The Wall Street Journal, Bloomberg, Globe and Mail and others have reported that the Competition Bureau (the “Bureau”) is investigating alleged price-fixing in the setting of interbank lending rates.
Interbank rates include the London interbank offered rate (“LIBOR”), Tokyo interbank offered rate (“TIBOR”) and euro interbank offered rate (“Euribor”).
The essence of the allegations in this ongoing and global case appears to be whether, if true, the fixing of interbank rates adversely affected the price of derivative and other financial products (such as credit default swaps, mortgages, etc.).
LIBOR
LIBOR is the principal global benchmark for short-term interest rates and used in relation to futures and options exchanges, loan agreements, such as mortgages, and consumer loans. LIBOR is set through a daily survey of firms performed on behalf of the British Bankers’ Association in London.
The British Bankers’ Association defines LIBOR as:
“LIBOR rates closely reflect the real rates of interest being used by the world’s largest financial institutions. Whereas central banks (such as the Bank of England, the US Federal Reserve and the European Central Bank) fix official base rates monthly, LIBOR reflects the rates at which these prime banks borrow money from each other each day, in the world’s 10 major currencies and for 15 borrowing periods ranging from overnight loans to 12 month. Once calculated, the LIBOR figures are then published by Thomson Reuters: they appear on more than one million screens around the world and are widely reported in the press, the wire services and online. Thomson Reuters undertakes this work for the British Bankers’ Association.
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LIBOR rates are the basis for a range of financial instruments: derivatives based on the LIBOR rates are now traded on exchanges such as LIFFE and the Chicago Mercantile Exchange (CME) as well as over-the-counter. The rates are also used as the basis for many types of lending, from syndicated and commercial lending, to residential mortgages.”
OVERVIEW OF INVESTIGATION
According to the Wall Street Journal:
“Canada’s top antitrust watchdog said it is investigating allegations of collusion in the setting of key benchmark interest rates, joining law-enforcement authorities across the globe in a probe of how the rates are set.
A spokeswoman for Canada’s Competition Bureau said Monday that the agency is investigating alleged collusive conduct into the setting of yen interbank lending rates. Canada joins U.S., European and Japanese regulators and law-enforcement officials, who are trying to determine whether major banks colluded to manipulate benchmark interest rates, such as the London interbank offered rate, known as Libor, and the Tokyo interbank offered rate, or Tibor.”
According to Bloomberg, an immunity applicant in this case informed the Bureau that traders and cash brokers conspired to influence the Yen London interbank rate from 2007 to 2010 to profit on interest-rate derivative positions linked to the benchmark interest rate.
Also according to Bloomberg, the affidavit in support of the section 11 production orders obtained in this case (see below) indicate that the Bureau was informed that HSBC Holdings Plc, JPMorgan Chase & Co., Citigroup Inc. (C), Deutsche Bank AG, Royal Bank of Scotland Group Plc, ICAP Plc (the world’s largest broker of transactions between banks) and RP Martin Holdings “agreed to make artificially high or low submissions for Yen Libor to improve the outcomes of trades tied to the rate.”
Time Business briefly describes the relation between interbank rates and other financial products:
“The London Interbank Offered Rate, or LIBOR, is set daily by a panel of sixteen banks through the British Bankers Association. It’s basically an average of the rates at which these banks can borrow from each other.
According to reports, banks submitted artificially high or low rates in order to manipulate this interest rate number. Since LIBOR is used to price a wide array of financial products, this would give banks a distinct advantage in trading.”
The Daily Mail describes what may have been the motivation for the alleged interbank rate setting:
“A sharp rise in Libor in 2007 was regarded as one of the early warning signs of the credit crunch, as banks started to charge each other more and more to borrow money.
The rate is set every morning. Banks submit their quotes to trade body the British Bankers’ Association. The BBA then takes an average figure.
There are concerns that banks were pushing down the rates during the crisis to over-state their health during the financial crisis.”
ONGOING INTERNATIONAL INVESTIGATIONS
The recent confirmation by the Bureau in Canada of its investigation in this case comes almost a year after investigations began in other jurisdictions.
United States
For example, in April, 2011, the WSJ reported that the U.S. Department of Justice was investigating whether a group of the world’s largest banks colluded to fix LIBOR rates (see: U.S. Probes Possible Interest-Rate Collusion Among Banks).
