Credit Default Swap Purchasers Accuse Bankers Of Blocking Competition

A new class action alleges that international megabanks used their monopoly power to manipulate the credit default swaps market.

Sheet Metal Workers Local No. 33 Cleveland District Pension Plan has filed a class action in Illinois federal court against 15 defendants, including Bank of America, Citibank, and JPMorgan Chase & Co.  According to the complaint, the defendants used companies they controlled, including Markit Group LTD., Intercontinental Exchange Inc., and the International Swaps and Derivatives Association, to inflate prices and block competitors from entering the credit default swaps market. 

Investors purchase a credit default swap, or CDS, to insure the money placed into a single bond or a broad portfolio of investments.  Buyers can only purchase a CDS by requesting a quote through specific dealers.  Plaintiffs, who seek to represent a class of CDS purchasers, argue that the “over-the-counter” structure of the CDS market allows for the anticompetitive behavior because the dealer defendants, rather than an open exchange, control the price.

Unlike in an exchange, real time data reporting the bid-ask spread for CDS transactions was unavailable to buyers.  The only spread data on which to base a decision was collected daily from the dealers by Markit, a company also owned by the defendants.

After the financial markets collapsed in 2008, many CDS buyers grew frustrated when making purchases without real time pricing data.  Recognizing an opportunity to provide “more robust risk management through price transparency,” Citadel spent millions of dollars building an exchange for CDS transactions. 

However, in order to start an exchange, Citadel needed to meet the membership requirements of Intercontinental Exchange Inc., and obtain a license through the International Swaps and Derivatives Association.  Plaintiffs allege that executives at the defendant companies used their positions on the ICE and ISDA boards to deny Citadel an exchange license and to block Citadel’s entry into the CDS market by setting capital requirements at an unreachable $5 billion. 

Although defendants later changed the capital requirements (after the ICE rules were investigated by the U.S. Commodities Futures Trading Commission) to require dealers to hold five percent of customer funds in excess capital, these new rules are alleged to have kept intact high barriers to entry into the market.

Plaintiffs seek treble damages and attorney fees, arguing that the $2 trillion the credit default swaps market generates in notional value each week has allowed defendants to profit significantly to the detriment of investors.

The case is Sheet Metal Workers Local No. 33 Cleveland District Pension Plan v. Bank of America Corp. et al., No. 1:13-cv-03357 (N.D. Ill.).