Justice Probing Whether Big Banks Have Unfair Advantage in Pricing Swaps
July 20, 2009
The U.S. Justice Department wants to know whether big banks are playing fair with credit default swap (CDS) prices.
The antitrust division of the DoJ sent information requests to the banks such as Goldman Sachs and Bank of America which own shares of CDS data provider Markit Group Ltd. to find out if the sell-side firms have an unfair advantage in the market, according to reports last week by Dow Jones and Bloomberg.
Markit's bank-owners are also its major data providers; unnamed sources told Bloomberg that authorities are concerned that the set-up could advantage the dealers over other customers.
Markit confirmed the probe in emailed statements sent to several news outlets, which state: "Markit has been informed of an investigation by the Department of Justice into the credit-derivatives and related markets. We will work with the Department to provide any information requested of us."
The DoJ sent investigative notices out to Markit's bank-owners earlier this month, according to these reports. Markit shareholders included as of May: Bank of America Corp., Barclays PLC, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., HSBC, J.P. Morgan Chase & Co., Morgan Stanley, Royal Bank of Scotland Group PLC and UBS AG.
Consortium-style institutions by their nature draw antitrust concerns. An earlier Justice probe began in 2000 focused on several bond trading platforms formed by groups of investment banks; the investigation was quietly concluded in 2004, no action was taken.
Markit, formed with the banks as participating partners in 2001, began as hub for credit derivatives pricing and underlying reference entity data, but has grown to serve over 1,500 firms, and it runs the major corporate CDS indexes--iTraxx Europe and CDX U.S.--since buying them from the investment banks in 2007.
Markit spokeswoman Teresa Chick did not immediately respond to a request to say whether the probe had delayed the launch of MarkitSERV, a new derivatives processing company scheduled to launch at the end of this month.
As late as June 2, industry executives said the jointly owned venture with the Depository Trust and Clearing Corporation (DTCC) would launch by July 31. A DTCC spokeswoman did not respond immediately to questions on the new firm's launch date.
