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The Application of Antitrust to Financial Services: Where Do the Boundaries Lie?

Author: Vassilena Karadakova, Associate, Cleary Gottlieb Steen & Hamilton LLP (London)

With all of this focus on digital markets and tech giants, you’d be forgiven for thinking that antitrust authorities around the world may have lost some of their interest in other sectors that previously made the headlines, including financial services.

But although there appeared to be a lull following the conclusion of the EU IBOR investigations, developments over the last year or so have squarely put financial services back on the antitrust enforcement radar. In the past months alone:

  • At the EU level, the European Commission (“EC”) announced settlements in FX and new investigations into bond trading, as well as publishing the report it had commissioned on syndicated lending;

  • Globally, the banking community has been shaken by Australia’s ongoing criminal cartel investigation into suspected collusion in relation to ANZ’s 2015 share placing.

The flip side to this increase in enforcement is that we are finally getting some more detailed guidance on where antitrust authorities will draw the line between acceptable and illegal conduct in financial markets – in particular when it comes to information exchange.

This blog post examines that guidance and seeks to do two things:

  • First, assess where the boundaries lie in light of recent precedent – including the General Court’s judgment in ICAP v Commission, the decisions in the EC’s Euro Interest Rate Derivatives and the FCA’s asset management investigations, and the EC-commissioned report on syndicated lending.

  • Second, consider what this means in practice and what we can expect going forward.

Where do the boundaries lie?

As always, there’s good news and there’s bad news.

The bad news, at least from a financial institution’s perspective, is that all of the recent precedents re-iterate that the threshold at which the disclosure or exchange of strategic information can constitute an object infringement is low:

  • In ICAP v Commission, the General Court confirmed that any exchange that is capable of removing uncertainty between competitors as to their future conduct on the market is caught – even if there is no direct link to consumer prices. Although the Court did not rule on whether such exchanges could constitute object infringements in their own right, it did note that the “mere communication” of future LIBOR submissions by one panel bank to another was capable of removing such uncertainty.

  • The EC took a similarly broad approach in its Euro Interest Rate Derivatives non-settlement decision, concluding that seemingly high-level comments on trading positions and strategies and discussions of public information that veered into joint evaluation of that information fell on the wrong side of the line.

  • In the UK, the authorities seem to have gone even further. In line with the OFT’s 2011 decision to fine RBS for disclosing competitively sensitive information to Barclays, the FCA has chosen to pursue a small number of bilateral information exchanges in its first full competition investigation. That may suggest it is willing to apply an even lower threshold to the types of conduct that it is prepared to investigate and sanction.

But the good news is that, to a greater or lesser extent, the relevant authority (or organisation) in each case engaged in a detailed analysis of the market context and the nature of information flows within it to determine whether a particular exchange was problematic:

  • FCA asset management decision. In order to determine whether information shared between asset managers bidding for shares was strategic, the FCA conducted a thorough examination of the book-building process through which share prices are set. The FCA acknowledged that this required certain information flows to operate effectively. However, the FCA noted that at no point does this process require the exchange of sensitive information between the potential investors themselves. According to the FCA, the investors are competing for the shares, and it is this very competition that allows the issuer to set the price at an appropriate level when the placing goes live. Since the value and volume of a bid are the key parameters on which investors compete, the disclosure of such information is capable of reducing competitive uncertainty. The FCA also clarified that the more granular the information and the closer the disclosure to the deadline for bidding, the more likely it would be considered strategic for these purposes. So either valuation or volume information disclosed on the final day of bidding would very likely be strategic. But price ranges which varied significantly and were disclosed well before the books closed were unlikely to be strategic – and in fact led the FCA to determine that it had no grounds for action in respect of one of the IPOs under investigation.

  • Final report on EU Loan Syndication. The EC-commissioned final report on EU Loan Syndication contains a similarly detailed analysis of the necessity of information flows at each stage of the syndicated lending process (as those who have read all 324 pages will know…). It will be a relief to many that the report concludes that the risks of inappropriate information exchange are relatively low given pre-existing safeguards, though it does make a number of recommendations to mitigate these risks still further (e.g., use of enforceable information exchange protocols).

  • EC Euro Interest Rate Derivatives non-settlement decision. Unfortunately for the parties, the EC disagreed with their market context-related arguments in this decision – but only on the basis of its own detailed examination of the market for the trading of the relevant derivatives. This analysis led the EC to conclude that, contrary to the parties’ assertions, the market was not transparent and the information exchange at issue was not necessary to maintain market liquidity.

Although this detailed market analysis should provide some comfort that the authorities will only pursue evidently unjustifiable exchanges, it is clear that if the relevant information is considered commercially sensitive, a company will find it very difficult to escape liability if it discloses or receives such information from a competitor. Once strategic information has been disclosed by one competitor to another, the recipient needs to take obvious and proactive steps to escape liability – simply staying silent and not altering one’s behaviour is not enough. This is apparent from both the EC’s and the FCA’s decisions – though it is difficult to imagine how this public distancing requirement would apply in practice on a busy trading floor, where traders are receiving vast quantities of information on multiple screens at the same time.

What does this mean in practice and where does that leave us?

In my view, there are three key takeaways:

  • First, the authorities seem to have acknowledged that as they push the boundaries of enforcement in this sector further, they need to take a more nuanced approach to analysing information exchange – one that understands and reflects the relevant market context. We should thank the FCA in particular for taking the time to provide us with a reasoned, no grounds for action decision – authorities spend a lot of time telling us what they view as problematic but very little time revealing details of conduct they choose not to pursue, even though this is just as important for promoting legal certainty. That being said, the result is that the decisions are all heavily fact-specific, so it will be important to analyse every exchange in its full market context.

  • Second, there seems to be a certain level of divergence when it comes to the types of information exchange the EC and the UK authorities are interested in pursuing. At least in the financial sector, the EC has to date seemed reluctant to pursue information exchanges on a standalone basis. The UK authorities have, on the other hand, been more willing to go after such exchanges, even if they are one-off – and their interest in doing so has been recently endorsed by the Court of Appeal in Balmoral Tanks v Competition and Markets Authority. There will be even more scope for divergence post Brexit.

  • Finally, despite the focus on tech and digital, competition interest in the financial sector shows no signs of slowing down. Against a backdrop of heightened competition awareness within financial institutions, more expansive regulatory reporting requirements, and increased confidence on the part of competition authorities in dealing with financial markets, this remains an area as relevant and interesting now as it was when LIBOR erupted nearly a decade ago. There will be a lot more activity in this space in future.

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