EU investigates 16 banks for market abuse

THE European Union is probing investment banks, including Goldman Sachs and JP Morgan, over possible collusion in credit default swaps, which many politicians blame for exacerbating the eurozone debt crisis.

Friday’s move by the European Commission marks a step up in efforts to tackle financial contracts designed to insure against debt default, but which have been at the heart of a crisis that has engulfed weaker European countries.

It follows frustration among some countries at Europe’s slow pace of reform of finance and the largely uncharted €406 trillion derivatives market, including credit default swaps (CDS), which ballooned before the global financial crisis.

“CDSs play a useful role for financial markets and for the economy,” the commissioner in charge of anti-trust cases, Joaquin Almunia, said.

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

Lack of transparency can lead to abusive behaviour, he said, adding: “I hope our investigation will contribute to a better functioning of financial markets and, therefore, to a more sustainable recovery.”

The tradeable instruments, which pay out if a company or country is not able to repay its debt, moved centre stage as Greece grappled with soaring borrowing costs. It blamed this on speculators driving up the cost of default insurance.

The European Commission, which regulates competition in the 27-state European Union, said it would investigate whether 16 investment banks, including JP Morgan and Citigroup, had colluded or abused a dominant market position.

The move ratchets up pressure on the banks as countries and the European Parliament continue to wrangle about how best to regulate the sector.

The opaque market, where the only record of many multi-million euro deals is a fax, has frustrated politicians who have attempted to control it because there are no central records of trading.

A competition investigation could sting banks as the commission can fine companies up to 10% of revenues and has handed out fines as big as €1 billion.

“There are a small number of players in this market having a large impact on the way the world works,” said Graham Bishop, an adviser to banks.

The Commission will also investigate any involvement in collusion of financial data provider Markit, which provides prices in the CDS market and is owned by banks.

Markit said it did not believe it had engaged in any inappropriate conduct and would demonstrate that to the European Commission.

“Markit has no exclusive arrangements with any data provider and makes its data and related products widely available to global market participants,” it said in a statement.

At the same time, the Commission said it had opened proceedings against nine of the 16 banks and ICE Clear Europe, a CDS clearing house owned by exchange operator InterContinental Exchange, to examine whether preferential tariffs granted by ICE to the banks had hurt competitors.

The Commission said the first investigation would focus on the financial information needed for trading CDS, which allow a creditor to hedge risk, or, if they expect a default, to take a speculative position in the market.

Deutsche Bank, Commerzbank, Goldman Sachs, Morgan Stanley, JP Morgan, Citigroup, HSBC, Barclays, UBS and BNP Paribas all declined to comment. The other banks and ICE Clear Europe were not available to comment.