Big banks accused of rate swap collusion

5 min read
mike kentz

A class action lawsuit, filed Wednesday, accuses 10 of Wall Street’s biggest banks and two trading platforms of conspiring to limit competition in the US$320trn market for interest rate swaps.

The class action lawsuit, filed in US District Court in Manhattan, accuses Goldman Sachs, Bank of America Merrill Lynch, JP Morgan Chase, Citigroup, Credit Suisse, Barclays, BNP Paribas, UBS, Deutsche Bank, and the RBS of colluding to prevent the trading of interest rate swaps on electronic exchanges, like those on which stocks are traded.

As a result, the lawsuit alleges, banks have successfully prevented new competition from non banks in the lucrative market for dealing interest rate swaps, the world’s most commonly traded derivative.

The banks “have been able to extract billions of dollars in monopoly rents, year after year, from the class members in this case,” the lawsuit alleges.

The suit was brought by The Public School Teachers’ Pension and Retirement Fund of Chicago, which purchased interest rate swaps from multiple banks to help the hedge against interest rate risk. The plaintiffs are represented by the law firm of Quinn, Emanuel, Urquhart, & Sullivan, which has taken the lead in a string of antitrust suits against banks.

As a result of the banks’ collusion, the suit alleges, the Chicago-based fund overpaid for those swaps.

The suit alleges that since at least 2007 the banks “have jointly threatened, boycotted, coerced, and otherwise eliminated any entity or practice that had the potential to bring exchange trading to buyside investors.”

“Defendants did this for one simple reason: to preserve an extraordinary profit center,” reads the suit.

The banks masked their collusion by using code-names for joint projects such as “Lily”, “Fusion,” and “Valkyrie,” according to the suit.

The suit also accuses broking platforms ICAP and Tradeweb – which control key cogs in the infrastructure of the swaps market – of facilitating the antitrust violations by acting as a forum for collusion and making business decisions on the bank’s behalf.

Nine of the 10 defendant banks own equity stakes in Tradeweb and hold positions on the company’s board and governance committees. Tradeweb is majority owned by Thomson Reuters - IFR’s ultimate parent. Thomson Reuters is not named as a defendant in the suit.

Bankers used those positions to control the direction of the company and collectively block the development of swaps exchanges by firms such as the CME Group, TrueEX, Javelin Capital Markets, and TeraExchange, according to the suit.

During the relevant time period, it is alleged that the Tradeweb board and governance committees ”were organised specifically for the purpose of protecting the ‘dealer community’ from the growth of exchange trading,” reads the suit.

For example, the suit notes that high-level Goldman Sachs executives Vic Simone and Brad Levy each served as Chairman of Tradeweb’s Board of Directors, in succession, while also heading up the bank’s Principal Strategic Investments Group.

Retaliation

ICAP and others have frequently been accused of preserving the practice of publishing the names of counterparties to swaps trades after execution at the behest of banks, an allegation that is echoed by the lawsuit.

By publishing the names of counterparties, banks can see which buyside funds are trying to enter dealer-only markets and it is alleged that they can retaliate by cutting off other services.

The suit alleges that BNP Paribas Securities Corp threatened two buyside clients with the loss of clearing and other banking services when they were notified that the funds had traded with one another – and not a dealer – through an anonymous central limit order book at TeraExchange.

Bank of America’s clearing unit is alleged to have made threats to inflate clearing fees and refuse liquidity provision for buyside funds if they traded on Tera’s platform.

Market participants have hinted at such activity for years and indicated they are not willing to risk losing other services for the sake of breaking down the dealer stranglehold.

Buyside funds have urged the CFTC, the chief US derivatives regulator, to prohibit the practice of publishing names of counterparties post-execution, but the agency has yet to budge.

Similar allegations of bank collusion in the market for credit default swaps have been the subject of investigations by the United States Department of Justice and the European Commission, as well as a separate class action lawsuit brought by investors.

In September, 12 banks and two industry groups settled that lawsuit by agreeing to pay US$1.8bn, making it one of the largest antitrust class action lawsuits in US history.

Lawsuit