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EU Charges Biggest U.S. Banks in CDS Market Antitrust Suit

NEW YORK ( TheStreet) -- Thirteen of world's largest investment banks, International Swaps and Derivatives Association and data provider Markit Group have been charged by the European Commission of blocking entrants into the opaque but lucrative credit default swap market, in violation of antitrust law.

On Monday, the European Commission said the syndicate of banks, ISDA and Markit had used their market position to shut German exchange Deutsche Boerse and U.S. commodities exchange the Chicago Mercantile Exchange (CME) from entering the CDS market.

The European Commission has charged Goldman Sachs (GS - Get Report), Morgan Stanley (MS - Get Report), JPMorgan (JPM - Get Report), Citigroup (C - Get Report), Bank of America Merrill Lynch (BAC - Get Report), Barclays (BCS), Deutsche Bank (DB), Credit Suisse (CS), HSBC, RBS, Bear Stearns and BNP Paribas, in its antitrust complaint.

ISDA is the trade group that represents Wall Street derivatives traders and it also is tasked with coordinating changes to the market. Markit is a financial data provider that owns licenses to the most highly traded CDS index contracts.

"It would be unacceptable if banks collectively blocked exchanges to protect their revenues from over-the-counter trading of credit derivatives," EU Competition Commissioner Joaquin Almunia said in a Monday statement. Banks fines of up to 10% of their revenue if found guilty of breaking EU antitrust rules.

CDS trading, while risky, is a highly profitable business for large banks because Wall Street dealers are able to set the price of many contracts in bilateral negotiations done off of an exchange. Exchange-traded products such as stocks and futures, by contrast, have generally seen trading commissions and fees drop precipitously as markets have embraced electronic trading.

In the wake of the financial crisis, many exchanges have sought to enter the CDS market with electronic trading platforms. Some exchanges such as IntercontinentalExchange (ICE) have had recent success in entering the market amid new regulations such as the standardization of some CDS products and a clearing of swap trades. Still more want to enter the market as post-crisis regulation of derivatives market takes hold.

New players such as Bloomberg have applied to become so-called swap-execution facilities, as an increasing number of products face clearing and electronic trading mandates. Meanwhile, Intercontinental Exchange has a licensing agreement with Markit to create CDS futures contracts.

In recent years, Deutsche Boerse, the Chicago Board of Options Exchange and the CME have all tried to build CDS futures contracts, however, success was limited by a lack of participation from large banks and an inability to get key licenses.

Deutsche Boerse and CME Group, for instance, weren't able to obtain licenses to Markit's index products as they tried to build electronically traded CDS futures contracts, the European Commission said.

The European Commission's antitrust probe was opened in April 2011 and focused on whether Markit, owned by the largest derivatives traders, had tried to curb new entrants in 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 said Monday.

-- Written by Antoine Gara in New York.

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