The New York Times reports that European regulators are investigating some of the world’s largest banks for derivatives market antitrust violations. Specifically, the regulators are looking into whether banks shut out competitors to maintain high profit margins and used industry committees to influence credit default swap rules and pricing. Both European and American regulators are concerned that buyers are paying higher prices for derivatives, including credit default swaps, than they would if there was greater competition. The U.S. Department of Justice is conducting a similar investigation.
The article explains that paying higher prices for derivatives can impact products such as airline tickets that include the cost of hedged oil prices or local taxes that are based on the fees cities pay for management of the risk in interest rate fluctuation.
A credit default swap is a financial instrument that serves to protect against a default by a bond or security. They are unregulated and invented by Wall Street in the late 1990s as a form of default insurance. These swaps insure against the risk of borrowers being unable to pay off debts. Their purpose was to make it easier for banks to issue complex debt securities by decreasing the risk to buyers.
