NEW YORK 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), 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), 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.
ISDA spokeswoman Lauren Dobbs said that "we believe that the allegations against us are without merit and that ISDA acted properly at all times."
Representatives for all the banks, Markit and ICE either declined comment or were not immediately available for comment.
The 12 banks named in the complaint are Bank of America Corp (BAC.N), Barclays (BARC.L), BNP Paribas (BNPP.PA), Citigroup Inc (C.N), Credit Suisse (CSGN.VX), Deutsche Bank (DBKGn.DE), Goldman Sachs Group Inc (GS.N), HSBC (HSBA.L), JPMorgan Chase & Co (JPM.N), Morgan Stanley (MS.N), The Royal Bank of Scotland (RBS.L) and UBS UBSN.VX.
Banks face potentially large payments from lawsuits and antitrust investigations for allegedly blocking entry to the CDS market in order to protect the lucrative revenues they earn in the opaque market.
The European Commission this month charged 13 banks, including the 12 named in the lawsuit by the Danish funds, with stifling competition, saying the initial conclusion from its antitrust investigation is that banks blocked exchanges, including the CME, from entering the market.
The U.S. Justice Department has been investigating since at least 2009 but has made no announcements.
The Danish funds are Unipension Fondsmæglerselskab, Arkitekternes Pensionskasse, MP Pension and Pensionskassen for Jordbrugsakademikere & Dyrlæger. Collectively they manage around $17 billion in assets.
(Editing by Kenneth Barry)