The European Union on Monday came one step closer to fining leading world banks over suspicions that they colluded to
limit the activities of competitors.
The case involves the trading of Credit Default Swaps (CDS), a type of financial insurance that some believe to have exacerbated the eurozone's sovereign debt crisis. CDS insure against a specific economic event, such as a government defaulting.
The nearly 2 million CDS contracts active this year amount to a gross notional value of more than 10 trillion euros (13 trillion dollars), according to the European Commission.
The investment banks under investigation are Bank of America, Barclays, Bear Stearns, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, Royal Bank of Scotland and UBS.
These lenders - or banks they have since purchased, and thus are liable for - are suspected of having limited their competitors to "over-the-counter trading of credit derivatives," which is more expensive for investors and "prone to systemic risks," EU Competition Commissioner Joaquin Almunia said.
Such behaviour would be "unacceptable," he warned.
The statement of objections issued by the EU on Monday is also directed at the International Swaps and Derivatives Association, a global association of derivatives traders, and Markit, the leading provider of financial information on CDS trading.
The illegal activity allegedly occurred in 2006-09, when Deutsche Boerse and the Chicago Mercantile Exchange were told they could only carry out over-the-counter (OTC) trading - rather than the less profitable exchange trading - when they sought to enter the market.
"The commission takes the preliminary view that the banks acted collectively to shut out exchanges from the market because they feared that exchange trading would have reduced their revenues from acting as intermediaries in the OTC market," the EU's executive said.
The companies in question can now respond to the allegations. If found guilty, they could face fines of up to 10 per cent of their annual global turnover.
The EU has moved to regulate the CDS market and other types of financial instruments, approving last year a ban on so-called naked CDS, which allowed market punters to bet on negative events in which they do not have a stake.
The instrument helped exacerbate market pressure on Greece, contributing to the start of the eurozone crisis.
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