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IP/11/509

Brussels, 29 April 2011

Antitrust: Commission probes Credit Default Swaps market

The European Commission has opened two antitrust investigations concerning the Credit Default Swaps market. CDS are financial instruments meant to protect investors in the event a company or State they have invested in default on their payments. They are also used as speculative tools. In the first case, the Commission will examine whether 16 investment banks and Markit, the leading provider of financial information in the CDS market, have colluded and/or may hold and abuse a dominant position in order to control the financial information on CDS. If proven such behaviour would be a violation of EU antitrust rules. In the second case, the Commission opened proceedings against 9 of the banks and ICE Clear Europe, the leading clearing house for CDS. Here, the Commission will investigate in particular whether the preferential tariffs granted by ICE to the 9 banks have the effect of locking them in the ICE system to the detriment of competitors.

"CDS play a useful role for financial markets and for the economy. Recent developments have shown, however, that the trading of this asset class suffers a number of inefficiencies that cannot be solved through regulation alone. We are therefore opening two new cases to improve market transparency and fairness in the CDS market. The first case will investigate privileged access to CDS transaction data by Markit, an information service provider. The second will examine the existence of preferential treatment by ICE Clear, a CDS clearing platform, of some well established banks who themselves promote this platform at the expense of others. Lack of transparency in markets can lead to abusive behaviour and facilitate violations of competition rules and the Commission should react accordingly. I hope our investigation will contribute to a better functioning of financial markets and, therefore, to a more sustainable recovery," said Joaquín Almunia Commission Vice President in charge of Competition Policy

CDS information market

The first investigation focuses on the financial information necessary for trading CDS. The Commission has indications that the 16 banks that act as dealers in the CDS market give most of the pricing, indices and other essential daily data only to Markit, the leading financial information company in the market concerned. This could be the consequence of collusion between them or an abuse of a possible collective dominance and may have the effect of foreclosing the access to the valuable raw data by other information service providers. If proven, such behaviour would be in violation of EU antitrust rules (Articles 101 and 102 of the Treaty on the Functioning of the European Union – TFEU). The 16 CDS bank dealers are: JP Morgan, Bank of America Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, Crédit Suisse First Boston, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, Wells Fargo Bank/Wachovia, Crédit Agricole and Société Générale.

The probe will also examine the behaviour of Markit, a UK-based company created originally to enhance transparency in the CDS market. The Commission is now concerned certain clauses in Markit's licence and distribution agreements could be abusive and impede the development of competition in the market for the provision of CDS information.

CDS clearing

In the second case, the Commission is investigating a number of agreements between nine of the above 16 CDS dealers (Bank of America Corporation, Barclays Bank plc, Citigroup Inc, Crédit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group, Inc., JP Morgan Chase & Co, Morgan Stanley and UBS AG) and ICE Clear Europe. These agreements were concluded at the time of the sale, by the dealers, of a company called The Clearing Corporation to ICE. They contain a number of clauses (preferential fees and profit sharing arrangements) which might create an incentive for the banks to use only ICE as a clearing house. 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. If proven, the practice would violate Art 101.

The Commission will also investigate whether the fee structures used by ICE give an unfair advantage to the nine banks, by discriminating against other CDS dealers. This could potentially constitute an abuse of a dominant position by ICE in breach of Article 102.

The CDS market

CDS are financial products traded between financial institutions or investors. They are derivatives originally created to provide protection against the risk of default. Today, CDS are also used for speculation. Information about CDS is needed to allow market participants to determine the value of their investment portfolios and develop investment strategies. In order to create and sell aggregated CDS information products and services, information service providers need access to a certain amount of CDS transaction and valuation data.

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 (see IP/10/1125 and IP/10/1126). The Commission's antitrust tools are complementary to these regulatory measures, which together seek to ensure safe, sound and efficient financial markets.

Background on antitrust investigations

Articles 101 and 102 of the TFEU prohibit anticompetitive agreements and the abuse of dominant positions. The implementation of these provisions is defined in the EU's Antitrust Regulation (Council Regulation No 1/2003), which can also be applied by national competition authorities. The fact that the Commission has opened proceedings does not mean it has conclusive proof of antitrust violations. By initiating proceedings, the Commission relieves national competition authorities of their authority to apply the rules. National courts must also refrain from making decisions, which could conflict with a Commission own decision.

The Commission has informed the parties and the national competition authorities it has opened proceedings in this case.

There is no legal deadline to complete antitrust investigations. The duration depends on a number of substantial and procedural factors.


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