May 7, 2013
In a very interesting recent development, Bloomberg, Reuters and others are reporting on the first lawsuit filed in the new (well newer) financial product “fixing” case involving credit default swaps (CDS) (see here, here, here, here and here). CDS are financial instruments intended to protect investors in the event a borrower (e.g., a company, state, etc.) they have invested in default on their payments. CDS are also used for speculation.
According to media, an Ohio pension fund, the Sheet Metal Workers Local 33 Cleveland District Pension Plan, is seeking damages against Goldman Sachs, Citigroup Inc. and ten other banks that, according to the pension fund, have restrained competition for credit default swaps (CDS) in violation of federal antitrust law. Other defendant banks include Bank of America, Deutsche Bank, UBS, Morgan Stanley, Barclays, BNP Paribas, Credit Suisse and RBS. In its complaint, the pension fund states: “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 by their distortions”.
More specifically, the complaint (Sheet Metal Workers v. Bank of America Corporation et al) that was filed on May 3rd in the Illinois Northern District Court, seeks “buy side” damages incurred in buying or selling CDS contracts to the “sell side” defendant dealers between 2008 and 2011, alleging that the defendants illegally coordinated to limit competition raising fund managers’ costs. The complaint alleges that CDS prices were “fixed at artificially derived levels” by the banks and that they used their influence on the boards and committees of Markit (an index and data provider), the International Swaps and Derivatives Association (ISDA) and the Depositor Trust & Clearing Corp. (DTCC) to block new market entrant trading platforms keeping the market privately traded (and with wide spreads for buying and selling CDS contracts).
The European Union announced its investigation of the CDS market in April 2011 (see: here), that involves whether 16 investment banks and Markit colluded or abused their dominance to control financial information on CDS, which was expanded in March to include the ISDA (see: here), and in particular whether the ISDA may have been involved in a coordinated effort involving investment banks to delay or prevent exchanges from entering the CDS business. The EU’s probe appears to include concerted theories of harm as well as collective dominance theories.
Aside from the marquee defendants in the case and size of the market, estimated to be as large as $27 trillion, the case is interesting for showing that regulatory (and private plaintiff) pressure on financial product “fixing” continues to expand with Libor (presumably amplifying headaches for financial regulators attempting to find alternatives).
Perhaps one of the most interesting questions will be whether this case, or any other related cases filed, will survive motions to dismiss and be distinguished from the recent adverse New York District Court finding against Libor plaintiffs (where the New York court found somewhat oddly to say the least, among other things, that banks were not acting as competitors when submitting interest rate information to the BBA). It will also be interesting to see what arguments are made by the defendant banks (and which may be accepted by the court) in their efforts to fend off this new attack on alleged bank financial instrument coordination.
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