EU: 13 major banks may pay fines 10% of worldwide turnover

Joaquín Almunia, Vice-President of the European Commission in charge of Competition, gave a press conference on the statement of objections to 13 investment banks, ISDA and Markit in credit default swaps and derivatives investigation. (EC Audiovisual Services, 01/07/2013).

Joaquín Almunia, Vice-President of the European Commission in charge of Competition, gave a press conference on the statement of objections to 13 investment banks, ISDA and Markit in credit default swaps and derivatives investigation. (EC Audiovisual Services, 01/07/2013).

In a long-awaited decision, Joaquín Almunia, Vice President of the European Commission responsible for Competition Policy, accused thirteen western giant investment banking groups and two support bodies that those banks created a trust, setting prices in the over the counter trade of Credit Default Swaps and Derivatives, a multi trillion business. The Commission’s investigation covers the period before and after the financial crunch of 2008.

In detail, the Commission sent yesterday its official ‘objections’, according to Article 101 of the Treaty on the Functioning of the European Union (TFEU) to the following financial groups: Bank of America-Merrill Lynch, Barclays, Bear Stearns (now part of JP Morgan), BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, UBS and the Royal Bank of Scotland as well as to Markit, a financial information firm and the International Swaps and Derivatives Associations (ISDA). Both Markit and ISDA are controlled by those banks. The sending of this statement of objections is a key step in the ongoing antitrust investigation that the Commission opened in April 2011.

The Commission stresses now that “Any finding of infringement of EU antitrust rules may lead to the imposition of fines up to 10% of a company’s annual worldwide turnover, if the Commission considers it appropriate”. Almunia also added that “Following our investigation, we have reached the preliminary conclusion that these companies may have breached EU antitrust rules that prohibit anticompetitive agreements. More precisely, we consider that they may have coordinated their behaviour in order to jointly prevent (official) exchanges from entering the CDS market between 2006 and 2009”.

According to the European Commissioner Markit and ISDA plaid a crucial role, by preventing other prospective entrants from joining the CDS market. Indeed two major stock exchanges, the Deutsche Börse and the Chicago Mercantile Exchange (CME), attempted to launch central clearing and exchange trading of credit derivatives, for which there was already a widespread demand among investors.

Exclusive club

To launch these exchange-traded credit derivatives, however, the exchanges needed licenses for data and index benchmarks. But ISDA and Markit refused to provide these licenses because – according to Commission’s findings the banks had instructed them to do so. In addition, several investment banks sought to shut out exchanges in other ways, for example by coordinating among themselves the choice of their preferred clearing house. In the end, neither Deutsche Börse nor CME managed to enter the market.

In short the accused banks along with Markit and ISDA aimed at restricting the sale of CDS contracts only over the counter (OTC) and exclusively by the above banks and not through an organised and regulated market. In this way they arbitrarily charged prices to individual buyers of CDSs and derivatives, without the customers having any option to seek information on competitive pricing in an organised market platform. If the official exchanges had managed to enter the CDSs and derivatives market, they would have offered competitive and transparent pricing to buyers. On top of that the whole finacial system would have been more transparent, reliable and stable.

High demand

Investor demand for those financial products was at times very high. Pension and hedge funds, insurance companies and other investors couldn’t actually enter the prime market of sovereign and company debt, without securing their placement with a CDS. At the beginning of 2013 there were almost 2 million active CDS contracts world-wide, with more than €10 trillion gross notional amount (source: DTCC). The notional amount is the amount of debt the CDS contract is written on.

Obviously if it is confirmed that the banks collectively and effectively blocked the official exchanges from the CDS market, breaching the prohibition of anticompetitive agreements enshrined in the EU Treaty, the Commission could decide to impose sanctions and fines. On top of that Almunia added that “The EMIR regulation provides that standardised derivative contracts must be centrally cleared. In the review of the MIFID Directive the Commission also proposes that these derivatives should be traded on transparent and organised trading platforms. Our regulatory work also seeks to ensure that clear rules are in place for access to benchmarks”.

However, apart from the possibility that those banks have formed a trust in order to illegally increase their incomes at the expenses of the entire economy, simultaneously with this behaviour, they undermined the stability of the global financial system. Some of those events occurred before the financial crisis broke out in 2008, some later. Among other factors, this ongoing crisis was due to such systemic risks. Risks of this type are intrinsic to over-the-counter trading. If one bank defaults, others are quickly affected. The bankruptcy of Lehman Brothers has shown how this mechanism is capable of destabilising the entire system.

Usurping taxpayers’ money

In contrast, when trading occurs through an official exchange, counterparty risk is managed more strictly, especially because transactions are automatically settled in a central clearing house. Official clearing houses are liable if some counterparty goes bankrupt. In this way failures do not affect others. Presumably those banks didn’t pay much attention to all those problems, even if at the end they themselves run the risk to get caught in the fallout.

