Banks held back e-trading for swaps, new lawsuit alleges

Some of the world's largest swap dealers are facing a new class-action lawsuit that accuses them of anti-competitive behaviour in the market for interest rate swaps.

The suit was filed earlier today (November 25) by Cohen Milstein and Quinn Emmanuel, the New York-based law firm that in September helped secure a $1.8 billion settlement in a suit that made similar allegations about dealer control of the credit default swap market.

The suit alleges that 10 banks – Bank of America Merrill Lynch, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Royal Bank of Scotland and UBS – used their influence over the interest rate swap market to stifle the shift from phone- to screen-based electronic trading.

Tradeweb and Icap, which sold its electronic swap trading platform to Tullett Prebon earlier this month, are also named as defendants.

The lead plaintiff in the suit, the Public School Teachers Pension and Retirement Fund of Chicago, claims swaps prices were kept high as a result of the banks' strategy.

Claims of anti-competitive behaviour are often levelled at the big swap dealers, and suspicions have swirled around their ownership stake in Tradeweb, which accounts for roughly 50% of dealer-to-client trading in US rates products.

The 2008 dealer investment in Tradeweb gave a consortium of banks an approximately 41% share of the venue, with Thomson Reuters retaining 53% and Tradeweb management holding the residual 6%, according to people with knowledge of the matter.

Despite holding the minority stake, the suit claims the banks used their influence to slow down the speed with which Tradeweb extended electronic trading to the swaps market, and to control the way in which it was offered.

Fully anonymous central limit order book (Clob) trading could have dramatically eroded the profit margins dealers enjoyed when trading bilaterally, as well as increasing competition from non-bank market-makers, the lawsuit claims.

"Tradeweb's Clob, which is technically open to the buy side, is in reality unusable because it utilises [post-trade] name give-up," the plaintiff alleges.

Post-trade name give-up refers to the practice of revealing counterparty names to each other after a trade is complete. Buy-side firms and non-dealer market-makers deride the practice, which they see as a pretext to exclude them from trading on Clobs.

Tradeweb's rival Bloomberg offers a Clob without post-trade name give-up, but dealers "do not provide liquidity to Bloomberg's order book", according to the suit.

Quinn Emmanuel declined to comment.

A source that spoke to bank investors in Tradeweb backs up some of the claims in the lawsuit: "The dealers were trying to slow down the electronification of the swap market, but that was never stated on the record. It was always a 'nod and a wink' type of thing, but you could figure out what was happening. It was never in the office, but when you would get guys off the desk and away from their boss, they would say: 'You're doing a great job, but we don't want the market to go electronic too fast.' I knew that already. Everybody else knew it too, but no one was really allowed to say it."

In September, Citadel Securities complained it was barred from making markets on Tradeweb's dealer-to-client US Treasury platform, although it had been accepted at Bloomberg. The platform has a requirement that liquidity providers must be primary dealers.

Similar suspicions have been aired regularly in recent years, after the failure of new swaps trading platforms and modes of trading to take off. In the US, the Dodd-Frank Act required a subset of the cleared interest rate swap market to trade electronically on swap execution facilities (Sefs), which are obliged to offer anonymous, all-to-all exchange-style trading alongside a request-for-quote (RFQ) model that is analogous to existing bilateral swap trading. The anonymous all-to-all model is generally seen as a threat to dealers, which might face more competition and tighter margins.

Despite an influx of start-up platforms with big plans to popularise the exchange model, most Sef volume still goes through incumbents – Bloomberg, MarketAxess and Tradeweb, as well as platforms run by interdealer brokers like Icap. RFQ continues to be the dominant mode of execution.

The suit alleges the dealers effectively boycotted rival Sefs, such as Javelin, Tera Exchange and TrueEx, that offered more advanced electronic trading capabilities to end-users.

Critics among the buy side and start-up platforms believe dealers have sought to preserve the status quo to the extent possible. Dealers argue many market participants prefer the current model.