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3rd Dec 2022

Banks rigged €10 trillion derivatives market, Brussels says

  • The Deutsch Borse was shut out of the derivatives market between 2006-2009 (Photo: stefan)

Thirteen big banks colluded to shut out competition from the multi-trillion euro derivatives market, according to an investigation by the European Commission.

The EU's executive arm said that its investigation, which began in 2011, had uncovered anti-competitive practices during the 2008-9 financial crisis.

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The commission investigation focuses on the credit default swap (CDS) market which allows banks and businesses to hedge against possible losses. However, more controversially, they were used by Goldman Sachs and others to speculate on the probability of a Greek debt crisis in 2010.

There are almost 2 million active CDS contracts with a joint notional amount of €10 trillion worldwide.

Most CDS contracts are negotiated privately between so-called 'over the counter' derivatives. However, critics of the practice say that the lack of transparency distorts the market and increases the risk of the parties being unable to meet their obligations.

EU lawmakers adopted legislation on derivatives trading in 2012 requiring all trades to be cleared through an exchange, making the practice more transparent and reducing risk.

The banks allegedly coordinated their behaviour to jointly prevent the Deutsch Bourse stock market and the Chicago Mercantile Exchange from being issued licenses allowing them to enter the CDS market. The two exchanges were allegedly shut out of the market between 2006 and 2009, covering the end of the credit boom and the financial crisis in 2008-9.

In a statement issued on Monday (1 July) the commission commented that its preliminary conclusion was that the banks had "delayed the emergence of exchange trading of these financial products because they feared that it would reduce their revenues."

The banks involved include a handful of Europe's largest financial institutions such as Barclays, BNP Paribas, Deutsche Bank and the Royal Bank of Scotland (RBS).

The UK-based Barclays and RBS were also involved in last year's Libor rate-fixing scandal which saw a handful of big banks rig the interest rate at which banks lend to each other, driving up the price of financial products to customers.

Speaking to journalists on Monday (1 July) EU competition chief Joaquin Almunia warned that fines would be meted out if the market manipulation was confirmed.

EU anti-trust rules allow the Commission to impose fines worth up to 10 percent of a firms annual turnover.

"Exchange trading of credit derivatives improves market transparency and stability," he added, in a nod to the new EU rules.

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