July 15, 2009

The Justice Department's probe of the credit default swaps market is reportedly focusing on Markit Group Holdings Ltd., the London-based supplier of prices in OTC derivatives, and its relationship to a group of major banks that own a stake in the company.

The DOJ is scrutinizing the ownership of Markit by a group of banks that control a large amount of pricing in the $28 trillion credit derivatives market. Industry analysts were puzzled as to why the DOJ's antitrust officials were investigating Markit. "There doesn't seem to be any smoking gun that Markit did anything as if it was behaving in a monopolistic fashion," said Adam Sussman, director of research at Tabb Group in an interview with Wall Street & Technology. Sussman pointed out that many of the information businesses in the financial industry get started by collecting prices from industry participants. In this case, someone had the idea of starting a company to collect data on credit derivatives and in exchange for offering their prices, the banks were offered an equity stake as financial incentive to get the business off the ground, Sussman suggested. "The banks were the axe in the space and their relationship to the banks was a necessary part of getting this business off the ground," he adds.

However, an article in the Wall Street Journal cited complaints from competitors and asset managers about Markit's dominant position in the credit derivatives market. "The DOJ is looking to find any wrongdoing in that marketplace," commented Paul Zubulake, senior analyst at Aite Group in an interview with Wall Street & Technology. "Obviously that is going to open up a large can of worms," he said. "It will be costly for the dealers that have to battle the DOJ given the discovery issues, about all the information, emails and instant messages they will need to turn over."