US launches probe into credit derivatives - Department of Justice seeks trading data

US launches probe into credit derivatives - Department of Justice seeks trading data
By Aline van Duyn, Joanna Chung and Michael Mackenzie in New York
Copyright The Financial Times Limited 2009
Published: July 14 2009 16:47 | Last updated: July 14 2009 16:47
http://www.ft.com/cms/s/0/ce0b0d48-7085-11de-9717-00144feabdc0.html


The Department of Justice has opened an investigation into the credit derivatives market, with letters sent to over a dozen dealers asking for several years’ worth of detailed information about trading and pricing.

The move comes as the regulatory spotlight continues to shine on the credit default swaps (CDS) market, a sector of the privately-traded derivatives universe that grew dramatically in the last decade and generated huge profits for Wall Street.

Initially devised as a type of insurance on defaults, the CDS market is widely blamed for amplifying the credit crisis as it became a means for institutions like AIG to place vast bets on corporate credit and mortgage debt.

The letters, sent to banks with an equity stake in Markit Group, which provides pricing data on the CDS market and has developed many of the most closely-watched derivatives pricing benchmarks in it such as the mortgage sector’s ABX, CDX and ITraxx Europe indices, were sent recently.

According to people who have seen the letter, it does not specify why the DoJ is seeking the information and whether it is a fact-gathering mission or linked to specific concerns of misconduct or market dominance.

It was sent by the anti-trust division of the DoJ. The DoJ declined to comment.

Markit said in a statement it “has been informed of an investigation by the Department of Justice into the credit derivatives and related markets. We will work with the Department to provide any information requested of us.”

Shareholders in Markit, set up in 2001, include JPMorgan Chase, Goldman Sachs, Deutsche Bank, Bank of America and Morgan Stanley. Banks either declined to comment or were not available for comment.

The investigation is not the first time the credit default swaps market has been targeted by US regulators.

Andrew Cuomo, the New York attorney-general, last year started investigating whether traders have been manipulating the largely unregulated CDS market as a way to push down the prices of stocks. The SEC has also sought information about activities in the sector.

The regulatory inquiries comes as other regulators seek broader powers to curb and monitor activity in the CDS market, which has shrunk from over $50,000bn last year to around half that size now as contracts are cancelled out.

The Federal Reserve has pushed for dealers to introduce centralised clearing and efforts are underway to bring investors such as hedge funds into a clearing house by the end of this year. In addition, dealers and big investors are providing information about trades to data repositories like the Depository Trust and Clearing Corp which regulators can then monitor.