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EU Crackdown on Credit Swaps May Shatter a Myth

The European Union’s antitrust investigations into derivatives will very likely demonstrate how banks use regulations to stifle competition.

All too often we imagine that businesses—especially financial firms—hate regulation and love deregulation. The truth is that many businesses support regulations that make it harder for competitors to do business.

That’s what seems to have happened with derivatives regulation.

Financial regulators in the US and Europe urged financial companies to trade credit default swaps through centralized clearing houses. For the past year or so, a great deal of trading in swaps has done just that—much of it on the Intercontinental Exchange’s clearing platform.

Now the EU’s antitrust regulators say that nine banks involved in setting up the ICE clearing house may be involved in anticompetitive practices. The nine financial banks are Bank of America, Barclays Bank, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley and UBS.

What have they done wrong? From what I can tell it is the fact that they have a profit sharing deal with ICE that bugs regulators. This deal, very obviously, makes them more likely to trade through ICE than other clearinghouses. So it is “anticompetitive,” according to regulators.

This is not exactly a shocking development. Cartelization is an aspect of almost all financial regulation—and a reason it is so destructive.

The dominance of Moody’s and S&P in credit ratings—for example—was largely created by government regulation.

The best thing that can come of this investigation would be the shattering of the myth that banks desire deregulation. They do not.

What they want, usually, is regulation that protects their franchise in the name of the common good.

Companies mentioned in this post:

Bank of America

Barclays Bank

Citigroup

Credit Suisse

Deutsche Bank

Goldman Sachs

JPMorgan

Morgan Stanley

UBS

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