MANHATTAN (CN) — A federal judge in New York advanced part of a consolidated lawsuit accusing 12 major banks — including Bank of America, Deutsche Bank and Goldman Sachs — of colluding to rig a $275 trillion market on interest-rate swaps.
An increasingly common and complex form of financial derivatives, interest-rate swaps allow two parties to trade interest-rate-based cash flows on a specific amount of money over a fixed time period.
U.S. District Judge Paul Engelmayer noted in his Friday ruling that this market has ballooned over the past three decades, estimating that its notional quantity grew from roughly $230 trillion in 2006 to $381 trillion by 2014.
Reuters reported that the market size in the lawsuits at issue is between those two numbers, around $275 trillion.
Last June, the Southern District of New York consolidated actions across the nation filed by investors and start-up companies, which accused the banks of anti-competitive actions.
On Friday morning, Engelmayer dismissed counts against HSBC and gave the green light to some allegations against others: Barclays PLC, BNP Paribas SA, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley, Royal Bank of Scotland Group PLC and UBS Group AG.
Ironically, the banks argued that the 2010 Dodd-Frank Act — designed to increase transparency and accountability in the markets — precluded the lawsuits.
But Engelmeyer rejected their reading of the statute.
“In short, the antitrust savings clause applies here,” he wrote in a 108-page ruling. “Dodd-Frank preserves, rather than precludes, plaintiffs’ … claim.”
In approving allegations by two start-up competitors — Javelin Capital and Tera Group, creators of two electric platforms for anonymous IRS trading — Engelmayer found it plausible that the banks’ actions tried to crowd them out of the market.
“Any one [of the actions], if engaged in by multiple dealers, could result from unilateral decisions,” the 108-page ruling states. “But, viewing these areas of symmetry in combination, the inference of communication and coordination among dealers with the shared goal of grinding down the new platforms is entirely plausible. To put the point differently, each dealer’s independent interest in maintaining the status quo would explain each’s decision not to supply liquidity to Javelin or Tera.”
Tera alleged the banks referred to it as a “Trojan Horse” and vowed not to let it “off the mat,” borrowing a wrestling metaphor.
But Engelmeyer pruned the claims considerably, dismissing the investors’ claims for conduct between 2008 and 2012. Allegations based on conduct between 2013 and 2016 can proceed.
The judge also booted Javelin or Tera’s allegations of tortious interference with business relations and unjust enrichment.
Bank of America declined to comment, and attorneys for several other banks did not respond Friday to requests for comment.
Neither did attorneys for the investors and start-ups.