Danish funds sue banks in U.S. for blocking CDS exchange-trading

Fri Jul 12, 2013 4:03pm EDT
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By Karen Brettell

NEW YORK (Reuters) - Four Danish pension funds have filed a lawsuit against twelve large banks, accusing them of increasing costs for investors trading in the $27 trillion credit default swap (CDS) market by stopping exchanges from entering the market.

The case, filed on Thursday in the U.S. District Court in the Northern District of Illinois, follows a similar suit filed in May by an Ohio-based pension fund, the Sheet Metal Workers Local 33 Cleveland District Pension Plan, in the same court.

The funds allege that dealers used their ownership and controls over clearing, data and other entities crucial to the market to block an independent clearinghouse from offering exchange-trading, deny market participants real-time price information and stop new participants from entering the market.

The CME Group (CME.O: Quote), the world's largest derivatives exchange and Chicago-based hedge fund Citadel Group, planned to offer CDS exchange trading in 2008 before dropping the plan the following year.

The banks threatened to withdraw their business from the CME if it went through with its CDS trading venture, the funds allege. CDS are used to protect against losses if a borrower defaults on their debt or to speculate on their credit quality.

The banks used their control over the International Swaps and Derivatives Association (ISDA), a trade group, and Markit, a data provider and owner of benchmark indexes, to deny or delay licenses the exchanges needed to offer CDS trading, according to the complaint.

The funds also accuse the banks of controlling a CDS clearinghouse, which is now owned by IntercontinentalExchange (ICE.N: Quote), to keep trading off exchanges and restricting membership to the clearinghouse to the largest banks.

Markit and ISDA are defendants in the suit and ICE is named as a co-conspirator.   Continued...

People walk at a Bank of America's Tower in New York October 24, 2012. REUTERS/Eduardo Munoz