On 1 July 2013, the European Commission (EC) sent a Statement of Objections (SO; a preliminary statement of its case) to 13 investment banks, as well as to the International Swaps and Derivatives Association (ISDA) and data service provider Markit, for an alleged infringement of the EU competition rules in the market for Credit Default Swaps (CDS).
According to the EC, the banks acted in a collective fashion to prevent exchanges from entering the CDS market. The idea was to delay the emergence of exchange trading of these financial products so as to maintain their own revenue levels.
At the time of the alleged breach of the EU competition rules (2006-2009), CDS were traded privately and bilaterally (so-called over the counter, OTC) instead of being traded on exchanges. In the EC’s view, trading on exchanges increases stability and transparency of the whole system, which the EC is also trying to achieve through regulatory means (for example by reviewing the Directive on Markets in Financial Instruments, the MiFID Directive). Specifically, the alleged anticompetitive behaviour consisted of preventing ISDA and Markit from licensing the necessary data and index benchmarks to the exchanges so that their entry into the CDS market would be made more difficult, as well as coordination of the banks behaviour so far as concerns the choice of their preferred clearing house. The EC made it clear that this investigation and the regulatory action both have the same objective: “ensuring that derivatives trading is safer and more transparent”.
This is one of a number of EC investigations in the financial services sector (which include the LIBOR investigation), which remains a priority area for the EC. Financial services providers should therefore continue to focus on compliance so as to minimize the risks of breaching competition rules.