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EU Slams CDS Collusion Charge on Banks - Analyst Blog
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.
The banks indicted by the EU include - Bank of America Corporation ( BAC ), Barclays PLC ( BCS ), JPMorgan Chase & Co. ( JPM ) along with the Bear Stearns Co. business that it purchased, BNP Paribas SA, Citigroup Inc. ( C ), Credit Suisse AG ( CS ), Deutsche Bank AG ( DB ), The Goldman Sachs Group, Inc. ( GS ), HSBC Holdings PLC ( HBC ), Morgan Stanley ( MS ), Royal Bank of Scotland Group PLC ( RBS ) and UBS AG ( UBS ). 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 and CME Group Inc. 's ( CME ) Chicago Mercantile Exchange from entering the credit default swaps (CDS) business during 2006-2009. Nevertheless, IntercontinentalExchange, Inc. ( ICE ) has started offering credit futures on its exchange from this year.
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.
BANK OF AMER CP (BAC): Free Stock Analysis Report
BARCLAY PLC-ADR (BCS): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
CME GROUP INC (CME): Free Stock Analysis Report
CREDIT SUISSE (CS): Free Stock Analysis Report
DEUTSCHE BK AG (DB): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
HSBC HOLDINGS (HBC): Free Stock Analysis Report
INTERCONTINENTL (ICE): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
ROYAL BK SC-ADR (RBS): Free Stock Analysis Report
UBS AG (UBS): Free Stock Analysis Report
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