EU targets 16 major banks in swaps market probes

The European Union's competition watchdog is investigating the practices of some of the world's largest banks, as well as a clearing house and a financial data firm, in the market for credit default swaps (CDS).

The two probes home in on a market that has come under fire for lacking transparency and allegedly worsening market turmoil during the financial crisis.

While the investigations focus on competition issues, they accompany a wider regulatory crackdown in Europe and the United States on credit default swaps and other derivatives and could have implications for the broader functioning of the market. In that market, several companies control trillions of dollars of financial instruments.

The European Commission said it is investigating whether nine big investment banks, including Barclays PLC and Goldman Sachs Group Inc, received unfair preferential treatment — such as lower fees and profit-sharing deals — from ICE Clear Europe and were therefore channeling their transactions only to that clearing house, by far the biggest for CDS in the EU.

"The effects of these agreements could be that other clearing houses have difficulties successfully entering the market and that other CDS players have no real choice where to clear their transactions," the commission said.

The banks targeted in the probe also include Bank of America Corp, Citigroup Inc, Credit Suisse Group, Deutsche Bank AG, JP Morgan Chase & Co, Morgan Stanley and UBS AG.

market transparency

The probe comes as regulators on both sides of the Atlantic are pushing investors to settle transactions of CDS and other structured derivatives through clearing houses to improve market transparency in the aftermath of the crisis.

That push has led not only to much bigger business for clearing houses by also to close relationships between banks and clearing platforms, as they scrambled to quickly set up a new system.

The nine banks scrutinised in the probe sold their clearing platform to Intercontinental Exchange Inc, the parent company of ICE Clear Europe in 2009, and are shareholders in the exchange's US clearing arm.

However, commission officials said Friday they had indications that business practices between the banks and ICE Clear Europe went beyond what is in the written contracts. The officials declined to be named in line with department policy.