EU probes banks over debt insurance abuses

The investigation focuses on Credit Default Swaps (CDS), derivative financial products traded between financial institutions or investors originally meant to protect investors in the event a company or state they have invested in defaults on payments, but also used today in speculative investment portfolios.

These products have helped push up yields when trading government bonds issued by Greece and other struggling European states.

The antitrust probe comes amid slow-moving work on legislation by European Union financial services commissioner Michel Barnier aimed at curbing leeway for the main players in a lucrative and hugely influential market.

CDS derivatives have become for some a symbol of reckless speculation in the wake of the eurozone sovereign debt crisis that first hit home in Greece and has since sucked in both Ireland and Portugal.

In a two-pronged investigation, the European Commission said it will examine whether 16 investment banks and Markit, the leading provider of Credit Default Swap market information, colluded or abused a dominant position to control financial information.

The banks are: JP Morgan, Bank of America Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, Wells Fargo Bank/Wachovia, Credit Agricole and Societe Generale.

The commission will also look at whether preferential tariffs received by nine of the banks from ICE Clear Europe, the leading clearing house for CDS, locked their competitors out of the market.

"Lack of transparency in markets can lead to abusive behaviour and facilitate violations of competition rules and the commission should react accordingly," said European Union competition commissioner Joaquin Almunia.

"I hope our investigation will contribute to a better functioning of financial markets and, therefore, to a more sustainable recovery," he underlined.

These products "play a useful role for financial markets and for the economy," Almunia maintained.

"Recent developments have shown, however, that the trading of this asset class suffers a number of inefficiencies that cannot be solved through regulation alone," he said.

Information about CDS is needed to allow market participants to determine the value of their investment portfolios and develop investment strategies.

The commission said it had indications that the banks, which act as dealers in the CDS market, give most of the pricing, indices and other essential daily data "only to Markit."

"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," the commission explained.

"If proven, such behaviour would be in violation of EU antitrust rules," it said.

The probe will also look into the behaviour of London-based Markit, a company which the commission said was created to enhance the transparency of the CDS market and which is as well known for regular survey snapshots of economic health.

The commission said it was concerned that 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."

The second investigation is looking at preferential fees and profit sharing agreements between nine banks and ICE.

"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," it said.