Credit Default Swaps Antitrust: Exclusion From Trading and the Reach of an Earlier Release

The credit default swaps antitrust settlement release arose from investors’ allegations that dealer banks shut out competing trading platforms to protect their spreads. It later became the basis for pausing an auction-manipulation case while the original court considered which claims the agreement covered. The later plaintiffs alleged that dealers controlled the auction inputs that determined what credit default swaps paid. For someone who worked on a trading desk, a licensing decision or an auction submission, the connection is concrete: who could compete, who saw the orders and who set the price.

The original case concerned the cost of getting into and out of a trade. The later case concerned the price used to settle the contract after a credit event. Both challenged the power of dealers over market infrastructure that their customers depended on.

The Trading Spread Was the Business

The earlier credit default swaps antitrust complaint alleged that banks preserved inflated bid/ask spreads by keeping investors dependent on dealer trading. An exchange threatened that business because it could bring buyers and sellers together with visible, firm prices.

A credit default swap transfers credit risk. The protection buyer makes periodic payments, and the protection seller agrees to pay if a specified credit event occurs, such as bankruptcy or default. The investors’ consolidated complaint describes pension funds, insurers, investment funds and other institutions using credit default swaps. A buy-side institution could buy protection or sell it.

In the market the complaint describes, an investor requested a quote by telephone, email or Bloomberg terminal, or responded to a dealer’s advertised prices, called runs. Those indications did not commit the dealer to trade at the displayed price. The complaint alleged that a customer could see one price on the screen and receive another when it contacted the dealer.

The spread was the difference between the dealer’s buying and selling prices. Investors alleged that dealers could protect that margin because customers lacked the same view of actual trading prices. They also alleged that dealers required Markit to delay subscriber price data by ten to twenty minutes. In the investors’ account, customers were negotiating against firms with fresher information than the service they used to check the quote.

CMDX Threatened the Dealer’s Place in Every Trade

CMDX was the exchange and clearinghouse venture developed by Citadel and CME that investors alleged the banks blocked. The proposed platform would have offered anonymous, firm bid and ask prices. Investors said it was ready to operate in late 2008 and would have reduced the transaction costs that supported dealer profits.

The complaint assigned different roles to the institutions around it. The banks supplied trading business. Markit supplied financial information and licensed credit default swap indices. The International Swaps and Derivatives Association, generally called ISDA, supplied standard contract documents. Investors alleged that the banks secured agreements from Markit and ISDA to deny CMDX the licenses it needed.

The alleged boycott went beyond refusing a particular trade:

Citadel’s continuing involvement allegedly made the venture a competitive threat even if its immediate form changed. The investors’ account put the licensing decision beside the banks’ agreement to withhold business. An exchange needed both permission to use the products and participants willing to trade them.

Clearing was another point of control. A clearinghouse becomes the buyer to every seller and the seller to every buyer. Traders can then trade without assessing each other’s creditworthiness for every deal. The complaint alleged that dealers refused to deal with clearinghouses that might develop into exchanges, or took control of committees and wrote rules that prevented the transition.

The alleged restraint therefore reached beyond a trading desk’s prices. It ran through licenses, committee decisions and access to the business needed to make a competing venue work.

What the Later Credit Default Swap Auction Case Alleged

The later credit default swap auction complaint alleged that dealers used their control of auction participation and information to move settlement prices in their own favor. New Mexico investment and retirement institutions brought that class case. Its first amended complaint challenged how a price was produced after a credit event, when protection buyers and sellers had to settle their contracts.

How an Auction Price Changes the Payment

The value of the underlying bonds determines the payment under a cash-settled credit default swap. The complaint explains the difference through the older settlement methods. With physical settlement, the protection buyer delivers eligible bonds and receives their full face value. With cash settlement, the protection seller pays the difference between face value and the bonds’ value after the credit event.

