A U.S. pension fund has initiated a class action lawsuit against a group of the world’s largest banks, accusing them of “conspiring” to scuttle competition in the $27 trillion credit default swap (CDS) market, in turn raising fund managers’ costs.
The case, filed on Friday in the district court in the Northern District of Illinois, is the first antitrust case relating to the banks that dominate the credit derivative market.
The European Commission and the U.S. Department of Justice are also conducting antitrust investigations into the banks and Markit relating to anticompetitive behavior in CDS.
In the suit, the Sheet Metal Workers Local 33 Cleveland District Pension Plan alleges that twelve banks, including Bank of America Corp., Citigroup Inc., Deutsche Bank, JPMorgan Chase & Co., Goldman Sachs Group Inc and Morgan Stanley, acted together to impede competition in order to protect lucrative revenues they earn from acting as intermediaries to trades.
The suit also alleges that the banks further used their dominance of boards and committees at Markit, an index and data provider, and the International Swaps and Derivatives Association (ISDA) trade group, as well as the Depositor Trust & Clearing Corp (DTCC), a trade warehouse, to limit transparency in the market and to block new market entrants, the suit alleges.
“The CDS market has been starkly divided between those who control and distort the market and those who, in order to participate in the market, must abide their distortions,” the fund said in the complaint.
The pension fund traded CDS with Citigroup, it said in the complaint.
The case is the latest blow to banks that dominate the $639 trillion privately traded credit, interest rate and equity derivatives markets, after revelations that the banks sought to fix the key London Interbank Offered Rate (LIBOR) spurred regulatory fines, continuing investigations and lawsuits.
Credit default swaps are used to protect against losses if a company, country or other borrower cannot repay their debt, and to speculate on a debt issuer’s credit quality. Contracts backed by risky mortgage-backed debt have been blamed as a key contributor to the 2007-2009 financial crisis.
The Sheet Metal Workers pension fund alleges that banks cost fund managers billions of dollars by acting together to stem exchange trading of credit default swaps. By keeping the market privately traded, and opaque, the banks were able to profit from wide spreads for buying and selling the contracts, and maintain their monopoly in the market, it said.
“The prices were fixed at artificially derived levels,” the fund said.
Banks boycotted a joint venture by Chicago-based exchange CME Group Inc and hedge fund Citadel Group in 2008 to offer exchange trading of the contracts, the complaint said. The banks further used their presence on boards and committees at Markit and ISDA to deny or delay permissions to use licenses that the CME the needed to offer the contracts, it added.
Banks further acted to set up an alternative clearinghouse, now owned by the Intercontinental Exchange, that would not trade the contracts on exchange, allowing the banks to maintain secrecy of trade pricing, the suit alleges.
Banks further routed all of their CDS trades to that clearinghouse, ICE Clear Credit, at the expense of the CME offering. They have also used their influence on the ICE risk committee to restrict membership to the clearinghouse to the largest banks, the suit alleges.
ICE has been named as a co-conspirator in the complaint. ICE spokeswoman Brookly McLaughlin declined comment.
Markit spokesman Alex Paidas said that “Markit has not been served with the complaint filed by this class action law firm but we have seen a copy of it. The allegations are wholly without merit and we will defend ourselves vigorously.”
ISDA spokeswoman Lauren Dobbs said: “We believe that the allegations against us are without merit and that ISDA acted properly at all times.”
Spokespeople for the banks, which also includes Barclays , BNP Paribas, Credit Suisse, HSBC , The Royal Bank of Scotland and UBS, all either declined comment or did not respond to requests for comment.