Brussels (Reuters)-$ 28 billion credit default swaps market is under investigation Friday by the European Union, in addition to official pressure on a huge business and opaque euro which is widely criticized for recent banking aggravating circumstances and debt crises area.
The Commission, executive body of the European Union, said that it is probing if major investment, including Goldman Sachs and JP Morgan banks, connivance in their operations in a market which is already under control by the authorities of us and be subject to the broadnew regulations.
Credit default swaps or CDS, are derivatives that allow a default buyer willing a vendor transfer risk, which in fact a kind of insurance against default. CD can also be purchased by speculators without direct interest in the debts involved.
CDS played a central role in the collapse near AIG in 2008 which led to a massive U.S. taxpayer bailout of the former giant of insurance. Contracts have also been at the heart of the debt crisis engulfing some smaller EU States.
The EU probe comes as the 27-nation bloc struggles, with the United States, to complete a crackdown by the Government in months now on offshore, $ 600 billion off-exchange in the derivative markets, including CDS.
"CDS play useful for financial markets and the economy," said the EU's antitrust Commissioner, Joaquin Almunia, in a statement announcing the investigation of two components.
"Recent developments have shown, however, that the negotiation of this sudden asset class a number inefficiencies that cannot be resolved by the only regulations," he said.
Almunia added that a lack of transparency could lead to abusive behavior and that he hoped that the probe would improve financial markets and help economic recovery.
The Ministry of Justice of the United States in 2009 has launched an investigation into anti-competitive practices, in the negotiation of compensation and the price of the CD to the United States. A spokesman for the Ministry of Justice of the United States declined to comment on the European Union to take.
Unlike the other derivatives, such as grain or future metal, credit derivatives are risk transfers. "This is a banking service that is transformed by this small group of banks in a commercial instrument," said Karen Shaw-Petrou, Director at consulting firm federal financial Analytics.
"The problem is that nobody knows what is a value unless, or until the entity against which the CDS is placed by default..." This is what makes it very opaque, she said.
CRISIS GREEK
In Europe, CDS moved to the Centre of the year final stage as Greece faced with higher costs of borrowing, blaming the move on speculators raising default insurance costs.
The European Commission, which regulates competition in the European Union, said that it investigate whether investment banks 16 had was in collusion or abused a dominant position on the market.
Opaque CDS market, where the players in the industry say that the only record of certain contracts of several million euro is just a fax, frustrated politicians who have struggled to understand because there are a few Central Archives of the trade.
"It is not a transparent market," said Shaw-Petrou. "It is a liquid market... but there is no real evidence of another value that the moment when the exchanges which are then unable to verify because it is not a public Exchange."
The probe could hit banks bottom lines as the EU can companies fine up to 10 percent of revenues and handed sentences as big as one billion euros ($1.5 billion).
Analysts said trade of CDS is too concentrated. "Eighty percent of transactions in derivatives of the two sides of the Atlantic are made by approximately eight banks," said Karel Lannoo of the Centre for European Policy Studies, a think tank.
EU countries and the Parliament of the region seek to agree how to reorder the rules of the derivatives market, with some legislators calling flatly prohibited the trade of speculative CDS. These appeals were heard two years at the United States, but the main CD merchants were able to silence their.
Instead, reforms of the financial regulation Dodd-Frank 2010 commissioned the first comprehensive regulation of U.S. derivatives exchange, including CDS. The legislation is now being implemented by regulatory agencies.
Standardisation mandate and reforms Exchange increased on exchanges or electronic platforms of derivatives. For instruments suited badly to this, use more central documentation centres and to the disclosure of transactions are required.
A comparable level of detail is not yet out of debate EU monitoring of derivatives, leading to a degree of concern among regulators growth of comprehensive reforms could slow down in regional divergent regulatory approaches and a fierce resistance of banks defend their business models.
IN THE EYES OF MARKIT
The European Commission said that he will study also any collusion by Markit, which provides prices and whose shareholders are the 16 banks. Markit denied any inappropriate conduct.
"Markit has no exclusive arrangements with any provider of data and makes its data and its related products widely available to the participants in the global market," he said in a statement.
As the EU, has said that he would investigate nine of the 16 banks and ICE clear Europe CDS information centre belonged to the InterContinental Exchange Exchange operator, to see if preferential tariffs given to banks badly competitors.
16 Banks examined are: JP Morgan, Bank of America Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, credit Switzerland, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, Wells Fargo Bank/Wachovia, Credit Agricole and Societe Generale.
The banks named either refused to comment on or were not immediately available.
(Additional reporting by Arno Schuetze Frankfurt, Emma Thomasson in Zurich, Kevin Drawbaugh, Sarah Lynch and Diane Bartz Washington and William James in London; editing by Rex Merrifield and Alexander Smith, Gary Hill)
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