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New Class Action Suit Over Swaps Trading Hits Wall Street

Five Years After Start Of Financial Crisis, Wall Street Continues To HumFive Years After Start Of Financial Crisis, Wall Street Continues To Hum

Wall Street’s biggest and best are facing new accusations of market-rigging in a multi-billion class action suit from investors in the $320 trillion market for interest rate swaps.

The suit, filed Wednesday, accuses 10 of Wall Street’s biggest banks and two trading platforms of conspiring to limit competition from non-banks in the lucrative market for dealing interest rate swaps, the world’s most commonly traded derivative.

The banks “have been able to extract billions of dollars in monopoly rents, year after year, from the class members in this case,” the lawsuit alleged.

Filed in the U.S. District Court in Manhattan, the suit accuses Goldman Sachs Group (GS), Bank of America Merrill Lynch (BAC), JPMorgan Chase (JPM), Citigroup Inc. (C), Credit Suisse Group (CS), Barclays Plc (BCS), BNP Paribas SA (BNPQY), UBS (UBS), Deutsche Bank AG (DB) and the Royal Bank of Scotland Plc (RBS) of colluding to prevent the trading of interest rate swaps on electronic exchanges, similar to those on which stocks are traded.

Goldman Sachs, Citigroup, Bank of America, BNP Paribas, Credit Suisse and Royal Bank of Scotland declined to comment. JP Morgan, Barclays, Deutsche Bank and UBS were not immediately available.

The suit was brought by The Public School Teachers’ Pension and Retirement Fund of Chicago, which purchased interest rate swaps from multiple banks to help the fund hedge against interest rate risk on debt. The plaintiffs are represented by the law firm of Quinn, Emanuel, Urquhart, & Sullivan LLP, which has taken the lead in a string of antitrust suits against banks.

As a result of the banks’ collusion, the suit alleges, the Chicago teachers’ pension and retirement fund overpaid for those swaps.

The suit alleged that since at least 2007 the banks “have jointly threatened, boycotted, coerced, and otherwise eliminated any entity or practice that had the potential to bring exchange trading to buyside investors.”

“Defendants did this for one simple reason: to preserve an extraordinary profit center,” the lawsuit said.

The banks masked their collusion by using code-names for joint projects such as “Lily”, “Fusion,” and “Valkyrie,” according to the suit.

The suit also accused broking platforms ICAP and Tradeweb, which control key cogs in the infrastructure of the swaps market, of facilitating the antitrust violations by acting as a forum for collusion and making business decisions on the banks’ behalf. ICAP (IAPLY) is currently in merger talks with rival Tullett Prebon Plc (TULLF)–something brought about, in part, by the collapse in trading margins due to new regulations that have effectively forced most of the swaps market onto more transparent electronic platforms.

Nine of the ten defendant banks own equity stakes in Tradeweb and hold positions on the company’s board and governance committees. Tradeweb is majority owned by Thomson Reuters. Thomson Reuters is not named as a defendant in the suit.

Tradeweb, ICAP and Thomson Reuters declined to comment.

Bankers used those positions to control the direction of the Tradeweb and collectively blocked the development of more investor friendly swaps exchanges by firms such as the CME Group, TrueEX, Javelin Capital Markets, and TeraExchange, according to the suit.

“During the time period relevant here, Tradeweb board and governance committees… were organized specifically for the purpose of protecting the ‘dealer community’ from the growth of exchange trading,” reads the suit.

Similar allegations of bank collusion in the market for another type of derivative known as credit default swaps, have been the subject of investigations by the United States Department of Justice and the European Commission, as well as a separate class action lawsuit brought by investors.

In September, twelve banks and two industry groups settled that lawsuit by agreeing to pay $1.87 billion, making it one of the largest antitrust class action lawsuits in U.S. history.

The new allegations will ensure that the whiff of misconduct scandals continues to hang over the industry, even as the scandals around manipulation of benchmark interest rates and foreign exchange fixings draw to a close. The banks involved in those–many of whom appear again in the new action over swaps pricing–have already paid $5.6 billion in fines relating to the FX market, and another $5.8 billion relating to rigging interest rates.