EU Launches Investigation into 16 Investment Banks and Markit Over Possible Collusion in Credit Default Swaps

Strategic Insights -

The European Commission has opened an investigation into 16 major investment banks, including the Royal Bank of Scotland, over possible collusion in credit default swaps (CDS). The commission alleges that the banks, which include Barclays and HSBC, may have conspired to give their pricing information only to Markit, a CDS information provider, potentially foreclosing access to raw data for other information service providers. The investigation stems from concerns that the banks' behavior may be in violation of EU anti-trust rules, which could result in fines of up to 10% of revenues. The commission has also opened separate proceedings against nine of the 16 banks and ICE Clear Europe, a CDS clearing house, over preferential tariffs granted to the banks that may have hurt rivals.

Key Takeaways:

  • The European Commission is investigating 16 major investment banks, including RBS, Barclays, and HSBC, for possible collusion in credit default swaps.
  • The commission alleges that the banks may have given their pricing information only to Markit, potentially creating a collective dominance that forecloses access to raw data for other information service providers.
  • The investigation is focused on whether the banks violated EU anti-trust rules, which could result in fines of up to 10% of revenues.
  • The commission has also opened separate proceedings against nine of the 16 banks and ICE Clear Europe over preferential tariffs granted to the banks that may have hurt rivals.
  • RBS has a significant exposure to CDS, with 40.7 billion of exposure gathered between 2005 and 2007, of which 34 billion was later insured by the taxpayer-backed Asset Protection Scheme.
  • CDS are like insurance contracts on credit agreements, which pay out when a debtor defaults, allowing creditors to hedge risk or take a speculative position in the market.
  • The European Commission has recognized the importance of CDS for financial markets, but has also acknowledged that recent developments have shown that the trading of this asset class suffers from inefficiencies that cannot be solved through regulation alone.
  • The investigation is ongoing, with the commission seeking to determine whether the banks' behavior constitutes an abuse of dominant position or collusion.

Statistics:

  • 16 major investment banks are under investigation, including RBS, Barclays, and HSBC.
  • RBS has a significant exposure to CDS, with 40.7 billion of exposure gathered between 2005 and 2007.
  • 34 billion of RBS's CDS exposure was later insured by the taxpayer-backed Asset Protection Scheme.
  • The maximum fine for a breach of EU anti-trust rules is up to 10% of revenues.
  • The commission has opened separate proceedings against nine of the 16 banks and ICE Clear Europe over preferential tariffs granted to the banks that may have hurt rivals.

Sources:

  • European Commission press release
  • Euclid Infotech Pvt. Ltd. (2011)