European Commission backs down on credit default swaps investigation

In a rare case closure, the European Commission has ended its antitrust investigation into the credit default swaps (CDS) market finding no evidence that 13 investment banks were involved in a cartel. The investigation was one of many launched in the wake of the financial crisis but the Commission has now announced that the evidence it has gathered is insufficient to confirm its original concerns.

A CDS is a contract used by a purchaser of debt to mitigate their potential losses in the event of debtor default.  CDS were often traded for speculative purposes in the run-up to the financial crisis.

In July 2013 the Commission issued a statement of objections to the largest banks, including Bank of America Merrill Lynch, UBS, Goldman Sachs JPMorgan, Morgan Stanley, Barclays, HSBC, Bear Stearns, BNP Paribas, Deutsche Bank, Citygroup, Credit Suisse and the Royal Bank of Scotland, as well as the International Swaps and Derivatives Association (ISDA) and Markit, a provider of financial information.  The Chicago Mercantile Exchange and Deutsche Börse attempted to launch a trading platform for credit derivatives.  Participation in the market required licences to be issued by ISDA and Markit, entities controlled by the banks.  The Commission had alleged that the banks conspired to prevent ISDA and Markit from issuing the requisite licences and that they agreed to provide data for valuation purposes solely to Markit.

The Commission’s volte face was not unexpected, although some practitioners expected it to issue a supplementary statement of objections.  Given recent European Commission and Court decisions into, for example, information exchange, there was some question as to how the investigated companies would fare in mounting an effective defence.  The Commission’s case closure announcement is carefully worded but as regards the specific allegation of collusion among the banks it has not found sufficient evidence of infringement.

It is rare for the Commission to abandon a case after the objections stage.  In the air cargo cartel case the Commission did not pursue its objections against all the initial addressees, dropping allegations against 11 carriers and a consultancy firm but it did maintain charges against 11 other carriers.

However, the antitrust scrutiny of CDS is not over.  The Commission’s separate investigations in relation to ISDA and Markit are continuing and the US Department of Justice has launched a parallel probe into Markit.  Some of the banks have also been subject to US antitrust private lawsuits over similar allegations to those examined in Europe.

Source:  Commission MEX/15/6254