Unfortunately this last crisis proved that those major western banks counted on their size and in a way, when they went bankrupt after 2008, they actually blackmailed societies, governments and central banks to recapitalise them and replenish their liquidity. This is exactly what happened in our western world during the past five years.

the sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Here’s how tech can help governments fight corruption

Khashoggi trial in Saudi Arabia falls short of independent, international probe needed: UN rights chief

Mobile technology saving lives: Changing healthcare systems with simple technology solutions

Tuesday’s Daily Brief: Venezuela-Colombia baby breakthrough, Italy piles on rescue boat pressure, States must combat hate, Kashmir rights latest and a musical plea to combat CAR hunger

Climate change will force us to redefine economic growth

This AI can predict your personality just by looking at your eyes

Northern Ireland: Parliament wants to secure post-Brexit regional funding

UN launches Facebook Messenger-powered bot to take on climate change

Keeping cool in the face of climate change

‘Favour dialogue’ over violence, UN chief urges all parties following clashes in Mali’s capital

Building climate resilience and peace, go hand in hand for Africa’s Sahel – UN forum

Being blinded by labels stops social change. Art helps us see a better future

Here’s why upskilling is crucial to drive the post-COVID recovery

UN, African Union make significant joint commitment to global health

Protecting refugees in Europe: UNHCR calls for a ‘year of change’

Yemen: UN envoy asks Security Council for more support ‘to move back’ to the negotiating table

Is the EU denying its social character favouring a banking conglomerate?

UN rights chief Bachelet appeals for dialogue in Sudan amid reports ‘70 killed’ in demonstrations

How the US should react to the pandemic, according to Bill Gates

One million facing food shortages, nutrition crisis after Mozambique cyclones: UNICEF

4 ways Africa can prepare its youth for the digital economy

UN agencies launch emergency plan for millions of Venezuelan refugees and migrants

Do doctors need to know their patients’ sexual orientation and gender identity?

The next 48 hours may change the European Union

The UK referendum has already damaged Europe: even a ‘remain’ result is not without cost to Britain and the EU

Mali facing ‘alarming’ rise in rights violations, warns UN expert

A European Discovers China: 3 First Impressions

5 things to know about African migration

MWC 2016 LIVE: GTI shifts to phase two – 5G – after hitting milestones

If we want to solve climate change, water governance is our blueprint

Minsk “ceasefire” leaves more doubts than safety, with EU already planning steps further

Trade: First year of the EU-Japan Economic Partnership Agreement shows growth in EU exports

Electronic Cigarettes: Are they really as safe as we think?

UN and African Union in ‘common battle’ for development and climate change financing

Parallel downfalls of Merkel and Deutsche Bank threaten Germany and Europe

For video game addiction, now read official ‘gaming disorder’: World Health Organization

A new proposal breaks the stalemate over the Banking Union

To Brexit, or not to Brexit…rather not: 10 Downing Street, London

AI can be a game-changer for the world’s forests. Here’s how

What young people can teach world leaders about mental health in 2020

How can you or your organization support the Hour of Pride initiative?

Why do humanitarian crises disproportionately affect women?

Russia and the West to partition Ukraine?

Uzbekistan wins its long fight against malaria, as global rates continue to rise

Clean air is good for business

These are the world’s 20 most dynamic cities

Making the most of the Sustainable Development Goal 3: its overlooked role in medical education

Capital transaction tax on Ecofin table

International Women’s Day 2019: more equality, but change is too slow

An all-out fight for the EU budget

World Digital Media Awards winners announced at WNMC.19 in Glasgow, in association with The European Sting

Millennials (and Gen X) – Here are the steps you should take to secure your financial future

Forget GDP – for the 21st century we need a modern growth measure

David Attenborough’s worried about this ocean threat – and it’s not plastic

Is this the way to finally beat corruption?

80 adolescents a day will still die of AIDS by 2030, despite slowdown in epidemic

UN ceasefire monitoring chief tours Yemeni port of Hudaydah

DR Congo elections: ‘historic opportunity’ for ‘peaceful transfer of power’ says Security Council

Consumers’ rights against defective digital content agreed by EU lawmakers

Parliament mobilised to channel EU funds to those affected by Coronavirus pandemic

More Stings?

Comments

  1. Thanks for your personal marvelous posting! I quite enjoyed reading it, you could be a great author.I will make sure to bookmark your
    blog and will come back sometime soon. I want to encourage you to
    definitely continue your great writing, have a nice holiday weekend!

  2. Hi it’s me, I am also visiting this web page daily, this
    site is really fastidious and the viewers are genuinely sharing fastidious thoughts.

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s