Pension Fund Sues Banks for CDS Transactions

May 7, 2013 ( – A pension fund filed a lawsuit alleging misconduct in the transaction of credit default swaps (CDS) by a number of large financial institutions.

Sheet Metal Workers Local No. 33 Cleveland District Pension Plan filed an antitrust class action to recover damages for the substantial injuries that it claims it and others have sustained and to prevent and enjoin from conspiring to restrain competition in the market for CDS. The pension fund alleges anticompetitive conduct was carried out by Barclays, BNP Paribas, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, RBS, and UBS (Dealer Defendants), as well as through entities they own or control, including International Swaps and Derivatives Association (ISDA), Markit Group Ltd., ICE Clear Credit, and the Depository Trust & Clearing Corporation (DTCC).  

According to the complaint, Dealer Defendants restricted who could act as a dealer, deprived buy side market participants of actual, real-time pricing information, prevented exchange trading, and maintained inflated bid-ask spreads on CDS transactions to the detriment of buy side participants in the CDS market. “Dealer Defendants undertook this anticompetitive conduct to forestall entry and maintain control of the CDS market, and consequently, their actions caused billions of dollars of damages to class members during the relevant period,” the lawsuit says.  

In a statement, Markit Group said, “Markit has not been served with the complaint filed by this class action law firm but we have seen a copy of it. The allegations are wholly without merit and we will defend ourselves vigorously.” Goldman Sachs, JP Morgan and Morgan Stanley declined to comment about the suit. 

The complaint explains that buy side participants lacked a source of actual, real-time transaction data and had to rely solely on aggregated and stale dealer internal CDS prices published by the defendant-controlled entity Markit.Buy side participants, including Citadel, LLC, working together with the clearinghouse CME Group Inc., attempted to bring market forces to bear by introducing price transparency through exchange trading of CDS. They built CMDX, a joint venture that would have brought exchange trading to the CDS market.   

However, the lawsuit claims, Dealer Defendants boycotted that effort and directed ISDA and Markit to deny CMDX and other market entrants the licenses necessary for market entry. To forestall exchange trading, and in response to regulatory pressures in the wake of the market collapse and recent economic recession, Dealer Defendants created a clearing platform known as ICE, which preserved the OTC/RFQ bilateral trading regime. “Thus, Defendants successfully prevented the introduction of exchange trading in CDS, which would have, among other things, provided real-time pricing information, allowed buy side participants to transact directly instead of through Dealer Defendants, and compressed the bid-ask spread on any given CDS trade,” the complaint says.  

The lawsuit notes that the defendants’ conduct has attracted the attention of U.S. and European antitrust enforcement agencies which have open and active investigations underway into defendants’ practices described in the complaint.  

The complaint, filed in the U.S. District Court for the Northern District of Illinois, is here.