UPDATE 2-EU includes ISDA in credit derivatives investigation

By Foo Yun Chee

BRUSSELS, March 26 (Reuters) - The International Swaps andDerivatives Association (ISDA) may have joined with investmentbanks to keep exchanges out of the credit derivatives market,European Union regulators said on Tuesday, expanding aninvestigation into the sector.

"The (European) Commmission's inquiry found preliminaryindications that ISDA may have been involved in a coordinatedeffort of investment banks to delay or prevent exchanges fromentering the credit derivatives business," the EU executive saidin a statement.

The EU antitrust regulators' scrutiny of the credit defaultswaps (CDS) industry is one of several by the EuropeanCommission into financial services since the financial crisis.Lack of transparency in derivatives played a central role in the2007-09 crisis, leading to calls for action to make thisbusiness less opaque.

Credit default swaps (CDS) are over-the-counter contractsthat bet on whether a company or country will default on itsbonds within a fixed period of time.

ISDA said it was cooperating with the regulatoryauthorities. "ISDA is confident that it has acted properly atall times and has not infringed EU competition rules."

ISDA, the trade body for the derivatives industry, has morethan 800 members including banks, companies, governmententities, investment managers and commodities firms from 60countries.

The EU's two main derivatives exchanges are Eurex, part ofDeutsche Boerse, and LIFFE, owned by NYSE Euronext.

Eurex, which had no comment on Tuesday's announcement, triedto launch the world's first exchange traded credit derivativescontract in March 2007 but has failed to attract any volume frombanks. LIFFE, which also had no comment, does not list anycredit derivatives contracts.

The Commission, which acts as EU competition watchdog,first opened its CDS investigation in April 2011, listing 16banks and financial data company Markit.

This focused on whether the banks may have worked withMarkit to block the development of certain CDS tradingplatforms.

The Commission has now dropped some banks from this list of16 from the investigation, two people familiar with the mattersaid. "Several of the banks have been excluded," said one of thesources, who declined to be named or to identify the banks,because of the sensitivity of the matter.

The Commission said in 2011 that banks under investigationincluded JP Morgan, Bank of America Merrill Lynch, Goldman Sachs, Deutsche Bank,Citigroup, Barclays and BNP Paribas.

Societe Generale, Commerzbank, CreditSuisse First Boston, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, WellsFargo Bank/Wachovia and Credit Agricole werealso named.