In the latest of its investigations into the data vendor community’s data practices (following its continuing investigations into S&P and Thomson Reuters), the European Commission has launched a new anti-trust investigation into Markit’s data sharing arrangements with 16 bank dealers in the credit default swap (CDS) market. The Commission is seeking to establish whether the derivatives data specialist and the banks “have colluded and/or may hold and abuse a dominant position in order to control the financial information on CDS,” which would be in breach of EU anti-trust legislation.
Joaquín Almunia, European Commission vice president in charge of competition policy, explained last week that the investigation will aim to determine whether these banks are being granted “privileged access to CDS transaction data by Markit”. The banks in question comprise: JPMorgan Chase, Bank of America Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, Crédit Suisse First Boston, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, Wells Fargo Bank/Wachovia, Crédit Agricole and Société Générale.
The Commission indicates that it has perceived that the 16 banks that act as dealers in the CDS market give most of the pricing, indices and other essential daily data only to Markit, which it describes as “the leading financial information company in the market concerned”. It is therefore seeking to ascertain whether this is the consequence of collusion between the dealers and the data provider or an abuse of a possible “collective dominance”. The Commission indicates in its notice that this “may have the effect of foreclosing the access to the valuable raw data by other information service providers”.
These practices would be in violation of Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU), which prohibit anticompetitive agreements and the abuse of dominant positions. Markit’s “behaviour” has also fallen under scrutiny including certain clauses in its licence and distribution agreements which the Commission fears could be “abusive and impede the development of competition in the market for the provision of CDS information”.
This is similar in tone to the European regulator’s investigation of data giant Thomson Reuters with regards to its licensing policy for its Reuters Instrument Codes (RICs), which has yet to be concluded. Thomson Reuters may support other codes, but the Commission seems particularly concerned about its intellectual property rights with regards to RICs and whether the proprietary nature of these codes means clients are prevented from easily moving from one vendor to another.
“Lack of transparency in markets can lead to abusive behaviour and facilitate violations of competition rules and the Commission should react accordingly. I hope our investigation will contribute to a better functioning of financial markets and, therefore, to a more sustainable recovery,” said Almunia last week on the subject of Markit.
The European Commission has been increasingly concerned with the practices within the data vendor community and their potential impact on competition over the last few years. Back at the start of 2009, it kicked off its investigation into Standard & Poor’s pricing practices concerning International Securities Identification Numbers (ISINs), which, like the Thomson Reuters case, has yet to be resolved. Speaking on the subject of competition in the European markets in Brussels at the end of March, Almunia noted that the S&P case could potentially be settled in future, but a conclusion has not yet been reached with regards to next steps.
The regulator seems keen to break down what it views as these data providers’ market monopolies by ensuring that their codes for data are interoperable and non-proprietary, and that their licences do not unfairly impact the competitive environment. The Commission has already noted that there is no legal deadline by which a decision must be made on anti-trust investigations (hence the three year delay for S&P thus far) and that the duration “depends on a number of substantial and procedural factors”. Markit could also be due a long wait.
As for other recent investigations, the Commission is also pursuing a second anti-trust investigation into the clearing environment within the CDS market. Nine of the banks involved in the Markit investigation are involved and it is seeking to establish whether the preferential tariffs granted by ICE Clear Europe have the effect of locking these banks into the ICE system to the “detriment of competitors”.