Antirust & Associations: European Commission Announces Expansion of Credit Default Swap Investigation to Include Derivatives Association (ISDA)
March 26, 2013
Earlier today, the European Commission announced that it has extended its credit default swaps (CDS) investigation to include the International Swaps and Derivatives Association (ISDA). In making the announcement, the Commission said:
“The European Commission has extended the scope of an investigation into credit default swaps (CDS) to include the International Swaps and Derivatives Association (ISDA), a professional organization of financial institutions involved in the over-the-counter (OTC) trading of derivatives. The 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. Such behaviour, 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.”
According to the Commission, in this proceeding which first opened in the Spring of 2011, it is investigating whether certain investment banks used a financial information provider (Markit) to foreclose the development of competing CDS trading platforms. The Commission has indicated that it is considering both potential concerted and unilateral theories of harm (i.e., potential collusion among competing investment banks or collective dominance).
The thrust of the Commission’s investigation (actually two parallel investigations – one into the use and control of financial information necessary for competing exchanges to trade CDS; and a second into CDS clearing) appears to be whether the financial institutions being investigated and now the association ISDA colluded to prevent the entry of competing CDS exchanges or, alternatively, whether their actions constitute collective dominance. In other words, whether competing CDS exchanges have been foreclosed from entry, and in particular whether they have been blocked from accessing raw data needed to compete.
Like the ongoing Libor probe, this case has caught the interest of antitrust enforcement agencies in Europe and the U.S. because, if the allegations are established, the investment banks’ conduct may have significantly wider effects. For example, in a New York Times note today:
“Regulators on both sides of the Atlantic have pursued the investigations because the effects could extend well beyond the world of finance into the wider economy. A number of industries, including airlines, energy companies and food manufacturers, rely on the derivatives market to help manage their risk and protect their profits.”
This case caught my eye both because of FSA’s recent financial reform efforts to remove Libor oversight from the British Bankers Association (see: FSA Finalizes Rules to Crack Down on Rate-Rigging), as well as the Canadian Competition Bureau’s reinvigorated interest in competition law and associations. For example, in recent remarks by Canada’s Interim Commissioner of Competition, he said:
“Trade associations, by their very nature, face unique compliance issues. They are naturally exposed to greater risks of anti-competitive behavior because they provide a forum that may encourage competitors to collaborate. For this reason, compliance programs are of the utmost importance to trade associations. While the Bureau does not believe that trade associations are inherently bad, it is also clear to us that there are practices they engage in which raise significant risks. Indeed, meetings and relationships formed between competitors through trade associations provide the forum and the temptation to engage in anti-competitive activity.
On the criminal side, there is the potential for price-fixing and bid rigging and on the civil side there is also the potential to violate the Act in the establishment of rules, policies, by-laws and other initiatives enacted and enforced by an association. These may be considered to be agreements among competitors for the purposes of both the criminal conspiracy and civil agreements provisions.
What this means is that any rule that restricts, in some manner, competition, could raise issues under the Act. The Bureau is likely to show an interest in trade associations if they engage in three types of conduct: (1) Restricting the types of professional service practice offerings – setting limits on things like office location, size; … (2) Secondly, limiting the number or range of members or the ability of members to compete — for example, through mandatory or suggested fee schedules or standards for product quality that advantage some members over others; (3) Finally, we are concerned with conduct that reduces incentives to compete vigorously. …
Beyond developing a credible and effective corporate compliance program, there are other steps that trade associations can take including: exercising caution when sharing commercially sensitive information, ensuring accurate minute taking in meetings, and finding alternatives to fee setting guidelines. I cannot; however, underscore enough the importance of what I have about spoken at length today – the development of and, commitment to, a corporate compliance program. And, first and foremost — instilling a culture of compliance throughout the organization.”
In Canada, like Europe, the U.S. and other jurisdictions, association activities can raise conspiracy, abuse of dominance or other issues. Some of the specific types of trade and professional association activities that can potentially raise competition law concerns include: (i) board and association meetings, (ii) information exchanges (i.e., exchanges of competitively sensitive information, such as relating to fees, customers, costs, bidding/tendering, etc.), (iii) association rules and bylaws (e.g., mandatory or suggested fee guidelines, advertising restrictions, etc.) and (iv) advertising or marketing restrictions.
For more about Canadian competition law and associations and compliance tips for trade and professional associations see: here.
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