The European Commission
has extended the scope of an investigation into the market for credit default swaps
to include the International Swaps and Derivatives Association
(ISDA), a professional organization of financial institutions involved in
the OTC trading of derivatives. The
Commission's inquiry found preliminary indications that ISDA may have been
involved in a coordinated effort of investment banks to delay or prevent
exchanges from entering the credit derivatives business. Such
behavior, if established, would stifle competition in the internal market in
breach of EU antitrust rules.
This investigation was
opened in April 2011 and is currently on-going. The Commission is examining
whether a number of investment banks may have used a leading provider of
financial information in the credit default swap market to foreclose the
development of certain trading platforms. This could have been achieved through
collusion or an abuse of a possible collective dominance.
Articles 101 and
102 of the Treaty on the Functioning of the European Union prohibit
anticompetitive agreements and the abuse of dominant positions. The
implementation of these provisions is defined in the EU's Antitrust Regulation,
which can also be applied by national competition authorities. There is no
legal deadline to complete antitrust investigations. Rather, the duration of an antitrust
investigation depends on a number of factors, including the complexity of the
case and the extent to which the undertaking concerned cooperates with the
Commission.
Credit default swaps are
financial products traded between financial institutions or investors. They are
derivatives originally created to provide protection against the risk of
default. Information about credit default swaps is needed to allow market
participants to determine the value of their investment portfolios and develop
investment strategies. In order to create and sell aggregated credit default
swap information products and services, information service providers need
access to a certain amount of
transaction and valuation data.
The Commission has actually opened two antitrust investigations concerning the credit default swaps
market. In the first case, the Commission is examining whether sixteen
investment banks and a leading provider of financial information in the credit
default swap market colluded and may hold and abuse a dominant position in
order to control the financial information on credit default swaps. The first investigation focuses on the
financial information necessary for trading credit default swaps. The
Commission has indications that the sixteen investment banks that act as
dealers in the credit default swap market give most of the pricing, indices and
other essential daily data only to the leading provider of financial
information in the market concerned. This could be the consequence of collusion
between them or an abuse of a possible collective dominance, reasoned the
Commission, and may have the effect of foreclosing the access to the valuable
raw data by other information service providers.
In the second case, the Commission opened proceedings against nine of
the sixteen investment banks and ICE Clear Europe, the leading clearing house
for credit default swaps. Here, the Commission is investigating in particular
whether the preferential tariffs granted by ICE to the investment banks have
effectively locked them into the ICE system to the detriment of competitors. More
specifically, the Commission is
investigating a number of agreements between the nine credit default swap
dealers. These agreements contain a number of clauses involving preferential
fees and profit sharing arrangements that might create an incentive for the
investment banks to use only ICE as a clearing house. The effects of these
agreements could be that other clearing houses have difficulties successfully
entering the market and that other players in the credit default swap market
have no real choice where to clear their
transactions. If proven, the practice would violate Article 101.
The Commission will also
investigate whether the fee structures used by ICE give an unfair advantage to
the nine investment banks by discriminating against other credit default swap
dealers. This could potentially constitute an abuse of a dominant position by
ICE in breach of Article 102.