Did Markit’s Owners Trade CDS on Advance Access to Information?

We have a juicy tidbit on the wires tonight. The Department of Justice is conducting an investigation into whether Markit’s clients traded on its research prior to its being made public,

As much as I would love to see the credit default swaps market reined in, or better yet, shut down, this move is puzzling. CDS are unregulated. Therefore there is no such thing (legally) as insider trading. Even in regulated commodities markets, there is no such thing as insider trading, since no one in theory had the advantaged position relative to the market in a commodity that corporate insiders do relative to a business.

So what legal theory is the DOJ operating on? Insider trading and front-running are SEC notions, and SEC regulations don’t extend to CDS, save any registered securities that had embedded CDS. The letter came from the antitrust division, so the theory may be abuse of monopoly position (as in, relative to those contracts). But Markit is headquartered in London, which also raises jurisdictional issues.

Maybe I am missing something, but it that logic pertains there, why would it not extend to owners of an index, like the GSCI? Goldman famously reweighted it in 2007, and it is certain they positioned themselves to take advantage of that, But I don’t recall the DOJ every going after actions like that.

I wonder if this is a shot across Wall Street’s bow, to tell them if they do not clean up their act in CDS, they can expect much more of this sort of thing, or alternatively, a fishing expedition to collect 5×7 glossies that could be used if needed later.

I said in a post just a few days ago that credit default swaps were Public Enemy Number One. Guess I was more on target than I realized.

From 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…

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…

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….

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.

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.

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  1. Leo Kolivakis

    F/X markets are also unregulated and there are plenty of ways of front-running big customers. Problem is you can get whacked if an even bigger fish comes along to squeeze you out of your position. CDS market was marked to model and unlike currencies, it wasn't anywhere near as liquid as traders thought. When the shit hit the fan, the whole market wobbled. They are desperately trying to revive it, but we need more regulation and an exchange which enforces rules. To be honest, why do we need CDS at all? It only leads to more carnage, death and suffering.


  2. Richard Kline

    So Leo, the Masters of More profit directly from (financial) carnage, death, and suffering so long as it is others who have those experiences. So they need CDSs. The real question is, why do we need _THEM_?

  3. Ginger Yellow

    Markit may be headquartered in London, but many of its shareholders aren't. The DoJ isn't arguing that Markit abused its position – it's investigating whether the banks that own it did. Seems dubious to me – I mean, the banks submit pricing and trading data to Markit, which then aggregates and cleans it. The shareholders already have the "insider" information, becuse they're the ones who are providing it.

  4. Anonymous

    I think you missed the point. the CDS market does not reference underlying commodities like euros oil or treasuries,it references borrowers, and yes traders can buy and sell on inside info.

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