Swap Dealers Stand Accused of Conspiring to Prevent Electronic Trading of Interest Rate Swaps
Two municipal entities filed an amended complaint in an antitrust class action suit that alleges a conspiracy by a large number of financial institutions acting as swap dealers ("dealers") to prevent "buy-side" entities from trading on "all-to-all" platforms for interest rate swaps ("IRS").
Specifically, the complaint alleges that the dealers:
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conspired to block the entry of exchanges and similar platforms into the IRS market;
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conspired to ensure that only the dealers were able to trade on electronic trading platforms for IRS;
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either "coerced" swap execution facilities into helping them maintain the over-the-counter market structure or put the facilities out of business entirely;
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pushed for "name give-up" as a way to ensure that buy-side entities were not on the other side of transactions; and
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declined to clear trades executed on certain swap execution facilities in order to keep buy-side clients from using such platforms.
As a result of this alleged collusion, the municipal entities assert that the IRS market "has not developed in the manner that financial markets typically do." In fact, the entities maintain that "many believe the IRS market is less efficient today than it was in 2008."
Commentary
Setting aside the merits of the anti-trust claims in the complaint and looking at the complaint itself as a story of how the market for interest rate swaps has developed since Dodd-Frank, plaintiff's characterizations seem inaccurate. The municipal entities' retelling of the interest rate swaps story makes a mere bystander out of the most significant player in the development of the market: the CFTC.
Reading the complaint, one might think that the CFTC is the regulatory equivalent of an invisible hand, since there is little to suggest that the rules adopted by the CFTC played any part in the development of the market (cf. Garfield minus Garfield).
This would come as a surprise to many at the CFTC and in the IRS industry. The CFTC's regulatory scheme for swaps trading has been criticized repeatedly by voices within the CFTC and by market participants on both the buy and sell sides.