Accused of infringing EU antitrust rules, 13 banks including RBS and HSBC have been sent statements of objections due to their anti-competitive agreements. The banks have been accused of attempting to prevent the entrance of exchanges into credit derivatives business between the years of 2006 and 2009.

What is a credit default swap?

A CDS is a derivative contract which is intended to transfer credit risk (or risk of non-payment) which is linked to a debt obligation. Investors tend to use CDS for investing and hedging.

For A CDS offers protection against credit risk which may arise from the holding of debt instruments, when used as a hedge. Regarding investing, a CDS is used in order to pinpoint a prediction of each debt issuer’s credit-worthiness. If that prediction is correct, it results in a profit.

In the period between 2006 and 2009, CDS were privately negotiated – they were traded over the counter, as it were. In OTC trading, investment banks assure that they will sell to every buyer and buy from every seller, acting as an intermediary in the credit derivative market.

If the implicated banks are found to have infringed the EU antitrust rules, the Commission will take moves to both prohibit the conduct and implement a fine – expected to be around 10% of the annual worldwide turnover of the said company.

Foul play

Vice president of the commission Joaquin Almunia said of the preliminary conclusion:

“It would be unacceptable if banks collectively blocked exchanges to protect their revenues from over-the-counter trading of credit derivatives. Over-the-counter trading is not only more expensive for investors than exchange trading, it is also prone to systemic risks.

“We hope we are ready to adopt a decision towards the end of the year,” Alumnia continued.

This comes after the news that UK banks have been in the spotlight for allegedly enabling money laundering and suspicious transactions. Of 17 banks reviewed, half had not taken the proper precautions against the enabling of criminal transactions.

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Worryingly, four banks which were guilty of the poor controls were major lenders in the UK. That’s four out of the five big banks of the country.

So why are UK banks so bad at stopping the abuse of the financial system by criminals?

The problems

At present, it would seem that current rules and sanctions regarding the act of money laundering are not enough to stop the bad behaviour of the banking community. Given the size of these organisations, it’s not enough to threaten imprisonment – as the Telegraph reports, big banks are simply ‘too big to jail’.

This has caused no end of frustration to consumers – even since the financial crisis, which was reportedly caused by the banking sector, very few bankers have been called to court. In fact, the only recent instance of note in which bankers were in the courtroom was when 104 former investment bankers who won more than £40million in unpaid bonuses.

Changes required within the banking sector are bound to be slow – when there are literally thousands of members of staff to take into account and offices bases all over the world, implementing new rules can take a long time.

However, the FCA’s most recent report has called for banks to speed up that process and clean up the bank sector.

Banks fined for misbehaviour

Speaking of the analysis, McDermott said “Some banks have a lot of work to do to raise their game to the best of their peers. Chief executive of the FCA, Martin Wheatley, added:

“It’s simple not acceptable for firms to turn a blind eye to where the money comes from, its journey from A to B.”

This analysis comes after the news that US regulators fined HSBC a record amount of $1.9billion for involvement in money laundering. HSBC had been reportedly aiding Mexican drug cartels and breaking sanctions imposed in Iran.

In addition, Lloyds and Barclays have been fined thanks to breaching anti-money laundering rules.

It’s not just money that’s been under the spotlight regarding banks’ bad behaviour; the FCA also dealt with a case in which scrap metal was being traded with no documents or receipts, financed by one bank to a United Arab Emirates business. In the case of scrap metal, McDermott pointed out this was to be seen as “a high risk commodity in money laundering terms.”

Further regulatory actions have been suggested by the FCA, though this has not yet been confirmed.

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