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May 02, 2011
European Commission to Investigate Antitrust Violations by Banks
    by Robert Kropp

The Commission will investigate possible collusion among 16 banks in the marketing of credit default swaps.

Last Friday, the European Commission (EC) announced that it had opened two antitrust inquiries into the possible collusion of investment banks in the marketing of credit default swaps (CDS). The selling of CDS on subprime mortgages led to the $150 billion taxpayer bailout of AIG in September 2008, when the financial crisis engulfed the global economy.

According to the EC, "The lack of transparency about the trading of derivatives and financial instruments traded Over the Counter (OTC) became apparent during the recent financial crisis. Given the importance of financial markets for the real economy, the Commission has been working to improve the regulation of CDS and other derivatives."

The first investigation focuses on the financial information necessary for trading CDS, the EC stated. The investigation will examine the possibility of collusion between 16 banks and Markit, a UK-based financial information company which was the only recipient of "most of the pricing, indices and other essential daily data" on CDS provided by the banks. Collusion between the banks and Markit would violate the European Union's antitrust laws.

The US-based banks named in the investigation include JP Morgan, Bank of America Merrill Lynch, Citigroup, Goldman Sachs, Morgan Stanley, and Wells Fargo Bank/Wachovia.

The second investigation will examine agreements between nine of the 16 banks—including JP Morgan, Bank of America Merrill Lynch, Citigroup, Goldman Sachs, and Morgan Stanley—with ICE Clear Europe, the leading clearing house for CDS. According to the EC, the agreements "might create an incentive for the banks to use only ICE as a clearing house." The EC will also investigate whether the fee structures used by ICE give an unfair advantage to the nine banks.

The actions would violate the Union's prohibition of anticompetitive agreements and the abuse of dominant positions.

"Lack of transparency in markets can lead to abusive behavior and facilitate violations of competition rules and the Commission should react accordingly," stated Joaquín Almunia, the EC's Vice President in charge of Competition Policy. "I hope our investigation will contribute to a better functioning of financial markets and, therefore, to a more sustainable recovery."


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