Posted on Bloomberg by Matthew Leising:
Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks, is under Justice Department scrutiny for potential anticompetitive practices ranging from requiring customers to buy bundled services to restricting which trades can be cleared in the $26 trillion credit-default swap market.
Markit told a swaps clearinghouse customer to purchase a pricing service as a condition for granting use of its benchmark indexes, said a person with knowledge of the transactions. Markit permitted use of its indexes by another clearinghouse only if every swap guaranteed by the company included a dealer, such as one of its owners, said other people familiar with those negotiations.
“That’s a legitimate area of inquiry,” said Evan Stewart, a partner at Zuckerman Spaeder LLP in New York who has practiced antitrust law for more than 30 years and isn’t involved in the case. “If you want to get into the market with Markit with access to real-time prices, this is where you have to play,” he said. “You don’t have a supermarket of other choices.”
The Justice Department said July 15 it was investigating users of credit-default swaps as U.S. lawmakers seek to regulate the $592 trillion over-the-counter derivatives market, which helped worsen the biggest financial calamity since the Great Depression. Trading in OTC contracts provides as much as 40 percent of profits for Goldman Sachs Group Inc. and Morgan Stanley, according to research firm CreditSights Inc.
The investigation is also looking at whether London-based Markit, which provides derivative and bond data to more than 1,500 customers, sought to retain ownership of the pricing data that is created when trades are processed by a clearinghouse, said one of the people. The people familiar with the Markit negotiations declined to be identified because they were private.
“Markit has been informed of an investigation by the Department of Justice into the credit-derivatives and related markets,” spokeswoman Teresa Chick said July 13 in an e-mailed statement in response to questions from Bloomberg News. Chick declined to comment last week.
People familiar with the probe said at the time the U.S. wanted to determine if the bank owners of Markit had unfair access to price information.
Justice Department spokeswoman Laura Sweeney, who confirmed the investigation into “credit derivatives clearing, trading and information services industries” on July 15, also declined comment last week.
CME, Intercontinental, Eurex
Chicago-based CME Group Inc., Intercontinental Exchange Inc. in Atlanta and Eurex AG of Frankfurt are among companies that agreed to pay Markit this year to use the firm’s indexes, pricing and other services. Markit’s terms for granting its licenses delayed the creation of clearinghouses, three of the people said.
CME Group is offering to clear credit-default swaps through its CMDX system and Intercontinental has created the ICE Trust clearinghouse, while Eurex Credit Clear is offering to guarantee the trades.
Unregulated trading of credit-default swaps made it difficult for the U.S. to assess how connected banks had become following the failure in September of Lehman Brothers Holdings Inc. Credit markets froze when the New York-based firm collapsed in the biggest bankruptcy in U.S. history.
The Federal Reserve Bank of New York pushed Wall Street banks to support the creation of clearinghouses to guarantee credit derivatives to lessen systemic risk and provide regulators with a place to monitor market prices and positions.
CME Group spokesman Allan Schoenberg, Intercontinental spokeswoman Kelly Loeffler and Eurex spokesman Heiner Seidel declined to comment.
New York-based JPMorgan Chase & Co. is Markit’s largest shareholder, followed by Bank of America Corp. in Charlotte, North Carolina, Royal Bank of Scotland Group Plc in Edinburgh and Goldman Sachs of New York, according to filings at U.K. Companies House.
Goldman Sachs spokesman Michael DuVally and JPMorgan spokesman Justin Perras declined to comment. Bank of America spokesman Scott Silvestri didn’t immediately return a message for comment and a Royal Bank of Scotland representative couldn’t be reached.
Markit owns pricing services and the most actively traded credit swap indexes such as the Markit CDX North American Investment-Grade Index and the Markit iTraxx Crossover Index. Markit’s indexes account for about half of all credit-default swaps traded. Credit-default swaps represent $26 trillion in notional value, according to the New York-based Depository Trust & Clearing Corp.
“Markit’s price data are valuable but, if the dealers were willing to provide their quotes to other data providers on a regular basis, access to Markit data would not be crucial,” said Darrell Duffie, a finance professor at Stanford University’s Graduate School of Business near Palo Alto, California.
“Ownership of the legal rights to the indices, particularly CDX, is also extremely valuable,” he said. “I doubt that the dealers have an incentive to weaken Markit’s position in this way.”
Investigators began reviewing the negotiations between Markit and Intercontinental earlier this year while performing a routine antitrust review of Intercontinental’s purchase of the Clearing Corp., the people said. That acquisition closed in March.
The department was also conducting a routine antitrust review of a joint venture, announced last July, between Markit and the DTCC. The new firm will confirm and settle trades electronically in credit, equity, interest-rate and commodities derivatives markets. Justice approved the combination July 13.
Clearinghouses act as the buyer to every seller and the seller to every buyer in derivatives transactions, insuring both sides against default by the other. They are financed by their members.
Price data for daily settlements on ICE Trust aren’t available on its Web site. The site directs users to Markit’s Web site for pricing.
Bloomberg LP, the owner of Bloomberg News, competes with Markit in selling information to the financial-services industry. Markit is among the contributors of data that appears on the Bloomberg terminal.
Credit-default swaps are contracts that protect against or speculate on corporate defaults by paying the buyer the face value of a bond or loan if a company fails to meet its debt agreements. The market ballooned almost 100-fold within seven years to represent about $62 trillion by the end of 2007, according to estimates from the New York-based International Swaps & Derivatives Association.