On 9 April 2019, the European Commission published the full text of its decision to fine Crédit Agricole, HSBC and JPMorgan Chase for participating in a cartel in the euro interest rate derivatives ("EIRD") sector.
While four of the seven participating banks settled the case with the Commission in December 2013, these three banks did not settle and, following a full investigative procedure, the Commission eventually imposed fines totalling €485 million on the non-settling banks in December 2016. After lengthy proceedings in the European courts over publication of the non-confidential version of the Commission's decision, the Court of Justice finally determined in March 2019 that the Commission could proceed with publication.
Although the Commission has now published a number of decisions relating to infringements in the financial services sector, this decision provides further useful insight into the Commission's approach to coordination of behaviour and exchange of information in the context of trading in derivatives and, by extension, other financial products. It also serves as a reminder that infringing conduct by a small number of employees for a short period of time can have significant financial consequences; regular and targeted compliance training and monitoring which specifically addresses the risks that can arise in a trading context may help to reduce the likelihood of these risks materialising.
The Commission found that between September 2005 and May 2008, traders at the banks shared their desired or intended EURIBOR submissions in order to distort the benchmark rates. The traders also exchanged sensitive information on their trading positions and pricing strategies.
The Commission found that the reason for the coordination was to manipulate the pricing of EIRD contracts, which derived their value in part from the EURIBOR rate (and from EONIA, an overnight benchmark rate). Although the binding elements of the decision (i.e. the articles) stop short of stating that the banks' conduct had the effect of distorting components of pricing in the EIRD sector, the Commission's commentary (i.e. the recitals) indicates that the banks were able to influence the levels at which benchmark rates were set, and were able to financially benefit by adjusting their trading positions to increase their profit or reduce their risk to the detriment of third parties.
The Infringing Conduct
Traders working at the seven banks were found to be in regular contact with each another via instant messaging services and chat rooms. The Commission identified seven different collusive practices by traders which, individually and collectively, it considered to constitute an infringement of Article 101(1) TFEU. These practices were:
- Communicating and receiving information on preferences for certain fixings of particular EURIBOR tenors;
- Communicating information on trading positions which was not publicly known;
- Exploring possibilities to align EIRD trading positions;
- Exploring possibilities to align at least one bank's future EURIBOR submission based on information received from other traders;
- Approaching their bank's EURIBOR submitters to request a submission toward a certain direction or at a specific level;
- Promising to report back to other traders before the daily EURIBOR had been submitted, or after they had discussed the submissions with their banks' submitter; and
- Communicating and receiving information on pricing strategies regarding EIRD.
In addition, the Commission found that certain traders had discussed the outcome of the EURIBOR rate setting, including specific banks' submissions, after the EURIBOR rates had been set and published, as a way of "monitoring" the cartel behaviour.
Restriction of Competition and the Commission's Views on Counter-Arguments
The Commission determined that the collusive behaviour it had identified had the object of restricting and/or distorting competition with regard to pricing components and other trading conditions of EIRDs. In reaching this conclusion, the Commission relied on a number of well-established principles and presumptions, i.e.:
- That price-fixing agreements have as their object the restriction of competition, such that it is unnecessary for the Commission to demonstrate that the agreements have the effect of restricting competition;
- That exchanges of information between competitors in respect of pricing matters can only be explained by the desire to replace the risks of pricing competition with practical cooperation; and
- That undertakings taking part in a concerted action and remaining active on the market take account of the information exchanged in determining their conduct on that market.
The Commission found that in respect of the pre-pricing communications described above, the banks had the objective of reducing the cash flows that they would have to pay or increasing the cash flows that they would receive, which would increase the value of EIRDs that they held in their respective portfolios.
In reaching its conclusion that the conduct had the object of restricting/distorting competition, the Commission set out its position in response to a number of points raised by the non-settling banks. In particular:
Benchmark rates as a component of pricing for EIRDs. As the decision explains, the trading price of EIRDs derives from the estimated value of the sum of future cash flows expected from the contracts, and the cash flows are determined by reference to future levels of EURIBOR or EONIA. The Commission therefore determined that the benchmark rates are a pricing component for EIRDs. In variable rate EIRD contracts, EURIBOR is used to calculate the cash flows to be exchanged; in fixed rate contracts, EURIBOR indirectly influences the price of the contract by virtue of their pricing in relation to expected future interest rates. The fixing of these rates therefore constituted the fixing of a pricing component of EIRDs. This affected competitor counterparties who were not involved in the cartel and distorted competition in the market.
Characterisation of rate-setting. The non-settling banks argued that rate-setting was a cooperative endeavour and not a competitive one. The Commission dismissed this argument on the basis that the collusive arrangements concerned pricing components of EIRDs such as EURIBOR, and that market players in the EIRD market compete for positive cash flows and not for EURIBOR submissions.
Timing and nature of competition. The Commission noted that competition in the EIRD market is continuous over time, and is not limited only to the bid/ask spread. It highlighted the fact that traders can enter into a new trade to sell the whole or part of an obligation under an EIRD at any time, and that traders are constantly engaging in competition for cash flows from EIRD contracts which are determined by the level of the relevant benchmark rate.
Individual influence on benchmark rates. The Commission was of the view that individual banks were capable of moving the rate unilaterally, and described how a bank could move the rate by changing its submissions by a few basis points while ensuring that the submission remained within the range of accepted submissions. This possibility had been documented in academic studies of the EURIBOR process. The decision also quotes traders who indicated in their communications that they could move the benchmark rates and refers to evidence that traders successfully profited from the manipulation.
Exchange of information. In the course of fixing prices, traders exchanged various types of information, including information relating to future conduct and the pricing of EIRD contracts. Applying the presumption that information exchange relating to pricing has as its object the restriction of competition, the Commission found that the exchange of information concerning preferences for future rate settings and trading positions allowed the banks to align their commercial interests before conducting other concerted actions to influence the value of the EIRDs to the detriment of competitors. It considered that the informational asymmetries brought about by the receipt of information allowed the banks to better know in advance the likely level of EURIBOR and also whether or not the rate on a particular day was at an artificial level. This gave the banks an advantage over third parties.
Publicity of information and legitimacy of exchange. The Commission concluded that accurate information on individual banks' pricing was not widely available in the market. As the majority of transactions involving EIRDs were "over the counter", third parties had little visibility over prices and volumes at which competitors concluded transactions in the market, which meant that traders could profit from transactions with other market participants who did not have the benefit of the same knowledge when pricing their EIRDs, and they therefore had no incentive to give accurate information on prices to those other market participants. The Commission also found that the information that had been exchanged was not needed to offset risk or hedge trades.
The decision is a reminder of the force of the presumptions upon which the Commission can rely in concluding that conduct amounts to an infringement of Article 101 TFEU. It was not necessary for the Commission to show that the non-settling banks' conduct had the effect of reducing competition; it was sufficient to demonstrate that the object of the conduct was to fix prices. Many of the non-settling banks' arguments that the Commission had not demonstrated the effects of the conduct on competition in the market were rebutted on the basis that the Commission did not need to establish this.
The decision is also a tangible reminder of the potential costs of even a small number of employees engaging in anti-competitive behaviour. JPMorgan Chase incurred a fine of €337 million as a result of one individual's participation in the collusive behaviour over a six month period, while HSBC incurred a fine of over €33 million in respect of conduct over a six week period.
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020