By Foo Yun Chee
BRUSSELS (Reuters) - EU watchdogs have charged 13 top investment banks with blocking exchanges' access to the lucrative credit derivatives market, hitting the sector with the latest in a growing list of regulatory headaches.
Monday's move by the European Commission, which could result in hefty fines, comes as major banks also come under investigation for suspected rigging of lending benchmarks including Euribor and Libor.
The Commission said banks including Citigroup and Goldman Sachs, along with financial data company Markit and the International Swaps and Derivatives Association (ISDA), had barred Deutsche Boerse and the Chicago Mercantile Exchange from the credit default swaps (CDS) business between 2006 and 2009.
CDS, which are worth more than 10 trillion euros ($13 trillion) so far this year, allow an investor to bet on whether a company or country will default on its bonds within a fixed period of time. They were originally over-the-counter (OTC) or non-exchange traded contracts, but the market is shifting to exchanges since regulatory efforts to boost transparency began.
The lack of transparency on OTC products has been a key target of regulators following the 2007-2009 crisis.
The CDS case is one of several opened by the EU antitrust regulator into financial services since the crisis. Banks and other companies involved could be fined up to 10 percent of their global turnover if found guilty of infringing EU rules.
"It would be unacceptable if banks collectively blocked exchanges to protect their revenues from over-the-counter trading of credit derivatives," EU Competition Commissioner Joaquin Almunia said in a statement on Monday.
"Over-the-counter trading is not only more expensive for investors than exchange trading, it is also prone to systemic risks."
The Commission said it had sent a statement of objections or charge sheet, which sets out suspected anti-competitive activities, to the companies and bodies concerned.
The accused can request a hearing to defend themselves before Commission officials and antitrust experts from national antitrust authorities across Europe ahead of the EU regulator's decision. While the Commission can take up to several years to reach a decision in such matters, it may issue its finding in this case before Almunia leaves office towards the end of next year.
The other banks charged are Bank of America Merrill Lynch, Barclays, Bear Stearns, BNP Paribas, Morgan Stanley, Credit Suisse, Deutsche Bank, HSBC, JP Morgan, UBS, and RBS.
The ISDA, a trade body which represents firms involved in the derivatives market, said it had received the Commission's charge sheet.
"As previously stated, ISDA is confident that it has acted properly at all times and has not infringed EU competition rules. ISDA is co-operating fully with regulatory authorities," it said in a statement.
UBS, Deutsche Bank, JP Morgan, HSBC, Barclays, Credit Suisse, Goldman Sachs, Citigroup, BNP Paribas and RBS declined to comment, while the other banks were not immediately available for comment.
Deutsche Boerse and the CME also had no comment.
Markit, which started out as a provider of valuations for dealers and investors in over-the-counter credit derivatives in 2001 before developing a dominant position in data and services, including credit indexes which the whole market uses, had no immediate comment.
The antitrust case comes amid efforts by EU financial market regulators to push more derivatives trading onto exchanges, aiming making the opaque market more transparent.
Several exchanges have tried and failed to break into the credit derivatives business. Deutsche Boerse subsidiary Eurex made a move in 2007, while LIFFE did so the following year, but neither made much progress with market liquidity remaining firmly off-exchange.
However, the IntercontinentalExchange (ICE) - a dealer-backed platform whose top shareholders include Goldman, JP Morgan and Wells Fargo - has for instance cleared more than $30 trillion of gross notional in credit default swaps since it began offering the service in March 2009.
Almunia said some of the banks in the CDS case were also involved in separate investigations into suspected rigging of lending benchmarks Euribor and Libor, but did not identify them. Barclays, UBS and RBS have already been fined for manipulating rates.
"We are trying to follow the Article 9 route. We hope we are ready to adopt a decision towards the end of the year," EU Competition Commissioner Joaquin Almunia told a news briefing, referring to a procedure where companies can get a 10 percent cut in fines in return for admitting wrongdoing.
He is also investigating suspected manipulation of the Japanese benchmark Tibor and the Swiss franc.
Such rates are used as references for hundreds of trillions of dollars' worth of financial contracts, ranging from credit cards to complicated derivatives deals. ($1 = 0.7693 euros)
(Additional reporting by Steve Slater, Laura Noonan, Alex Chambers and Helen Bartholomew in London, with John O'Donnell and Kathrin Jones in Frankfurt, Martin De Sa'Pinto in Zurich, and Christian Plumb and Matthias Blamont in Paris; Editing by Adrian Croft and David Holmes)