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Goldman, JPMorgan Among Banks Targeted in Swaps Probe

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Lloyd Blankfein (left), CEO of Goldman Sachs Group, Inc. and James Dimon, CEO of JP Morgan & Co. (right). Photo: Mark Wilson/Getty Images

Goldman Sachs Group Inc., JPMorgan Chase & Co. and 14 other investment banks face the first-ever European Union antitrust probes into the swaps market, following investigations by U.S. regulators.

The EU is examining whether 16 banks, including Citigroup Inc. and Deutsche Bank AG, colluded by giving market information to Markit Group Ltd., a data provider majority-owned by Wall Street’s largest banks. It will also check if nine of the firms struck unfair deals with Intercontinental Exchange Inc.’s European derivatives clearinghouse, shutting out rivals.

“Lack of transparency in markets can lead to abusive behavior and facilitate violations of competition rules,” Joaquin Almunia, the EU’s competition commissioner, said in an e-mailed statement. “I hope our investigation will contribute to a better functioning of financial markets.”

Global regulators have sought to toughen regulation of the $30.3 trillion credit-default swap market, saying the trades helped fuel the financial crisis. The EU’s probes add to separate investigations in the U.K. and U.S. into whether banks colluded to manipulate the London interbank offered rate.

The credit-default swap investigations are the first by antitrust regulators in Europe. The U.S. Justice Department’s probe of the credit derivatives clearing, trading and information services industries is “ongoing,” spokeswoman Alisa Finelli said today. The department first confirmed the investigation in July 2009. She declined to comment further.

Share Performance

Goldman Sachs advanced 41 cents to $151.01 at 4:15 p.m. in New York Stock Exchange composite trading. The shares had dropped 10 percent this year before today. JPMorgan declined 0.5 percent to $45.63. It had advanced 8.1 percent this year before today.

Markit “does not believe it has engaged in any inappropriate conduct,” Michael Gormley, a spokesman for the company in New York, said in an e-mailed statement. Bloomberg LP, the owner of Bloomberg News, competes with Markit in selling information to the financial-services industry.

German Chancellor Angela Merkel and French President Nicolas Sarkozy called last year for the European Union to ban the use of CDS by investors to profit from defaults on government bonds that they don’t own. Merkel and Sarkozy blamed such so-called naked short-selling of government bonds for fueling Greece’s debt crisis, which later spread to other euro-area countries.

‘Prudential Motive’

Banks may have “a strong prudential motive” to favor one clearinghouse, Craig Pirrong, a finance professor at the University of Houston, said in an interview. “Let’s not be purely suspicious and think the only reason firms would want to do that is for nefarious anticompetitive reasons.”

Bank of America Corp., Barclays Plc, BNP Paribas SA, Commerzbank AG, Credit Suisse Group AG, HSBC Holdings Plc, Morgan Stanley, Royal Bank of Scotland Group Plc, UBS AG, Wells Fargo & Co., Credit Agricole SA and Societe Generale SA will also be investigated for possible collusion in giving “most of the pricing, indices and other essential daily data only to Markit.”

The European Commission said this “may have the effect of foreclosing the access to the valuable raw data by other information service providers.” It said some of the clauses in Markit’s license and distribution agreements “could be abusive and impede the development of competition in the market for the provision of CDS information.”

No Exclusive Agreements

Markit provides derivative and bond data to more than 1,500 customers. It owns the most actively traded credit swap indexes and pricing services in the market.

Markit “has no exclusive arrangements” with any data provider and is “unaware of any collusion by other market participants,” Gormley said.

The EU will also separately investigate credit default swap clearing agreements struck by ICE Clear Europe with Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley and UBS.

“What we are looking at is whether the main players in the market have behaved badly, have entered into anti-competitive agreements or abused a possible dominant position,” Amelia Torres, a commission spokeswoman, told reporters in Brussels today.

ICE in Atlanta didn’t return a phone call and an e-mail seeking comment. ICE’s U.S. clearing arm is owned by dealers including JPMorgan, Goldman Sachs and UBS.

Goldman Sachs declined to comment on today’s probe, said Michael Duvally, a spokesman for the bank in London.

Deutsche Bank

Deutsche Bank, Commerzbank, JPMorgan, Bank of America, BNP Paribas, Morgan Stanley, Barclays, UBS, Credit Suisse, RBS, Societe Generale, HSBC, Wells Fargo and Citigroup also declined to comment.

The agreements with ICE have clauses on preferential fees and profit sharing arrangements “which might create an incentive for the banks to use only ICE as a clearinghouse,” the EU said. That may block other clearinghouses from starting up and limit choice for CDS dealers, it said.

The investigation will also cover fee structures used by ICE to check if they give “an unfair advantage to the nine banks by discriminating against other CDS dealers.”

The commission must send companies a formal antitrust complaint before it takes any decision to fine them up to 10 percent of yearly revenue. Businesses may avoid fines if they agree to change contracts that harm competition. There is no legal deadline to end an investigation.

Delivering Information

“I can’t imagine that there’ll be a large punishment for banks because the probe seems to be about delivering information and not about demanding too high prices from clients or price fixing,” Philipp Haessler, a Frankfurt-based analyst at Equinet AG, said in an e-mail.

CDS are derivatives that pay the buyer face value if a borrower defaults. Lawmakers in the EU plan to encourage the use of clearinghouses and transparent trading systems.

Clearinghouses operate as central counterparties for every buy and sell order executed by their members, who post margin and contribute to default funds, reducing the possible risks that a derivatives trade may collapse.

Dealers of credit-default swaps in Europe bowed to pressure from the EU in 2009 to conduct trades through clearinghouses, such as ICE Clear, to cut risk to the financial system.

IntercontinentalExchange Inc., ICE Clear Europe’s parent company, and Nasdaq OMX Group Inc. made an unsolicited takeover offer this month for NYSE Euronext, to thwart a rival bid for NYSE from Deutsche Boerse AG.

Almunia said, prior to the counterbid by ICE and Nasdaq, that the proposed tie-up between NYSE and Deutsche Boerse was likely to require an in-depth competition probe.

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