EU reviews banks’ role in derivatives
Ever since the financial crisis, when derivatives were blamed for exacerbating the panic, regulators have been looking for ways to make these complex financial instruments less risky. Now, regulators are also considering whether a small network of big banks unfairly controls the derivatives market itself.
European regulators in Brussels announced two sweeping antitrust investigations into the world’s largest banks yesterday, opening a second front in the battle to rein in a $600 trillion business that until now has operated mostly in the shadows. The regulators are focusing on whether the banks have shut out competitors in recent years in a bid to keep profit margins high.
The European reviews mirror one underway by the Justice Department.
The European officials said they were investigating whether financial institutions, including giants like Barclays, JPMorgan Chase, and Deutsche Bank, used important industry committees to influence pricing and rules for a product known as a credit-default swap. These swaps provide a type of insurance against the risk of corporations or other borrowers being unable to pay their debts.
The concern, the European Commission said, was that the banks had “an unfair advantage’’ in this largely opaque market. None of the banks cited by the European regulators commented on the inquiry.
The result of the investigations could affect broad swaths of the economy, because banks dominate the market for many sorts of derivatives, not just credit-default swaps.
As in Europe, American regulators have expressed worries that buyers are paying higher prices for these complex instruments than they would in a more competitive market. That can affect products like airline tickets that include the cost of hedges on oil prices or local tax bills that reflect the fees cities pay to manage the risk of swings in interest rates.
The investigation announced yesterday was twofold.
One part focuses on a larger set of banks — 16 in total — that work with a data provider called the Markit Group, based in London, designing pricing procedures and indexes related to these swaps. Many of the banks also hold stakes in Markit.
Markit, which the European regulators are also looking at, said in a statement that it “has no exclusive arrangements with any data provider.’’
The second part of the investigation centers on nine banks that play a major role in a procedure called clearing that regulators in the United States and Europe have promoted for several years as a better way to manage the risks posed by derivatives.
These banks gained power in part through regulators’ efforts in 2008 to improve transparency in the market. At the time, the Federal Reserve Bank of New York ordered the banks to help build clearing houses for derivatives.
In return for partnering with the Intercontinental Exchange, a publicly traded company, the banks got a favorable deal with ICE that persists today.
The European Commission said the deal between ICE and the nine banks might be unfair to other players in the market.
ICE declined to comment.
The banks named in the ICE clearing investigation are JPMorgan, Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, and UBS. In addition to those nine, the Markit inquiry also includes Wells Fargo, BNP Paribas, Commerzbank, HSBC, Royal Bank of Scotland, Credit Agricole, and Societe Generale.