European Commission
On April 29, 2011, the European Commission commenced two competition law investigations relating to the credit default swaps market (see: Antitrust: Commission probes Credit Default Swaps Market):
“The European Commission has opened two antitrust investigations concerning the Credit Default Swaps market. CDS are financial instruments meant to protect investors in the event a company or State they have invested in default on their payments. They are also used as speculative tools. In the first case, the Commission will examine whether 16 investment banks and Markit, the leading provider of financial information in the CDS market, have colluded and/or may hold and abuse a dominant position in order to control the financial information on CDS. If proven such behaviour would be a violation of EU antitrust rules. In the second case, the Commission opened proceedings against 9 of the banks and ICE Clear Europe, the leading clearing house for CDS. Here, the Commission will investigate in particular whether the preferential tariffs granted by ICE to the 9 banks have the effect of locking them in the ICE system to the detriment of competitors.”
Japan
On December 16, 2011, Japan’s Financial Services Agency announced administrative actions against UBS Securities Japan Ltd.’s and UBS AG’s Japanese branches (see: Administrative Actions against UBS Securities Japan Ltd. and UBS AG, Japan Branches).
Switzerland
On February 3, 2012, the Swiss Competition Commission announced that it had launched an investigation into potential cartel conduct by UBS, Credit Suisse and ten other banks (see: COMCO Opens Investigation Against Banks):
“COMCO has received information regarding potential unlawful agreements among banks. Specifically, collusion between derivative traders might have influenced the reference rates LIBOR und TIBOR. Furthermore, market conditions regarding derivative products based on these reference rates might have been manipulated too. Hence, COMCO has opened an investigation against UBS and Credit Suisse, as well as against more than ten foreign financial institutes and other companies.
The Secretariat of the COMCO (“Secretariat”) received an application for its leniency pro-gram, which indicated that derivative traders of various banks might have influenced the reference rates LIBOR and TIBOR fixed with respect to certain currencies. The London Interbank Offered Rate (LIBOR) and the Tokyo Interbank Offered Rate (TIBOR) are reference rates which are aimed at reflecting the interest rate level in the interbank deposit market. The British Bankers’ Association (for LIBOR) and the Japanese Bankers’ Association (for TIBOR) calculate these reference rates on a daily basis, for a range of currencies, based on submissions by respective panel banks. Derivative traders working for a number of financial institutions might have manipulated these submissions by coordinating their behaviour, thereby influencing these reference rates in their favour. Moreover, derivative traders might have colluded to manipulate the difference between the ask price and the bid price (spread) of derivatives based on these reference rates to the detriment of their clients.
Beside the two major Swiss banks UBS and Credit Suisse, ten foreign banks (Bank of Tokyo-Mitsubishi UFJ, Citigroup Inc., Deutsche Bank Aktiengesellschaft, HSBC Holdings plc, JP Morgan Chase & Co., Mizuho Financial Group Inc., Rabobank Groep N.V., Royal Bank of Scotland Group plc, Société Générale S.A., Sumitomo Mitsui Banking Corporation) and other financial intermediaries are subject to this investigation lead by the Secretariat. To assess the effects of the alleged practises on Swiss clients and companies is one of the aims of the investigation.”
Currently, the enforcement agencies investigating this case include: the Canadian Competition Bureau, U.S. Department of Justice and Securities and Exchange Commission, Japanese Financial Services Agency, U.K. Financial Services Authority, Swiss Competition Commission and the European Commission.
SECTION 45 OF THE COMPETITION ACT (CONSPIRACY AGREEMENTS)
Under the current section 45 of the Competition Act (criminal conspiracy agreements), agreements between competitors to fix prices, divide/allocate markets or restrict output/supply are per se illegal (i.e., with no requirement to establish any adverse market effects).
The potential penalties for violating section 45 include fines of up to C $25 million (per count), imprisonment for up to 14 years, or both (increased in 2010 from the former C $10 million and 5 years imprisonment). As a practical matter, the Bureau commonly uses 20% of the affected volume of commerce as a starting point for negotiating fines in cartel cases.
Other types of agreements between competitors are also potentially subject to review under a second and separate non-criminal reviewable matters provision (section 90.1).
