trueEX sues 11 banks over swaps ‘conspiracy’

trueEX, an electronic trading platform for interest rate swaps, has filed a lawsuit in New York against 11 of the largest bank market-makers, accusing them of conspiring to block customers from trading on the platform with the aim of ultimately letting trueEX “die on the vine”.

The lawsuit, filed on June 14, alleges the accused banks protected Tradeweb – a competing swap execution facility (Sef) which is partly owned by a consortium of banks – by continuously delaying signing up to trueEX. Those that have signed up only offer limited execution in a small range of products.

“For seven of the major dealers in the world (ie, JP Morgan, Citi, Barclays, Bank of America, Morgan Stanley, Deutsche Bank and Goldman Sachs), not one streams euro or sterling liquidity to trueEX. Six out of those seven do not stream any US dollar liquidity to trueEX,” it reads.

The filing claims banks also conspired to restrict access to clearing for clients using trueEX, in contrast to how the banks operate on Tradeweb.

“Because clearing performs an important risk mitigation function for many [swaps], denial of clearing services effectively hamstrings the buy side’s ability to trade [swaps],” it continues.

The text also alleges that one current employee at Tradeweb admitted to trueEX in March that the banks were “all in this together” and would “let trueEX die on the vine”.

As well as the banks named above, BNP Paribas, Credit Suisse, Royal Bank of Scotland and UBS are also named in the filing. Tradeweb, while it is referenced repeatedly, is not a defendant.

This is the second lawsuit filed against this group of banks – except Morgan Stanley – over alleged anti-competitive activity in interest rate swaps. A November 2015 case accuses the banks of using their influence in the market to stifle the shift from phone- to screen-based electronic trading. That case is ongoing.

trueEX has spent $95 million developing its trading platform since its 2012 launch, the lawsuit says. It competes for market share in swaps trading, predominantly against Bloomberg and Tradeweb in the dealer-to-customer market, and has amassed 100 buy-side clients in the process.

For seven of the major dealers in the world … not one streams euro or sterling liquidity to trueEX. Six out of those seven do not stream any US dollar liquidity to trueEX

trueEX’s lawsuit

While trueEX has nine banks that have signed legal paperwork to provide liquidity to end-users on the platform, the lawsuit claims this is “pointless” without the commitment from all banks to make markets in the same automated way they do on other Sefs.

“Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley and UBS still do not provide automated pricing for any product or currency and are effectively non-participants on trueEX,” it reads. “Bank of America, for example, only provides pricing to one client in one currency for compression trades – which merely consolidate multiple offsetting trades into one position – on trueEX.”

However, the lawsuit alleges all dealers listed as defendants stream prices to Tradeweb for all products and major currencies the rival Sef supports.

The filing also claims dealers repeatedly attempted to steer buy-side firms away from trueEX towards Tradeweb, created “unreasonable delays” by claiming a lack of resources available to onboard, and “endless reviews” of their standard-form rulebook.

The platform is the brainchild of current chief executive and co-founder Sunil Hirani. It was created in anticipation of US rules governing the trading of over-the-counter derivatives, including interest rate swaps, fleshed out after the financial crisis, which attempted to move markets away from opaque trading protocols to more transparent, electronic, open access systems, including a central limit order book and request-for-quote (RFQ) system.

With the swaps market divided into two – the interdealer and dealer-to-customer market – the anticipation was that the new rules would seek to merge these markets, eliminating the two-tier structure and creating an abundance of competition in the form of Sefs.

That has largely failed. Liquidity and participants have remained as they were pre-crisis, with the exception of some success in making the market more electronic – and trueEX. The start-up platform managed to pick up market share, mainly via its automated compression service which gained traction with the buy side, in particular.

“The interest rate swaps markets are near impossible to break into; they’re like a fortress. Our strategy was to offer things the two incumbent trading venues, which have been in the rates market for two decades, wouldn’t,” said Hirani, speaking in 2016 about the platform.

But trueEX has now lost patience as volume continues to be dominated by the incumbent trading platforms, despite what the lawsuit describes as “the platform’s superiority to, and lower costs than, other RFQ platforms on which the dealer defendants trade, such as Tradeweb”.

trueEX’s market share stands at 11% year-to-date, according to data from the Futures Industry Association. Of this, 95% represents “portfolio termination and compaction trades”, which trueEX says it receives “minimal” fees for facilitating.

As a result of the dealer “collusion”, the filing says trueEX “effectively facilitates no ‘new risk’ [swaps] trading despite years of development and millions of dollars in investment capital”.

The lawsuit accuses the 11 banks of acting like a cartel to preserve anti-competitive practices and, therefore, “to enjoy an extraordinary profit centre”.

“By blocking the entry of trueEX and other similar independent [swaps] trading platforms, the dealer defendants force the buy side to trade with them in an opaque OTC market and thereby extract billions of dollars in monopoly rents, year after year,” it reads.

trueEX says this conspiracy has negated its substantial investment in its all-to-all trading platform which it claims the buy side has demanded for “more efficient and competitive” electronic trading of swaps.

The lawsuit also alleges this co-ordinated activity is directed by bank trading desks, which it says “have gone so far in some cases to illegally direct their clearing desks to limit clearing on trueEX” – a violation of US regulations, it says.

By blocking the entry of trueEX and other similar independent [swaps] trading platforms, the dealer defendants force the buy side to trade with them in an opaque OTC market and thereby extract billions of dollars in monopoly rents, year after year

trueEX’s lawsuit

It claims employees at the clearing arms of Bank of America, Deutsche Bank, Goldman Sachs and Morgan Stanley have told trueEX employees that “their trading desks influenced the decisions of the clearing units with regard to trueEX”.

The filing claims it achieved this through the use of so-called pre-trade credit checks, which are required to ensure a client has enough credit available at its clearing member before executing the trade. The dealers would allegedly often refuse to conduct the checks for trades executed on trueEX, which they would not do on other platforms such as Tradeweb.

Rules governing how swaps are executed are due to be tweaked by the Commodity Futures Trading Commission in a proposal to be issued in July, according to Amir Zaidi, director of the regulator’s division of market oversight, although some market participants feel this timeline is now looking optimistic.

The lawsuit was filed at the United States District Court Southern District of New York by Wollmuth Maher & Deutsch for breaches of section 1 of the Sherman Act, the Donnelly Act, and unjust enrichment and tortious interference with business relations under New York law.

Bank of America, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, UBS and trueEX declined to comment. Morgan Stanley and RBS were unavailable for comment.

Editing by Alex Krohn