European regulators today opened two competition probes into the credit default swap market, targeting US and European banking giants over instruments used as insurance against national debt default.
The European Commission said it will examine whether 16 investment banks and Markit, the leading provider of CDS market information, colluded or abused a dominant position to control financial information.
In the second case, the commission will look at whether preferential tariffs nine of the banks received from ICE Clear Europe, the leading clearing house for CDS, locked their competitors out of the market.
The 16 banks under investigation 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 Société Générale.
'CDS play a useful role for financial markets and for the economy,' said European competition commission Joaquin Almunia.
'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.
A niche market that provides investors protection against the risk of default, CDS derivatives have become for their critics a symbol of reckless speculation in the wake of the Greek sovereign debt crisis.
'Lack of transparency in markets can lead to abusive behaviour and facilitate violations of competition rules and the commission should react accordingly,' Almunia said.
'I hope our investigation will contribute to a better functioning of financial markets and, therefore, to a more sustainable recovery,' he added.