Interestingly, Bloomberg’s reporting indicates that the Bureau may (at least partially) be pursuing a theory of harm in this case under the former section 45(1)(b) of the Competition Act prior to recent amendments in 2009 and 2010, which prohibited agreements to, among other things, “enhance unreasonably the price” of products (including services).
If true, this would be interesting, as the majority of conspiracy (cartel) cases in Canada have historically proceeded under the former section 45(1)(c), which prohibited agreements to prevent or lessen competition “unduly” (if this is the case, one rationale for this approach may be the high standard under the former section 45(1)(c)). This would also, if true, be consistent with a number of recent novel cases brought by the Bureau, given that there is virtually no decided case law under section 45(1)(c) of the Act.
SECTION 11 ORDERS
According to the WSJ, the Bureau obtained section 11 orders in this case. Under section 11 of the Competition Act, the Bureau may obtain court orders for the production of records (e.g., meeting minutes, sales reports, marketing or business plans, etc., as well as electronic records, such as e-mails), the interview of individuals under oath and/or written returns of information.
According to the Globe, the Bureau is seeking production of instant messaging chats between traders, e-mails, meeting records and details of telephone calls (as well as names of Canadian counterparty banks with whom business was performed).
The Bureau may obtain section 11 orders where: (i) an inquiry is being conducted under section 10 of the Competition Act and (ii) a person has (or is likely to have) information relevant to the inquiry. The Bureau may also obtain section 11 orders on an “ex parte” basis (i.e., without notice to the target of the order).
Section 11 orders, which are being increasingly used by the Bureau, together with other enforcement tools, are generally very costly and time consuming to comply with.
(The Bureau also has the power to obtain search warrants in criminal and civil matters, though the burden is higher given that the Bureau must show, as one example, that there are “reasonable grounds” to believe that a criminal offence has been committed under the Act.)
BUREAU’S IMMUNITY PROGRAM
According to Bloomberg, UBS AG sought immunity from prosecution in Canada under the Bureau’s Immunity Program and has already been granted conditional immunity by the Swiss Competition authority and U.S. Department of Justice.
Under the Bureau’s Immunity Program, an individual or firm implicated in criminal conduct under the Competition Act may offer to cooperate with the Bureau in its investigation and request immunity (i.e., full immunity from prosecution for criminal offences under the Act).
In general, in order to be eligible under the Bureau’s Immunity Program, the Bureau must either: (i) be unaware of an offence (and the immunity applicant is the first to disclose it) or (ii) be aware of the offence but does not yet have enough evidence to refer the matter to the Director of Public Prosecutions for criminal prosecution.
There are a number of other requirements for immunity applicants, including termination of participation in the illegal activity and providing “complete, timely and ongoing co-operation” with the Bureau during an investigation, including confidentiality obligations, disclosing any other offences and securing the co-operation of current directors and officers.
Importantly, immunity (and leniency, under the Bureau’s Leniency Program) is a “race” in that only the first applicant to fulfill the requirements of the Immunity Program is eligible to receive full immunity from prosecution.
OTHER INTERESTING ASPECTS OF THE CASE
Also according to some media reports, the immunity applicant in this case has also claimed that the banks’ employees communicated with one another and with cash brokers to form agreements. There is also allegedly e-mail evidence of potential coordination between the target banks. Other media reports indicate that some enforcement agencies are reviewing e-mail correspondence for “code words” that “could be used to manipulate LIBOR”.
For example, according to the Globe, the Bureau is seeking production of instant messaging chats between traders, e-mails, meeting records and details of telephone calls (as well as names of Canadian counterparty banks with whom business was performed).
These reports raise several interesting conspiracy related evidentiary issues. While the exchange of “competitively sensitive information” between competitors is not itself illegal in Canada (e.g., information relating to price, cost, markets, market shares, etc.), though could theoretically raise issues under the civil agreements provision of the Act (section 90.1), the risk of such exchanges are generally thought to be: (i) that they can lead to an agreement that violates section 45 of the Competition Act (criminal conspiracy agreements, including price-fixing agreements) or (ii) that they can be used, by the Bureau, a court or a private plaintiff, to infer the existence of an agreement that violates section 45.
It is also important to note that the compulsory production order provisions of the Competition Act (sections 11 and 15) allow the Bureau to obtain court orders for the production of “records”, including electronic records such as e-mails.
It will be interesting to see how the Canadian investigation of this ongoing global case proceeds.
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