Chicago Public School Teachers' Pension & Retirement Fund sued Bank of America, Barclays, Goldman Sachs, J.P. Morgan Chase and 30 other investment banks or their units, accusing them of “conspiring to engineer and maintain a collusive and anti-competitive stranglehold over the market for interest-rate swaps in violation of federal antitrust laws,” the $10.9 billion pension fund said in a statement Wednesday.
The suit, filed Nov. 25 in U.S. District Court in New York, alleges the monopolistic–type activities have led the Chicago teachers' fund and other investors to overpay for interest-rate swaps.
The suit contends the investment banks blocked entry of exchanges for trading in interest-rate swap market “to preserve an extraordinary profit center,” according to the 91-page complaint.
The suit seeks class-action status on behalf of investors who entered into any interest-rate swap transaction from Jan. 1, 2008, through the present.
Even though interest-rate swaps “have been standardized and ripe for exchange trading,” the Chicago teachers' fund and other buy-side investors or end users have been “unable to trade (swaps) on exchanges,” the complaint said. “Instead they remain stuck trading (swaps) in an inefficient and antiquated market dominated by the dealer defendants.”
“As a result of the lack of price transparency and limited direct price competition, the dealer defendants were able to buy (interest-rate swaps) lower and sell (them) higher than they would have been able to in a competitive market where prices are streamed to end-users in real-time on an electronic platform.”
Interest-rate swaps, used by asset owners for fixed-income management and risk mitigation, in 2014 had a $381 trillion notional value outstanding, “representing 75% of all types of interest-rate derivatives,” the suit said. Daily trading activity was $1.4 trillion in 2013, the latest figure in the suit.
Charles A. Burbridge, the pension fund's executive director, said in an interview the amount of interest-rate swaps the fund has outstanding varies. Currently, it has $43 million in notional amount, while six months ago it was $2 million, Mr. Burbridge said. The interest-rate swaps are all transacted at the discretion of the fund's fixed-income managers. Western Asset Management Co. is the only one of the plan's fixed-income managers that has interest-rate swaps outstanding, Mr. Burbridge said. Western manages $407 million for the pension fund.
The lawsuit was triggered by reaching a tipping point in “recognizing an inefficiency” in the market and “activities that warranted” litigation, Mr. Burbridge said.
The suit seeks to recoup damages for pension funds and other institutional investors and enjoin the defendants from preventing competition in the interest-rate swap market. The suit doesn't quantify the damages.
Cohen Milstein Sellers & Toll and Quinn Emanuel Urquhard & Sullivan law firms are representing the teachers' fund in the case. Carol V. Gilden, Cohen Milstein partner and one of the lead attorneys for the case, said, “We could expect to see other institutional investors, including pension funds, seek to get involved in this case.” She declined to name any.
Other banks named as defendants include BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Royal Bank of Scotland Group and UBS.
Spokesmen from Barclays, BofA and Goldman Sachs declined to comment. A J.P. Morgan spokesman couldn't be reached.