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.
