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Credit-Default Swaps Probed by Justice Department, Markit Says
July 14 (Bloomberg) -- The U.S. Justice Department is investigating the market for credit-default swaps, according to Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks.
“Markit has been informed of an investigation by the Department of Justice into the credit-derivatives and related markets,” spokeswoman Teresa Chick said yesterday in an e- mailed statement in response to questions from Bloomberg News. She declined to comment on the nature of the investigation. “We will work with the Department to provide any information requested of us.”
The antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter. U.S. lawmakers plan to regulate the $592 trillion over-the-counter derivatives market, which includes credit-default swaps blamed for helping worsen the biggest financial calamity since the Great Depression.
Justice Department spokesmen couldn’t immediately be reached for comment.
Credit-default swaps -- contracts that protect against or speculate on corporate defaults by paying the buyer the face value of a bond or loan if a company fails to meet its debt agreements -- ballooned almost 100-fold within seven years to represent about $62 trillion by the end of 2007, according to estimates from the New York-based International Swaps & Derivatives Association.
Unregulated Market
Unregulated trading of the contracts made it difficult for the U.S. to assess how connected banks had become following the failure of Lehman Brothers Holdings Inc. in September. Credit markets froze when the New York-based firm, once the fourth- largest U.S. investment bank, collapsed in the world’s biggest bankruptcy.
The Obama administration now wants all trades of over-the- counter derivatives to be backed by clearinghouses or registered with regulators. Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather.
Markit provides derivative and bond data to more than 1,500 customers. It owns the most actively traded credit swap indexes and pricing services in the market, which represents $28 trillion in underlying securities, according to the New York- based Depository Trust & Clearing Corp.
Bloomberg LP, the owner of Bloomberg News, competes with Markit in selling information to the financial-services industry.
Owners and Providers
Justice Department investigators want to know if Markit’s bank shareholders received advantages as owners and providers of prices and trading patterns for credit-default swaps, said two of the people. The data from the market’s largest users is provided to more than 300 financial firms to set prices of the contracts in their portfolios, according to Markit’s Web site.
The notices ask recipients to give the Justice Department details on the amount of their trading, exposure in the market, monthly value of their credit swaps and other information, said a person who read parts of the letter to Bloomberg News.
The letter also seeks the level of current bank ownership in Markit and whether the shareholders have tried to sell their stakes, the person said. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, all of New York, are among the owners of Markit.
Transparency, Efficiency
End-of-day and real-time prices for credit swaps are available to Markit customers, the company says on its Web site. Real-time prices come from the Wall Street dealers that send that information to clients throughout the day.
Markit checks the information it receives to ensure it’s current and correct, according to the company. “By insisting on the highest standards, we ensure superior data quality for an accurate mark-to-market and market surveillance,” the Web site says.
“Markit strives to enhance transparency and efficiency in the credit derivatives market by making all our independent data products commercially available to all market participants,” Chick said in the statement.
Markit, founded in 2001 by Toronto-Dominion Bank executive Lance Uggla and Kevin Gould, made a string of acquisitions in 2007 and 2008. The company purchased the owners of the iTraxx and CDX credit-default swap indexes, which are used to speculate on the credit quality of more than 500 companies in Europe, Asia and North America.
Losses on mortgages made to borrowers with poor credit began to soar in 2007, causing credit markets to freeze up and leading to almost $1.5 trillion in writedowns and credit losses at the world’s biggest financial institutions, according to data compiled by Bloomberg.
To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net
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