How Citadel, CME Group and Chicago teachers could benefit from this suit – Finance News

on Aug11

10 August 2017 | 3:00 pm

The Chicago Teachers’ Pension Fund is making headway battling the biggest banks in the U.S. over interest rate swaps fees, and Chicago’s trading firms may be secretly cheering it on.

A federal judge in New York ruled July 28 that the pension fund’s case alleging the banks have a collusive stranglehold on the interest rate swaps market could proceed. That gives the teachers’ pension, and other institutional investors covered by the class action, a potential billion-dollar payout.

That would be good news for the underfunded Chicago Teachers’ Pension Fund. It could also incidentally play into the hands of Chicago’s trading companies eager to grab a bigger piece of the trillion-dollar market. Citadel hedge fund mogul Ken Griffin has tried for years to break into that over-the-counter market, and CME Group, the largest futures exchange in the world, might also benefit from a more competitive arena.

“If this case ultimately succeeds, it portends to have a pretty big market structure impact,” said Chicago lawyer Matt Kluchenek, who heads law firm Baker & McKenzie’s global derivatives and hedge fund practice. “That translates into winners and losers potentially.”

The Chicago teachers’ pension, which has locked arms with the city of Baltimore and the Genesee County Employees Retirement System in Michigan, argued in their initial 2015 court complaint that the banks have colluded and violated antitrust laws to keep control of the $300 trillion interest rate swaps market.

Those swaps allow two parties to exchange interest rate cash flows, for a certain period of time, tied to various financial instruments, often swapping fixed for floating rate streams, or vice versa. To hedge movements in interest rates, all types of investors and speculators work with the banks, which act as dealers in the market, to trade the swaps.

The plaintiffs contend that because the banks unfairly dominate the market, it lacks the transparency that might lead to lower fees. Some of the banks named as defendants in the case include Bank of America, Credit Suisse, Citigroup, JPMorgan, UBS, Morgan Stanley and Goldman Sachs. They all declined to comment, or didn’t respond to a request for comment.

“This state of affairs is the result of the Dealer Defendants’ conspiring to prevent buy-side investors (also called “end users”) from enjoying the critical benefits of exchange trading, including transparent and competitive pricing and faster execution,” the complaint said. “The Dealer Defendants did this for one simple reason: to preserve an extraordinary profit center.”

The Chicago Teachers’ Pension Fund was drawn into the case by its attorneys at Cohen, Milstein, Sellers & Toll, who monitor the pension’s $10 billion investment portfolio for litigation claims, said Carol Gilden, a Chicago litigator for the firm who is a lead attorney on the case. While neither she nor the Chicago Teachers’ Pension Fund would estimate damages that could be won, she said she expects they’re likely in the billions of dollars. The plaintiffs have done their own investigation and found evidence of the anticompetitive behavior, she said, though she declined to elaborate.

“We’re going to continue to press these claims very aggressively,” she added.

For Chicago’s high-speed trading firms, which make markets in all kinds of asset classes all over the world, a more open interest rate swaps market would offer another venue for their trading.

Citadel’s Griffin has lamented the lack of competition in that market for years. While his Citadel Securities trading firm has a nascent interest rate swaps business, it hasn’t gained the kind of wherewithal in the market that the big banks have.

“Citadel tried to gain entry (into the interest rate swaps market)…and they’ve been effectively denied on multiple occasions,” said John Nyhoff, a finance professor at Lewis University and former CME Group executive.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act sought to push some swaps trading to more competitive platforms, and allowed for the creation of swap execution facilities, with dozens of U.S. financial institutions, including Chicago-based CME, setting up such venues. CME and Citadel declined to comment.

CME’s potential gains from breaking up the clubby interest rate swaps market is less certain, Nyhoff said. It’s not clear that CME would have an advantage in attracting the liquidity in that market that traders crave, he said.

In any case, the lawsuit is likely to take years to resolve, with neither the Chicago Teachers’ Pension Fund nor the city’s trading participants likely to benefit for some time. Chicago Teachers’ Pension Fund Board President Jay Rehak will wait it out. “It’s about changing the industry. We want to recover every cent we can,” he said. “It will be worth everybody’s time.”

Chicago trading firms couldn’t have said it better.



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