European antitrust authorities are preparing a case against some of the world's largest banks, alleging collusion in the $27 trillion market for credit derivatives, The Wall Street Journal reports, citing “people familiar with the investigation.”

The European Commission is investigating 16 financial groups on whether they sought to stifle competition from exchanges in the market for credit-default swaps, which pay out when a country or a company defaults on its debts.

Some or all of the banks could face fines if found guilty.

Also under investigation is Markit Group, a credit derivatives data provider that is partly owned by the dealers, and ICE Clear Europe, a unit of IntercontinentalExchange Inc. (NYSE:ICE). Markit and ICE declined to comment.

The commission also said it had "preliminary indications" that the International Swaps and Derivatives Association might have been part of a scheme to limit access to the credit-derivatives market, as reported earlier by IBTimes UK.

ISDA said it "is aware that it has been made subject to these proceedings" and is "confident that it has acted properly at all times and has not infringed EU competition rules."

"The European Commission's inquiry found preliminary indications that ISDA may have been involved in a coordinated effort of investment banks to delay or prevent exchanges from entering the credit derivatives business," says the EU in its statement."Such behavior, if established, would stifle competition in the internal market in breach of EU antitrust rules. The opening of an investigation does not prejudge its outcome. There is no legal deadline to complete antitrust investigations," it adds.

The probe is part of U.S. and European efforts to bring more competition to secretive CDS market. The contracts came under fire during the 2008 financial turmoil and, more recently, the European debt crisis. Critics said they were being used to speculate on the health of a country or company, not just as insurance against defaults.

Meanwhile, the U.S. Department of Justice has launched its own probe into suspected anticompetitive activity in credit-derivatives trading and clearing, and in information services industries supporting the activities. Among those the European Commission probe has focused on are such industry giants as J.P. Morgan Chase (NYSE:JPM), Goldman Sachs Group Inc. (NYSE:GS)  and Deutsche Bank AG, (Xetra:DBK) the commission has said.

The banks either declined to comment or didn't immediately reply to requests for comment.

Unlike other financial instruments, CDS are traded privately between two parties, away from regulated exchanges where prices are displayed—meaning that customers aren't able to see whether they are getting the best prices.