By Karen Brettell
NEW YORK, July 12 (Reuters) - Four Danish pension funds havefiled a lawsuit against twelve large banks, accusing them ofincreasing costs for investors trading in the $27 trillioncredit default swap (CDS) market by stopping exchanges fromentering the market.
The case, filed on Thursday in the U.S. District Court inthe Northern District of Illinois, follows a similar suit filedin May by an Ohio-based pension fund, the Sheet Metal WorkersLocal 33 Cleveland District Pension Plan, in the same court.
The funds allege that dealers used their ownership andcontrols over clearing, data and other entities crucial to themarket to block an independent clearinghouse from offeringexchange-trading, deny market participants real-time priceinformation and stop new participants from entering the market.
The CME Group, the world's largest derivativesexchange and Chicago-based hedge fund Citadel Group, planned tooffer CDS exchange trading in 2008 before dropping the plan thefollowing year.
The banks threatened to withdraw their business from the CMEif it went through with its CDS trading venture, the fundsallege. CDS are used to protect against losses if a borrowerdefaults on their debt or to speculate on their credit quality.
The banks used their control over the International Swapsand Derivatives Association (ISDA), a trade group, and Markit, a data provider and owner of benchmark indexes, to deny or delaylicenses the exchanges needed to offer CDS trading, according tothe complaint.
The funds also accuse the banks of controlling a CDSclearinghouse, which is now owned by IntercontinentalExchange, to keep trading off exchanges and restrictingmembership to the clearinghouse to the largest banks.
Markit and ISDA are defendants in the suit and ICE is namedas a co-conspirator.
ISDA spokeswoman Lauren Dobbs said that "we believe that theallegations against us are without merit and that ISDA actedproperly at all times."
Representatives for all the banks, Markit and ICE eitherdeclined comment or were not immediately available for comment.
The 12 banks named in the complaint are Bank of America Corp, Barclays, BNP Paribas, Citigroup Inc, Credit Suisse, Deutsche Bank,Goldman Sachs Group Inc, HSBC, JPMorgan Chase &Co, Morgan Stanley, The Royal Bank of Scotland and UBS.
Banks face potentially large payments from lawsuits andantitrust investigations for allegedly blocking entry to the CDSmarket in order to protect the lucrative revenues they earn inthe opaque market.
The European Commission this month charged 13 banks,including the 12 named in the lawsuit by the Danish funds, withstifling competition, saying the initial conclusion from itsantitrust investigation is that banks blocked exchanges,including the CME, from entering the market.
The U.S. Justice Department has been investigating since atleast 2009 but has made no announcements.
The Danish funds are Unipension Fondsmæglerselskab,Arkitekternes Pensionskasse, MP Pension and Pensionskassen forJordbrugsakademikere & Dyrlæger. Collectively they manage around$17 billion in assets.