Some of Wall Street's biggest financial institutions -- including Goldman Sachs Group Inc., JPMorgan Chase & Co., Citigroup Inc. and HSBC Holdings PLC -- have agreed to a $1.87 billion settlement to resolve allegations they conspired to limit competition in the lucrative credit-default swaps market.
The banks reached an agreement in principle with a group of investors that included the Los Angeles County Employees Retirement Association, Daniel Brockett, a lawyer for the investors, told a judge in U.S. District Court in New York on Friday. The sides need seven to 10 more days to iron out some details, Brockett said.
The investors, including a series of Danish pension funds, in 2013 sued the parent companies or units of about a dozen global banks. These banks, as well as data provider Markit Group Ltd., monopolized trading in the instruments and conspired to control the market for information about them, in violation of U.S. antitrust laws, the investors alleged.
The banks "made billions of dollars in supracompetitive profits" by taking advantage of "price opacity in the CDS market," the investors said.
The banks will pay differing amounts toward the settlement, according to two people familiar with the deal. The size of each bank's payment is based on its share of credit-default swap trading, one of the people said.
Ed Canaday, a Markit spokesman, declined to comment on the deal. Goldman Sachs and JPMorgan also declined to comment. Citigroup and HSBC didn't immediately reply to requests for comment.
The credit-default swaps market was worth $16 trillion as of the end of 2014, according to the Bank for International Settlements. The instruments are used as a hedge against the possibility of a borrower default. Although the contracts trade frequently and fluctuate like stocks or bonds, the market is opaque.
In court papers, the banks said there was no antitrust conspiracy. They argued that members of the group supported proposals to increase competition in the credit-default swap market and that there's little actual demand for exchange trading of the contracts. In September, they were successful in persuading U.S. District Judge Denise Cote to throw out a claim they colluded to monopolize trading.
Some of the alleged behavior occurred before the Dodd-Frank Act of 2010, which regulated the credit-default swap market for the first time, including measures to make the market more transparent and less risky.
The swaps were traded in way that "kept the relevant price information in the hands of the dealer defendants, who ensured they were on one side of, and thus profited from, virtually every CDS transaction," according to the complaint. As a result, the Wall Street firms and the International Swaps and Derivatives Association "successfully maintained an inefficient and opaque market structure that yielded for them exorbitant profits at the direct expense" of the investors suing the banks.
The banks had exclusive access to price data, the investors said, forcing them to rely on limited information. The plaintiffs complained that in a typical deal they had no idea how much a broker was profiting from the transaction.
The banks were also accused in the lawsuit of conspiring to sabotage a credit-default swap exchange planned by hedge fund Citadel Group LLC and the CME Group Inc., a derivatives market operator. They agreed to boycott the new exchange as long as Citadel was involved, according to the lawsuit, as they considered the hedge fund a "threat." As a result, potential buyers and sellers had no efficient way to find other potential participants for swaps, unless they were dealers.
Citadel isn't a plaintiff in the case.
Other banks named as defendants in the case are Bank of America Corp., Barclays PLC, Deutsche Bank AG, BNP Paribas SA, Royal Bank of Scotland Group PLC, Credit Suisse Group AG, Morgan Stanley and UBS AG.
Bank of America, Morgan Stanley, Credit Suisse, Deutsche Bank and Barclays declined to comment on the deal. RBS had no immediate comment. UBS and BNP Paribas didn't immediately reply to requests for comment.
The International Swaps and Derivatives Association, a trade group representing participants in the over-the-counter derivatives market, didn't immediately respond to requests for comment.
The U.S. Department of Justice's antitrust division investigated the conduct. The agency effectively dropped its investigation in October 2013.
An inquiry by the European Union's antitrust arm into whether the banks conspired to shut exchanges out of the credit-default swaps market is still open, according to a person familiar with the matter.
Information for this article was contributed by Matthew Leising, Keri Geiger, Mary Childs, Claire Boston, Michael J. Moore, Hugh Son and Gaspard Sebag of Bloomberg News.
Business on 09/12/2015