Justice Department Probe of Credit Swaps Said to Widen
A U.S. Justice Department antitrust investigation into data provider Markit Group Ltd. is expanding to include other companies in the credit-default swap market, according to three people familiar with the matter.
Investigators are asking market participants about firms that are owned by Wall Street’s largest banks and whether that presents conflicts of interest, said the people, who spoke on condition of anonymity. The Justice Department is also asking about Tradeweb Markets LLC and The Clearing Corp., which was bought by Atlanta-based Intercontinental Exchange Inc. (ICE) in 2009.
The Justice Department probe of potentially anticompetitive practices at Markit began in 2009 and also includes questions over how licenses for clearing services in the $26.4 trillion credit-default swap were granted. The expansion of the agency’s investigation comes as regulators are writing rules to govern the market for the first time to increase competition and prevent a repeat of the financial crisis.
“The Justice Department is always suspicious of arrangements among firms that should be competitors but they’re cooperating in a market,” said Craig Pirrong, a finance professor at the University of Houston. That can lead to questions about “the pricing and whether it could be a non- competitive situation.”
‘Cooperate and Assist’
“We continue to cooperate and assist the Department of Justice in its review of the credit derivatives and related markets,” Alex Paidas, a spokesman for London-based Markit Group, said in an e-mailed statement. Clayton McGratty, a Tradeweb spokesman, declined to comment. Lee Underwood, an Intercontinental Exchange spokesman, declined to comment on the investigation.
Markit provides derivative and bond data to its customers and owns the most actively traded credit-swap indexes and pricing services in the market. Its owners include JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), UBS AG, Royal Bank of Scotland Group Plc (RBS), Deutsche Bank AG (DBK) and Goldman Sachs Group Inc. (GS), according to filings at U.K. Companies House.
The recent Justice Department questions focused on Markit’s influence in providing services to the credit-swaps market, according to two people interviewed by investigators. Questions were also asked about Markit’s RED identifier system that is used in the credit-swaps market to legally verify reference- entity and reference-obligation data to allow trades to be confirmed and tracked, the people said.
Alisa Finelli, a Justice Department spokeswoman, declined to comment. The department previously has confirmed its antitrust investigation of the credit derivatives information industry.
Intercontinental has a profit sharing agreement with the previous owners of the Clearing Corp., which the company bought in March 2009 to provide risk management, operational processing and clearing systems for its credit swap clearing, Underwood said. The former owners also included Markit, GFI Group Inc., Eurex AG, ICAP Plc and Creditex Group Inc., he said.
The former bank owners of the Clearing Corp. include Goldman Sachs, Bank of America, JPMorgan, Citigroup Inc. (C) and other dealers.
The banks “have economic rights of less than 35 percent of the total profits of ICE CDS clearing,” Underwood said. “Under the terms of the acquisition, consideration provided to TCC shareholders included TCC’s cash on hand as of the closing, $39 million in cash paid by ICE and profit-sharing participation in ICE CDS clearing.”
Clearinghouses owned by Intercontinental Exchange and CME Group Inc. (CME), the world’s largest futures exchange, negotiated with Markit to obtain licenses to offer its credit swap indexes and use its products to guarantee trades, people familiar with the investigation said in 2009. Markit is facing Justice Department scrutiny for potential anticompetitive practices ranging from requiring customers to buy bundled services to restricting which trades can be cleared, the people said at the time.
According to the people, Markit told a swaps clearinghouse customer to purchase a pricing service as a condition for granting use of its benchmark indexes and permitted use of its indexes by another clearinghouse only if every swap guaranteed by the company included a dealer, such as one of its owners.
Jeff Sprecher, chief executive officer of Intercontinental Exchange, said in 2009 that the Markit probe “makes sense” after the questions about the company that he faced from U.S. officials.
“The Department of Justice reviewed all our documents prior to the launch” of the company’s credit swap clearinghouse, including negotiations with Markit over benchmark credit-default swap licenses, Sprecher said on an Aug. 4, 2009, conference call with analysts. “The fact that they’re following on and understanding how the market infrastructure works is not surprising” he said.
Tradeweb, a New York-based bond- and derivatives-trading network, is majority-owned by Thomson Reuters Corp. (TRI) with the rest split among Goldman Sachs, JPMorgan, Morgan Stanley (MS), Citigroup, Bank of America, Credit Suisse Group AG (CSGN), Deutsche Bank, UBS, Royal Bank of Scotland and Barclays Plc. (BARC)
Bloomberg LP, the parent company of Bloomberg News, competes with Tradeweb, Markit and Thomson Reuters in arranging interest-rate, credit-default and other swap trades between investors and banks and in providing financial data and news to investors.
The cost of providing services to the credit swaps market may limit the number of companies that can compete, according to Pirrong.
That gives rise to “natural monopoly characteristics,” he said. “The credit-default swap market has been a lightning rod for criticism for the last five years and I think that’s one thing that attracted attention to the market.”
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