Risk & Compliance

3 Banks to Pay 54% of $1.8B CDS Suit Settlement

JP Morgan Chase, Morgan Stanley, and Barclays are shouldering most of the cost of a deal that resolved investors' allegations of CDS price fixing.
Matthew HellerOctober 19, 2015

JP Morgan Chase, Morgan Stanley, and Barclays will pay the lion’s share of a $1.86 billion settlement of a class-action lawsuit alleging 12 major banks conspired to fix prices and restrain competition in the credit default swap market.

The settlement was announced a month ago but details were only disclosed late Friday in court papers. Investors including hedge funds, pension funds, and university endowments sued the banks in October 2013.

JPMorgan will pay $595 million of the settlement, while Morgan Stanley and Barclays will pay $230 million and $178 million, respectively. According to Bloomberg, an individual defendant’s portion of the settlement is largely based on the plaintiffs’ measure of CDS market share.

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Other banks that settled include Goldman Sachs ($164 million), Bank of America ($90 million), Credit Suisse ($159 million), Deutsche Bank ($120 million), Citigroup ($60 million), and BNP Paribas ($89 million).

British banks HSBC and Royal Bank of Scotland will pay $25 million and $33 million, respectively.

Credit default swaps allow investors to buy protection to hedge against the risk that corporate or sovereign debt issuers will not meet their payment obligations. The market peaked at $58 trillion in 2007, according to the Bank for International Settlements, but shrank to $16 trillion seven years later as investors better understood its risks.

In the class action, investors claimed the banks caused them to pay unfair prices on CDS trades from late 2008 through the end of 2013, even though improved liquidity should have driven costs down.

They also said the banks tried in late 2008 to thwart the launch of a credit derivatives exchange being developed by CME Group Inc by agreeing not to use new CDS platforms and pressuring the International Swaps and Derivatives Association (ISDA) and Markit not to provide licenses to the exchange.

The ISDA will pay $750,000, while Markit, which provides credit derivative pricing services, will pay $45 million to settle the investors’ claims against them.

A lawyer for the investors has described the outcome of the case as “one of the largest antitrust class-action settlements, and an extraordinary result for the class.”