British-based Markit, the leading provider of financial information on credit default swap trading, to shut out other competitors from the market. Ironically, Markit was originally established to enhance the transparency of the CDS market.
Credit default swaps are a form of insurance against a specific economic event, such as a government defaulting.
“If proven, such behavior would be a violation of EU antitrust rules,” Almunia said.
The probes announced by Almunia come on the heels of separate moves by the European Commission to regulate the CDS market and other types of financial instruments that some say have exacerbated the eurozone's sovereign debt crisis.
Betting on default
Criticism has focused on so-called naked CDS trading, which is when an investor buys such a policy without holding a stake, such as a government bond, in the country in question, thus providing him with an incentive to speculate against the country's finances to force it to default.
Greek Prime Minister George Papandreou said last year that such practices had forced his country into taking an EU bailout.
Commissioner Almunia said that the lack of transparency appeared to be leading to abusive behavior and facilitating attempts to bypass competition rules. “I hope our investigation will contribute to a better functioning of financial markets and, therefore, to a more sustainable recovery,” he said.
Author: Gregg Benzow (dpa, AFP, AP)
Editor: Susan Houlton