June 8, 2012 / 8:13 PM / in 8 years

US derivatives probe eyes bank control of LCH.Clearnet-sources

NEW YORK, June 8 (Reuters) - The U.S. Department of Justice has extended its derivatives investigation to include questions about London-based clearinghouse LCH.Clearnet, as it examines the influence of large banks in the $650 trillion privately traded derivatives markets, people familiar with the situation said.

The Justice Department has been asking market participants questions about the ownership and fee structure at LCH.Clearnet, said two people familiar with the enquiries.

LCH.Clearnet, the largest clearinghouse in the $400 trillion interest rate derivatives market and also a credit derivatives clearing service, is owned by its members including banks such as JPMorgan Chase, Goldman Sachs and Deutsche Bank. A spokeswoman for the firm declined to comment.

The Justice Department is concerned that a small group of the world’s largest banks can use their ownership and influence over key market infrastructure including clearinghouses, trading platforms and data services to impede competition.

Justice Department spokeswoman Alisa Finelli declined to comment on specific details of the probe, or the firms involved. But she did outline three areas the DOJ is focused on.

“The Antitrust Division is investigating the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries,” she said.

The Justice Department has been investigating the credit derivatives market since at least 2009. So far it has focused on whether large banks and Markit Group, which collects and distributes credit default swap (CDS) data and owns and operates benchmark credit indexes, have used licenses to restrict competition, said people familiar with the enquiry.

The probe into Markit also includes questions over the use of the company’s so-called RED codes, which are used as legal identifiers for credit default swap reference entities and are meant to help confirm CDS trades, said three people familiar with the investigation.

In recent months, the probe has expanded to include queries about ownership and fee structures at other entities that banks have large stakes in and bank-dominated operating committees.

These include questions about IntercontinentalExchange’s purchase of The Clearing Corp, a credit default swap clearinghouse, from a group of nine large dealers in 2009, said people familiar with the investigation.

The Justice Department is also asking about bank ownership of electronic trading platforms including Tradeweb. Tradeweb is majority owned by Thomson Reuters, with 10 large dealers also holding a minority stake.

It is further looking into previous bank-owned trading platforms that failed, including LiquidityHub.

Markit spokeswoman Rachel Harling did not return requests for comment. Tradeweb spokesman Clayton McGratty and ICE spokeswoman Kelly Loeffler declined comment.

Barclays, Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley and UBS have a profit sharing agreement with ICE’s clearing arm. These banks and Royal Bank of Scotland hold a stake in Tradeweb. All 10 banks are among those that have some ownership of LCH.Clearnet.

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