The auction produces a common bond price for that settlement. A lower bond price means a larger payment to the protection buyer. A higher price means a smaller payment. The banks participating in the auction could also hold credit default swap positions whose value depended on its result.

The complaint describes a process with two stages. Dealers first submit bid and offer prices and physical settlement requests specifying quantities of bonds to buy or sell. Creditex and Markit use those submissions to calculate the initial market midpoint and the net open interest: the excess supply or demand for bonds left to match.

In the second stage, limit orders specify quantities and prices for that remaining interest. The order that exhausts it sets the final auction price, subject to a ceiling or floor tied to the initial midpoint. The first submissions therefore shape the conditions under which the final price is set.

Plaintiffs alleged that only dealers could submit directly. Other market participants had to pass their requests through a dealer, even though the resulting benchmark determined the value of their credit default swap settlement too. On the plaintiffs’ account, the firms with positions affected by the price also controlled customers’ access to the process that produced it.

The Client’s Order Reached the Dealer’s Trading Desk

The auction complaint alleged that client requests gave dealers advance information they could use for their own positions. A customer seeking physical settlement sent its request before the auction. The trader responsible for entering that request also worked on the dealer’s credit default swap market-making desk.

The complaint described the opportunity that created:

The alleged information advantage extended across desks. Plaintiffs said a dealer’s structured-credit desk could receive prices as another bank’s customer, while its own market-making desk could see those prices through shared Bloomberg access. They also alleged that preliminary votes in the Determinations Committee gave bank representatives advance knowledge about decisions affecting auctions.

Rule-making mattered too. According to the complaint, the dealer working group developed the auction rules while a separate non-dealer group had only an advisory role. Plaintiffs alleged that dealers presented their rules as final and refused meaningful changes after objections. Customers could comment on the system without controlling the terms on which they entered it.

The Toys “R” Us Auction Example

The Toys “R” Us auction was the complaint’s concrete example of allegedly coordinated submissions. Plaintiffs alleged that Barclays matched Goldman Sachs’ low initial bid even though Barclays appeared to have an opposing economic interest in the outcome.

They further alleged that Goldman Sachs and Barclays submitted the limit orders that exhausted the remaining interest and set the final auction price at 26% of face value. In the complaint’s account, that low bond price favored Goldman Sachs’ position as a buyer of credit default swap protection.

The example connects the two stages: an initial submission influences the midpoint, and later orders determine where the remaining bonds clear. The alleged coordination concerns both the prices submitted and the positions those prices would benefit.

What an Insider Adds to the Auction Data

The plaintiffs used statistical analyses of auction submissions to support their allegations of coordination. Someone who knows how the desk operated can explain the decisions behind those submissions: who could see a client’s request, who could see another bank’s prices and what changed before the dealer entered its own order.

Trading patterns alone may leave the exclusionary arrangement unexplained, which is why the evidence page connects records to decisions.

Applied here, that means connecting the auction result to the client instructions, desk access and committee decisions behind the inputs.

The CDS Settlement Release and Later Auction Litigation Stay

The credit default swaps antitrust settlement release connected the earlier trading-exclusion case to the later auction claims. On January 24, 2024, the New Mexico court paused the auction case while the original New York court considered the release’s reach. The court’s opinion recounts a private settlement fund of $1,864,650,000 for investors alleging that dealers kept their trading costs inflated by suppressing competition.

The earlier case concerned the spread investors paid to trade. The later case concerned the price used to settle their contracts. The question was whether the banks’ first agreement also settled claims about how they ran the auctions.

How Much of a Settlement Does a Whistleblower Get?

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

The Justice Department and its postal partners also offer an Antitrust Whistleblower Rewards Program. Our whistleblower experts work out which reward opportunity fits what you know about trading restrictions, auction inputs or customer orders. We bring in whistleblower lawyers who understand financial-market antitrust conduct.

You Know What Happened Before the Price Appeared

Our whistleblower experts can work with you on the decision that blocked a trading platform or customer, including what the relevant agreements actually covered.