12 Global Banks May Face Credit Default Swap Antitrust Suit - Analyst Blog

Adding to the existing litigation overhangs, several global banking giants may be hit by yet another lawsuit. On Thursday, in a consolidated case, US District Judge Denise Cote in Manhattan dismissed certain claims against 12 banking giants. However, she stated that investors may pursue a lawsuit against the banks for artificially inflating prices and restricting competition in the credit default swaps (CDS) market, which constituted a violation of the U.S. antitrust law.

The $21 trillion (as of 2013) CDS market was under the scrutiny of U.S. and European regulators for potential anticompetitive activity. In Jul 2013, the European Commission accused many of the defendants of resorting to collusive arrangements to restrict the entry of new CDS exchanges in the market.

The defendants include Bank of America Corp. (BAC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), Barclays PLC (BCS), HSBC Holdings plc (HSBC), Deutsche Bank AG (DB), The Goldman Sachs Group, Inc. (GS), Credit Suisse Group AG (CS), Morgan Stanley (MS), The Royal Bank of Scotland Group plc (RBS), BNP Paribas SA (BNPQY) and UBS AG (UBS).

Other defendants included the International Swaps and Derivatives Association (ISDA) – a trade group for over-the-counter (OTC) derivatives market – and Markit Group Ltd, a London-based financial-information company.

Allegations

The plaintiffs of this case were a group of investors, including public pension fund, which traded CDS with the banks in 2008-2013 period. The allegations were converted into consolidated lawsuits in 2013. They alleged that the banks conspired to incapacitate the launch of a CDS exchange – Credit Market Derivatives Exchange (CMDX), which was being partly developed by Chicago-based CME Group Inc. (CME).

The banks were alleged to have worked collectively to not use new CDS exchanges and made arrangements with ISDA and Markit to not issue licenses to CMDX.

Owing to this, market participants were not able to make an efficient choice for non-dealers who wanted to trade the same CDS. The banks’ control over the CDS market resulted in higher transaction prices.

The Ruling in a Nutshell

Owing to lack of evidence, Cote dismissed investors’ claims of the bank’s collusive act for monopolized trading in the CDS market and certain other claims that have risen in autumn 2008.  However, the remainder of the case can move forward where damages could amount to tens of billions of dollars.

The Manhattan federal judge, in her 49 page decision, said the plaintiffs could bring in a case against the banks for violating the Sherman Act, which led to payment of unfair prices on CDS trades in the above mentioned period, even when improved liquidity and standardization should have pushed costs lower.

Cote’s ruling stated the presence of evidence of the banks having arranged secret meetings, their decision to block rival CDS exchanges and their arrangement with ISDA and Markit. Her findings reflect conspiracy. Per the judge, “The complaint provides a chronology of behavior that would probably not result from chance, coincidence, independent responses to common stimuli, or mere interdependence.”

Bottom Line

The global banking giants are encountering numerous lawsuits from charges ranging from soured mortgage loans to rigging of interest rates. The latest addition will further fuel their legal troubles. While regulators are striving to bring justice to affected investors and prevent further occurrence of such issues, we believe that it is high time that these banking behemoths realize that they cannot always find an easy escape to their wrong deeds.

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