European Commission Enquiry of Credit Default Swaps Market


The Commission dropped its investigation into allegations that 13 large investment banks had prevented exchanges from entering the European CDS market.

Retained by Cravath, Swaine & Moore and by Skadden, Arps, Slate, Meagher & Flom

Defence counsel for two major investment banks separately retained Cornerstone Research in a European Commission (EC) regulatory investigation into allegations of anticompetitive behaviour in the trading of credit default swaps (CDS). The EC filed a statement of objections against a group of major international financial institutions. The statement alleged that the banks had colluded to prevent the launch of CDS exchange trading between 2006 and 2009, and that this resulted in an increase in the bid-ask spreads paid by market participants.

In a hearing before the EC, Dr. Allan Kleidon and Professor Matthew Richardson described the economic conditions that affected the functioning of the CDS market.

Cornerstone Research supported two experts: Dr. Allan Kleidon, a senior vice president of Cornerstone Research; and Professor Matthew Richardson of New York University, both of whom presented in front of the EC in a week-long hearing in May 2014. Dr. Kleidon analysed the functioning of the CDS market, and provided an assessment of the economic feasibility of exchange trading in this market during the relevant time period.

Professor Richardson described the economic theory which drives trading to occur in over-the-counter markets under certain economic conditions and on exchanges in others. He then analysed both the characteristics of CDS and the market conditions during the time at issue to conclude that the likelihood of successfully migrating CDS to exchange trading was not supported by either economic theory or evidence.

The EC stated, “Today’s closure decision regarding the 13 investment banks is based on a thorough analysis of all information received from the parties in their replies and during the oral hearing of May 2014, as well as on documents obtained through additional fact finding.”

For additional information on this matter, please contact Ronnie Barnes or Paul Zurek.

Case Experts

Allan W. Kleidon

Senior Advisor

Matthew P. Richardson

Charles E. Simon Professor of Applied Economics,
Professor of Finance,
Stern School of Business,
New York University