12 big banks reach $1.865bn settlement

Sep 11, 2015, 4:44 PM EDT
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12 big banks reached a $1.865 billion settlement over price-fixing and limiting competition in the market for credit default swaps. The settlement in principle was disclosed at a hearing before U.S. District Judge Denise Cote in Manhattan, reports Reuters. "We think it's historic," Daniel Brockett, the investors' lawyer, said in an interview. "It's one of the largest antitrust class-action settlements, and an extraordinary result for the class." The defendants include Bank of America Corp (BAC.N), Barclays Plc (BARC.L), BNP Paribas SA (BNPP.PA), Citigroup Inc (C.N), Credit Suisse Group AG (CSGN.VX), Deutsche Bank AG (DBKGn.DE), Goldman Sachs Group Inc (GS.N), HSBC Holdings Plc (HSBA.L), JPMorgan Chase & Co (JPM.N), Morgan Stanley (MS.N), Royal Bank of Scotland Group Plc (RBS.L) and UBS AG (UBSG.VX).

Other defendants are the International Swaps and Derivatives Association (ISDA) and Markit Ltd (MRKT.O), which provides credit derivative pricing services. Credit default swaps are contracts that let investors buy protection to hedge against the risk that corporate or sovereign debt issuers will not meet their payment obligations. The market peaked at $58 trillion in 2007, according to the Bank for International Settlements, but shrank to $16 trillion seven years later as investors better understood its risks. American International Group Inc's (AIG.N) CDS exposure was a major factor behind the 2008 federal bailout of that insurer.

In the lawsuit, investors including the Los Angeles County Employees Retirement Association and Salix Capital US Inc claimed that the defendants' activity caused them to pay unfair prices on CDS trades from late 2008 through the end of 2013, even though improved liquidity should have driven costs down. They also said the banks tried in late 2008 to thwart the launch of a credit derivatives exchange being developed by CME Group Inc (CME.O) by agreeing not to use new CDS platforms and pushing ISDA and Markit not to provide licenses to the exchange.

The credit default swaps market was worth $16 trillion as of the end of 2014, according to the Bank for International Settlements, writes Bloomberg. The instruments are used as a hedge against the possibility of a borrower default. Although the contracts trade frequently and fluctuate like stocks or bonds, the market is opaque. In court papers, the banks said there was no antitrust conspiracy. They argued that members of the group supported proposals to increase competition in the CDS market and that there’s little actual demand for exchange trading of the contracts. In September, they were successful in persuading U.S. District Judge Denise Cote, who presided over the case, to throw out a claim they colluded to monopolize CDS trading. Some of the alleged behavior occurred before the Dodd Frank act of 2010, which regulated the CDS market for the first time, including measures to make the market more transparent and less risky.