SHARE THIS ARTICLE Share Tweet Post Email

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 includes the Los Angeles County Employees Retirement Association, Daniel Brockett, a lawyer for the group, told a judge in Manhattan federal court on Friday. The sides need seven to 10 more days to iron out some details, Brockett said.

A settlement would avert a trial following years of litigation by hedge funds, pension funds, university endowments, small banks and other investors, who sued as a group. They alleged that a dozen global banks -- along with Markit Group Ltd., a market-information provider in which the banks owned stakes -- conspired to control the information about the multitrillion-dollar credit-default swap market in violation of U.S. antitrust laws.

Billions in Profits

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 different 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 CDS trading, one of the people said.

Ed Canaday, a Markit spokesman, declined to comment. Goldman Sachs, JPMorgan, Citigroup and HSBC also declined to comment.

The U.S. Justice Department’s antitrust division had probed the conduct of Markit and the banks. The agency shelved the investigation in October 2013, people familiar with the matter said at the time. A investigation by the European Union’s antitrust arm into whether the banks conspired to shut exchanges out of the credit-default swaps market remains open, according to a person familiar with the matter.

Brockett, of Quinn Emmanuel Urquhart & Sullivan LLP, said the discovery process generated “millions” of documents, including e-mails.

“In a case where neither the DOJ or the EC was able to make any charges stick against the banks in their investigations, we came in and took over the case and they will pay almost $1.9 billion,” said Brockett.

“All of the discovery is under a protective order, so I can’t tell you what was in the e-mails or what was in the documents or what they testified to,” he said. “We felt we had developed, brick by brick, a very powerful case on the liability.”

Peter Carr, a Justice Department spokesman, declined to comment. An EU antitrust representative didn’t immediately respond to a request for comment.

CDS Market

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 CDS 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, who presided over the case, to throw out a claim they colluded to monopolize CDS trading.

Some of the alleged behavior occurred before the Dodd Frank act of 2010, which regulated the CDS market for the first time, including measures to make the market more transparent and less risky.

The CDS were traded in a 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 trade 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.

Exclusive Access

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 named as a plaintiff in the case but is part of the group to benefit from the settlement. Zia Ahmed, a spokesman for Citadel, declined to comment on the deal.

Other defendants in the suit include Bank of America Corp., Morgan Stanley, Credit Suisse Group AG, Deutsche Bank AG, Barclays Plc, UBS Group AG, Royal Bank of Scotland Group Plc and BNP Paribas SA. Each declined to comment.

Also sued was International Swaps and Derivatives Association, a trade group representing participants in the over-the-counter derivatives market.

“We are pleased this matter is close to resolution,” ISDA spokeswoman Lauren Dobbs said in an e-mailed statement. “ISDA remains committed to further developing CDS market structure to ensure the market functions safely and efficiently.”

Markit competes with Bloomberg News parent Bloomberg LP in selling information and communications to the financial industry.

The case is In Re Credit Default Swaps Antitrust Litigation, 13-md-02476, U.S. District Court, Southern District of New York (Manhattan).

(Updates with lawyer's comment in ninth paragraph.)