Investment banks' hold over the derivatives market has come
under regulatory scrutiny as European Commission - the European
Union's (EU) anti-trust body - accused 13 large global banks of
colluding against stock exchanges. The EU charged the banks for
preventing the exchanges from entering the lucrative derivatives
market during 2006-2009.
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The banks indicted by the EU include -
Bank of America Corporation
JPMorgan Chase & Co.
) along with the Bear Stearns Co. business that it purchased, BNP
Credit Suisse AG
Deutsche Bank AG
The Goldman Sachs Group, Inc.
HSBC Holdings PLC
Royal Bank of Scotland Group PLC
). Concurrently, International Swaps and Derivatives Association
(ISDA) and Markit - a financial data provider - was also charged
by the EU.
After conducting preliminary investigation, the EU concluded that
banks, aided by ISDA and Markit prevented Deutsche Boerse Group
CME Group Inc.
) Chicago Mercantile Exchange from entering the credit default
swaps (CDS) business during 2006-2009. Nevertheless,
) has started offering credit futures on its exchange from this
CDS permits an investor to place a bet on whether a company or
country will default on its bonds within a fixed time period. CDS
were initially traded over-the-counter (OTC). Gradually, given
the regulatory efforts to improve transparency, CDS have been
shifting to exchanges.
The EU alleged that the banks were against the CDS move from OTC
to the exchanges, as their bottom lines would have suffered,
since exchange-traded CDS are less expensive. Hence, the banks
instructed ISDA and Markit to refuse the stock exchanges licenses
to use their data for creating exchange traded CDS. They were
only given licenses to using data for OTC products.
Further, OTC trading of CDS lacked transparency and regulatory
oversight, thereby weakening the financial markets. This was all
the more exposed when Lehman Brothers Inc. collapsed in 2008.
Since then, efforts from regulators across the globe continue in
an attempt make derivatives trading more transparent.
The banks charged by the EU for their alleged involvement in such
contentious practices are expected to be severely penalized.
Moreover, the U.S. anti-trust authorities have started their own
investigation with respect to similar allegations.
For banks, these charges and investigations pose huge risks.
These are likely to increase legal expenses and tarnish the
company's reputation to some extent as well.
However, for financial markets as a whole, these initiatives will
help in countering economic crisis in the future. Notably, this
could ultimately result in less involvement of taxpayers' money
in the bailout of troubled financial institutions.