The Derivatives Market’s Helpful Enemies

CHICAGO – The launch of two European antitrust investigations into the market for credit default swaps (CDS) might appear to be no more than a political vendetta against one of the alleged culprits behind the 2010 European sovereign-debt crisis. The negative perception that most people (especially in Europe) have of CDS has certainly played a role here. After all, foreigners and politically weak companies are often the favorite targets of law enforcement.

Consider, for example, that the first insider-trading case tried in Russia after the fall of communism was against an American firm. Likewise, the European Union’s antitrust authorities have been tougher with Microsoft than with many European firms.

That said, the existence of political motivations does not undermine the legitimacy of the new EU investigations, which will be conducted alongside an ongoing inquiry by the United States Justice Department into anti-competitive practices in the trading, clearing, and pricing of CDS in the US. In fact, the ideological bias of Europeans against CDS might be beneficial in the long term for the development of a better market for CDS, and for derivatives in general.