European Regulators Investigate Banks for Credit Swaps

European regulators in Brussels announced two sweeping antitrust investigations into the world’s largest banks on Friday, opening a second front in the battle to rein in a $600 trillion business that until now has operated mostly in the shadows. The regulators are focusing on whether the banks have shut out competitors in recent years in a bid to keep profit margins high.

The European investigations mirror one already under way by the United States Department of Justice, and follow an examination of derivatives market last year by The New York Times that highlighted efforts by large banks to control this lucrative corner of finance.

The European officials said they were investigating whether financial institutions, including international giants like Barclays, JPMorgan Chase and Deutsche Bank, used important industry committees to influence pricing and rules for a product known as a credit-default swap. These swaps provide a type of insurance against the risk of corporations or other borrowers being unable to pay off their debts.

The concern, the European Commission said, was that the banks had “an unfair advantage” in this largely opaque market. None of the banks cited by the European regulators commented on the inquiry.

“Lack of transparency in markets can lead to abusive behavior and facilitate violations of competition rules,” the European Union competition commissioner, Joaquín Almunia, said in a statement. “I hope our investigation will contribute to a better functioning of financial markets and, therefore, to more sustainable recovery.”

Antitrust rules in Europe tend to be tougher in these types of cases than in the United States, experts said, and the efforts in Europe may increase the pressure on Washington to open this marketplace up to more competition. The investigations also differ from other prominent antitrust cases recently because they involve many big players in the industry, rather than a single company, and the outcome will be determined by laws covering collusion rather than monopolies.

“Our big time, famous antitrust cases over the past couple years have involved a single dominant firm, like Microsoft,” said Keith N. Hylton, a professor of law at Boston University. “This is a story of a secretive group that controls the market and they’re excluding competitors.”

The result of the investigations could affect broad swaths of the economy, because banks dominate the market for many sorts of derivatives, not just credit-default swaps.

As in Europe, American regulators have expressed worries that buyers are paying higher prices for these complex instruments than they would in a more competitive market. That can affect products like airline tickets that include the cost of hedges on oil prices or local tax bills that reflect the fees cities pay to manage the risk of swings in interest rates.

The investigation announced on Friday was twofold.

One part focuses on a larger set of banks — 16 in total — that work with a data provider called the Markit Group, based in London, designing pricing procedures and indices related to these swaps. Many of the banks also hold stakes in Markit.

Markit, which the European regulators are also looking at, said in a statement that it “has no exclusive arrangements with any data provider and makes its data and related products widely available to global market participants.” And, the company said, it was “unaware of any collusion by other market participants as described by the commission.”

The second part of the investigation centers on nine banks that play a major role in a procedure called clearing that regulators in the United States and Europe have promoted for several years as a better way to manage the risks posed by derivatives.

The nine banks gained power in part through regulators’ efforts in 2008 to improve transparency in the market. At the time, the Federal Reserve Bank of New York ordered the banks to help build clearing houses for derivatives.

In return for partnering with the Intercontinental Exchange, a publicly traded company, the banks got a favorable deal with ICE that persists today. Not only did they get a major say in ICE’s rules on derivatives, the banks also share in ICE’s profits from clearing and enjoy a cap on the fees they pay for clearing.

The European Commission said the deal between ICE and the nine banks might be unfair to other players in the market. In particular, the commission criticized the cap on clearing fees. The banks are not obligated to pass on the benefits of the caps to their customers and could use part of their savings to undercut bids from new competitors.

“This could potentially constitute an abuse of a dominant position by ICE,” the commission said in a statement.

ICE declined to comment. But officials inside the banks say privately they are entitled to the caps on the fees at ICE because as part of their partnership, they sold a jointly owned clearing business to ICE. The caps, they argue, are part of the payment for that deal.

Alisa Finelli, a spokeswoman for the Justice Department in Washington said on Friday that the department’s investigation of the derivatives market was still underway. Last fall, she said the department was focused on “the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries.”

Also late last year, Christine A. Varney, assistant attorney general in the department’s antitrust division, urged the Securities and Exchange Commission and the Commodities Futures Trading Commission to create regulations that spur more competition in the derivatives market.

The banks named in the ICE clearing investigation are JPMorgan, Bank of America, Barclays, Citigroup, Crédit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley and UBS. In addition to those nine, the Markit inquiry also includes Wells Fargo, BNP Paribas, Commerzbank, HSBC, Royal Bank of Scotland, Crédit Agricole and Société Générale.

 

Bucks: Secured Credit Cards: Not Everyone Qualifies

If your credit was ruined during the Great Recession, using a secured credit card may be a good way to help improve your standing.

That is, if you can get a secured card.

Not everyone may be immediately eligible, especially if you have a recent bankruptcy on your record. A reader who recently emerged from bankruptcy wrote to me after she and her husband were denied secured credit cards from Citibank. That, at least in my mind, raised several questions: Are all people emerging from bankruptcy unable to get a secured card? Are there other situations where you’re likely to be denied? And is the passage of time the only option for the millions of people whose credit has been ruined during the recession?

Secured credit cards appear to pose minimal risk to the card issuer. After all, the cardholder is required to put a certain amount of money into a bank account, say $250 or $500, which is used as collateral. And the available amount of credit is often equivalent to the amount on deposit. By using these cards strategically, a person with bad credit can speed up the recovery process by demonstrating positive behavior: charging only small amounts and paying off their balance each month.

“You need to dilute the negative information on your credit report, and there is no better way to do that than with a secured card,” said Odysseas Papadimitriou, chief executive of CardHub.com, a credit card comparison site. He said he believes getting denied for these cards are the exception rather than the rule. But he did say that some banks want to be sure that the bankruptcy is well behind the applicant, and, in some cases, penalize them a bit for getting into trouble.

So to clarify who is actually eligible for these cards, I called several issuers of secured credit cards and asked them about their approval policies. Some were more forthcoming than others, but here’s what they said:

Citibank. It depends on the individual’s situation, said Sean Kevelighan, a Citi spokesman. He declined to disclose the factors that it considers when making credit decisions.

(The Bucks’ reader said the bank refunded her and her husband’s secured deposit, totaling $1,000, and said it could not accept their application because “a credit obligation related to a bankruptcy or financial counseling plan was recorded on your credit bureau report.” The reader said they had applied for the card about 10 months after their debts were discharged in bankruptcy, though they continued to pay their student loans, mortgage and auto loans during the six-month bankruptcy period. Her husband has been self-employed since January 2010, though she is not working. Citi looked into the situation at our request, but declined to say why the couple was denied.)

HSBC. Applicants who provide a security deposit get approved, unless a background check with the credit bureaus turns up a discrepancy related to the identity of the applicant. Recent bankruptcies do not make you ineligible, and credit scores are not a factor in the company’s decision.

Capital One. If the courts have discharged your debts, an applicant would be immediately eligible for a secured card. Capital One also considers the applicant’s ability to repay. “Our goal is to provide reasonable access to credit with the appropriate guardrails in place,” said Sukhi Sahni, a spokeswoman for Capital One.

Bank of America. Generally speaking, applicants must be out of bankruptcy for a year, and must have another relationship with the bank, like a checking account. Delinquencies on other accounts are also likely to result in a denial. “Over time, we would want to see that they demonstrate the ability to manage their finances responsibly because ultimately the goal is to graduate them to a nonsecured card,” said Betty Riess, a spokeswoman for Bank of America.

Wells Fargo. Applicants must be out of bankruptcy for a year. The bank also looks at a variety of other factors, including FICO credit scores and payment history. Wells Fargo only issues credit cards to current bank customers as a general policy.

U.S. Bank. The bank declined to comment.