E.U. charges banks with blocking exchanges from derivatives market

E.U. watchdogs have charged 13 top investment banks with blocking exchanges’ access to the lucrative credit derivatives market, hitting the sector with the latest in a growing list of regulatory headaches.

Monday’s move by the European Commission, which could result in hefty fines, comes as major banks also come under investigation for suspected rigging of lending benchmarks including Euribor and Libor.

The commission said banks including Citigroup and Goldman Sachs, along with financial data company Markit and the International Swaps and Derivatives Association (ISDA), had barred Deutsche Boerse and the Chicago Mercantile Exchange from the credit default swaps (CDS) business between 2006 and 2009.

Credit default swaps, which are worth more than $13 trillion so far this year, allow an investor to bet on whether a company or country will default on its bonds within a fixed period of time. They were originally over-the-counter or non-exchange traded contracts, but the market is shifting to exchanges since regulatory efforts to boost transparency began.

The lack of transparency on over-the-counter products has been a key target of regulators following the 2007-2009 crisis.

The CDS case is one of several opened by the E.U. antitrust regulator into financial services since the crisis. Banks and other companies involved could be fined up to 10 percent of their global turnover if found guilty of infringing E.U. rules.

“It would be unacceptable if banks collectively blocked exchanges to protect their revenues from over-the-counter trading of credit derivatives,” E.U. Competition Commissioner Joaquin Almunia said in a statement Monday. “Over-the-counter trading is not only more expensive for investors than exchange trading, it is also prone to systemic risks.”

The commission said it had sent a statement of objections, or charge sheet, which sets out suspected anti-competitive activities, to the companies and groups concerned.

The accused can request a hearing to defend themselves before commission officials and antitrust experts from national antitrust authorities across Europe ahead of the E.U. regulator’s decision. Although the commission can take several years to reach a decision in such matters, it may issue its finding in this case before Almunia leaves office toward the end of next year.

The other banks charged are Bank of America Merrill Lynch, Barclays, Bear Stearns, BNP Paribas, Morgan Stanley, Credit Suisse, Deutsche Bank, HSBC, JPMorgan, UBS and RBS.

The ISDA, a trade body that represents firms involved in the derivatives market, said it had received the European Commission’s charge sheet.

“As previously stated, ISDA is confident that it has acted properly at all times and has not infringed EU competition rules. ISDA is co-operating fully with regulatory authorities,” it said in a statement.

UBS, Deutsche Bank, JPMorgan, HSBC, Barclays, Credit Suisse, Goldman Sachs, Citigroup, BNP Paribas and RBS declined to comment, while the other banks were not immediately available for comment.

Markit had no immediate comment. Deutsche Boerse and the Chicago Mercantile Exchange also had no comment.

Almunia said some of the banks in the CDS case also were involved in separate investigations into suspected rigging of lending benchmarks Euribor and Libor but did not identify them. Barclays, UBS and RBS have already been fined for manipulating rates.

Such rates are used as references for hundreds of trillions of dollars’ worth of financial contracts, ranging from credit cards to complicated derivatives deals.

— Reuters