Markit and ISDA Seek to Settle EU Antitrust Probe on CDS

  • EU concerned they hindered exchange trading as rival to banks
  • Licenses to be offered on fair terms, governance changes

Markit Group Ltd. and the International Swaps & Derivatives Association offered to settle a European Union antitrust investigation into their role in the credit-default swaps industry with pledges to change licensing arrangements.

The European Commission is seeking feedback on commitments from Markit, a financial information provider, and ISDA, a derivatives industry group, it said in an e-mailed statement. If accepted, the offer would allow regulators to end a five-year probe without levying any fines or making any ruling on whether there was a breach of EU law.

Banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. were dropped from the probe last year after the EU said it lacked evidence they conspired to shut exchanges out of the CDS market. The EU pressed on with the case against Markit and ISDA over concerns that not licensing certain inputs for exchange trading may have hindered it emerging as a rival to the banks that dominate over-the-counter CDS trading.

Markit is now promising to license rights in the iTraxx and CDX indexes on fair, reasonable and non-discriminatory terms for the exchange-traded financial products based on them. It will also try to prevent banks influencing individual licensing decisions by reducing their participation in its advisory committees and any discussion on licensing requests.

ISDA pledged to license on fair terms all rights in the so-called final price: the price used industry-wide that results from auctions to determine the settlement price of CDS trades following a default. Its chief executive officer will in future make licensing decisions without seeking the views of the banks.

‘Effective Risk Management’

ISDA is “pleased that we have reached a proposed resolution with the commission,” said spokesman Nick Sawyer. “ISDA is committed to ensuring the CDS market functions safely and efficiently to facilitate effective risk management for all users of the product.”

Markit said it will comment later on the EU case.

Both Markit and ISDA have agreed to third-party arbitration in any dispute over fair terms, the commission said. The commitments, if made binding, will remain in place for 10 years.

Ending the case without a finding of liability could help Markit deflect lawsuits seeking damages for possible antitrust violations. Markit said it spent $5.6 million in 2014 and $3.7 million in 2015 on legal advisory fees linked to the EU and U.S. Department of Justice investigations and related lawsuits.

Banks’ Leverage

The probe initially centered on allegations that banks abused their leverage over Markit and the ISDA from 2006 to 2009 to block Deutsche Boerse AG’s Eurex and CMDX -- a CDS electronic trading platform planned by the CME Group Inc. and Citadel Investment Group Inc. -- to maintain more lucrative over-the-counter trading.

European lenders Barclays Plc, BNP Paribas SA, Credit Suisse Group AG, HSBC Holdings Plc, Royal Bank of Scotland Group Plc and UBS Group AG were targeted by the EU in the case. The other U.S. banks are Citigroup Inc., Morgan Stanley, Bank of America Corp. and Bear Stearns Cos., which JPMorgan acquired in 2008.

Some of Wall Street’s biggest financial institutions -- including Goldman Sachs, JPMorgan, Citigroup and HSBC -- agreed in September to a $1.87 billion settlement in the U.S. with a group of investors to resolve allegations they conspired to limit competition in the lucrative credit-default swaps market.

The U.S. Justice Department’s antitrust division had probed the conduct of Markit and the banks. The agency shelved the investigation in October 2013, people familiar with the matter said at the time.

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