Fines from the European commission could be on the horizon for a number of big banks, including Barclays, Royal Bank of Scotland and HSBC. The Commission watchdog has alleged that the banks have been plotting together to stop new entrants from becoming involved in lucrative financial contracts.
Accused of infringing EU antitrust rules, 13 banks including RBS and HSBC have been sent statements of objections due to their anti-competitive agreements. The banks have been accused of attempting to prevent the entrance of exchanges into credit derivatives business between the years of 2006 and 2009.
What is a credit default swap?
A CDS is a derivative contract which is intended to transfer credit risk (or risk of non-payment) which is linked to a debt obligation. Investors tend to use CDS for investing and hedging.
For A CDS offers protection against credit risk which may arise from the holding of debt instruments, when used as a hedge. Regarding investing, a CDS is used in order to pinpoint a prediction of each debt issuer’s credit-worthiness. If that prediction is correct, it results in a profit.
In the period between 2006 and 2009, CDS were privately negotiated – they were traded over the counter, as it were. In OTC trading, investment banks assure that they will sell to every buyer and buy from every seller, acting as an intermediary in the credit derivative market.
If the implicated banks are found to have infringed the EU antitrust rules, the Commission will take moves to both prohibit the conduct and implement a fine – expected to be around 10% of the annual worldwide turnover of the said company.
Foul play
Vice president of the commission Joaquin Almunia said of the preliminary conclusion:
“It would be unacceptable if banks collectively blocked exchanges to protect their revenues from over-the-counter trading of credit derivatives. Over-the-counter trading is not only more expensive for investors than exchange trading, it is also prone to systemic risks.
“We hope we are ready to adopt a decision towards the end of the year,” Alumnia continued.
This comes after the news that UK banks have been in the spotlight for allegedly enabling money laundering and suspicious transactions. Of 17 banks reviewed, half had not taken the proper precautions against the enabling of criminal transactions.
