EU inquiry into claims of banks' collusion in credit derivatives market By Simon Goodley 29 Apr

• Suspicion over derivatives at centre of European debt crisis
• HSBC, RBS and Barclays among banks in spotlight over CDOs

                                                                                                     Photograph Yves Herman/Reuters

 EU competition commissioner Joaquin Almunia will oversee the investigation into credit default swaps.

 The European Union is investigating HSBC, Royal Bank of Scotland and Barclays among 16 of the world's leading investment banks over suspicions they colluded and abused their positions in providing the financial derivatives many blame for exacerbating the eurozone sovereign debt crisis.

 The inquiry into credit default swaps (CDS), the controversial financial contracts designed to allow investors to insure against debt default, follows accusations that banks, many of them rescued by their host governments from collapse, played a part in forcing Greece and Ireland to seek EU bailout funds.

 If found guilty of abusing their position, the banks could be fined up to 10% of revenues by the European commission, which has handed out sanctions as big as €1bn (£880m).

 Joaquín Almunia, the commissioner in charge of anti-trust cases, said: "Recent developments have shown that the trading of this asset class suffers a number of inefficiencies that cannot be solved through regulation alone. We are therefore opening two new cases to improve market transparency and fairness in the CDS market ... Lack of transparency in markets can lead to abusive behaviour and facilitate violations of competition rules and the commission should react accordingly."

 Concerns in several EU countries at Europe's slow pace of finance reform as well as the largely unregulated £360tn derivatives market, which ballooned before the financial crisis, are also understood to lie behind investigation.

 Members of the EU parliament have lobbied for deeper reforms of the CDS market and other areas of the financial system.

 The opaque financial derivatives were thrust into the limelight during the credit crunch and were widely blamed for the panic that gripped the financial system after the collapse of Lehman Brothers, which had issued millions of CDS contracts. As well as a form of insurance for investors providing debt, credit default swaps are heavily used by speculators. They were blamed for driving up the cost of insuring national debts – and therefore the debt itself – as Greece has grappled with soaring borrowing costs.

 The 16 banks being examined by the commission are: Goldman Sachs, HSBC, Barclays, Royal Bank of Scotland, JP Morgan, Bank of America Merrill Lynch, BNP Paribas, Citigroup, Commerzbank, Credit Suisse, Deutsche Bank, Morgan Stanley, UBS, Wells Fargo Bank/Wachovia, Credit Agricole and Société Générale. All 16 declined invitations to comment.

 The move increases pressure on the banks as governments decide how to regulate the sector. The CDS market, where the only record of many multimillion euro deals is a fax, has frustrated politicians who have attempted to control it because there are no central records of trading.

 The lack of transparency, coupled with the fact that traders have no personal interest in the contracts, worries many market watchers. Some argue that a CDS speculator's position can be compared to that of a neighbour buying insurance on your house – forbidden, as it would provide him with an incentive to want your house to burn down, or to attempt arson.

 "This is a much smaller market in terms of number of players than you think," said one City trader. "It is a closed shop and the potential for collusion is quite high. By default, the CDS market sets the price of the credit market. So everybody, at certain times, has a vested interest in prices."

 The commission said that it will also investigate any involvement of financial data provider Markit, which provides CDS market prices and is owned by banks.

 In a statement, the company said: "Markit has no exclusive arrangements with any data provider and makes its data and related products widely available to global market participants. Markit is unaware of any collusion by other market participants as described by the commission. Markit does not believe it has engaged in any inappropriate conduct and looks forward to demonstrating that to the commission."

 In a second investigation, 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 IntercontinentalExchange (ICE), to examine whether preferential tariffs granted by ICE to the banks had hurt competitors. The commission said the agreements include clauses such as preferential fees and profit-sharing agreements that might create an incentive for the banks to use only ICE as their clearing house.

 "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," the commission added.

 The CDS system is mostly used by financial firms and hedge funds who find it simpler and cheaper to use these contracts to hedge and speculate, rather than trading in the underlying debt or bond.

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