Breakfast Seminar Competition Law and the Financial Services Sector

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1 Breakfast Seminar Competition Law and the Financial Services Sector 28 June 2017 Presented by Grant Saggers of NERA and Robin Henry and Stephen Critchley of Collyer Bristow

2 Competition law basics The two prohibitions 1) The prohibition of anticompetitive agreements Chapter 1 of the Competition Act 1998 Article 101 of the Treaty on the Functioning of the EU 2) The prohibition of abuse of dominance Chapter 2 of the Competition Act 1998 Article 102 of the Treaty on the Functioning of the EU The regulators The European Commission The UK Competition & Markets Authority Sectorial regulators Financial Conduct Authority

3 Competition Enforcement in Financial Services Grant Saggers Vice President, Competition London 28 June 2017

FS is under close scrutiny Finding and punishing large cartels Activity on

Exemption Regulation Competition powers and strategic objective Use it or lose

4 FS is under close scrutiny Finding and punishing large cartels Activity on Interchange Fees Mergers / State aid (in wake of GFC) / Insurance Block Exemption Regulation Competition powers and strategic objective Use it or lose it Well-resourced, active team (linked also to PSR / CMA) Principle 11 and FSMA Managing other priorities e.g. financial system stability Presented by XXXXXXXXXXX Close working between EC and FCA, especially post-brexit or additional information

5 Early focus on Market Understand the supplyand demand-side of markets Studies Retiremen t income Retail business models Credit cards Behavioural economics e.g. in remedy design Huge datasets and information requests Identify areas for enforcement action Asset managers Investmen t and corporate banking General insurance add-ons Proposed: investment platforms; wholesale insurance Market Studies Big data in general insurance: call for inputs Mortgage s Cash savings SME banking (joint with CMA)

6 Shifting fast into enforcement Anti-competitive information exchange e.g. between counter-parties On notice letters Exploitative prices for vulnerable customers e.g. high exit fees Unfair cross-subsidies and price discrimination between customer groups Pipeline of non-public cases Comp Act Advisory letters Risks arising from Big data and Algorithmic pricing Aviation Insurance brokering inquiry

7 Grant Saggers Vice President NERA ECONOMIC CONSULTING Marble Arch House 66 Seymour Street London W1H 5BT, UK Tel: +44 (0) Mobile: +44 (0) Copyright 2017 NERA Economic Consulting All rights reserved. This report is for information only. It is not intended for general circulation or publication, nor is it to be reproduced, quoted or distributed for any purpose without the prior written permission of NERA Economic Consulting. There are no third party beneficiaries with respect to this report, and NERA Economic Consulting does not accept any liability to any third party.

8 Competition law seminar benchmark manipulation 28 June 2017 Presented by Robin Henry, Partner

9 Benchmark manipulation Allegations against banks relating to the manipulation of financial benchmarks LIBOR/EURIBOR FX ISDA Fix Precious metals Regulatory actions US civil claims

10 LIBOR/EURIBOR LIBOR = London Interbank Offered Rate World s most important benchmark sets borrowing rate for unsecured short-term loans between banks in the interbank market Widely used as a reference rate for financial instruments and loan products totalling hundreds of trillion of dollars 5 different currencies and 7 different maturities Other similar benchmarks e.g. EURIBOR = Eurozone Interbank Offered Rate

11 LIBOR/EURIBOR allegations Prior to 2014, 16 panel banks submitted daily to BBA the interest rate they expected to be able to raise a substantial loan in the interbank money market Top 25% and bottom 25% of submissions were disregarded Remaining rates were averaged Banks manipulated rates to benefit cash and derivative trading positions Traders used electronic chat rooms to communicate Altered submissions downwards to protect their reputation - lower rates showed the bank as more solvent

12 LIBOR/EURIBOR regulatory actions Examples include: 4 December 2013: EU Commission Barclays, Citigroup, Deutsche, JPMorgan, RBS fined 1.49bn 28 July 2014: FCA Lloyds and BOS fined 35m 23 April 2015: FCA Deutsche fined 227m 23 April 2015: NYSDFS Deutsche fined $600m 23 April 2015: CFTC Deutsche fined $800m

13 LIBOR/EURIBOR US civil actions 2013: Antitrust claims struck out by NY court LIBOR setting not a competitive process, so injury resulted from misrepresentation not harm to competition 2016: Appeal Court restored anti-trust claims claimants had shown anti-trust injury by alleging that they paid artificially higher prices 2017: Supreme Court dismissed banks appeal Settlements Barclays, UBS and HSBC settled for $35m The case continues - Bank of America v Gelboim No. 1:12- CV (SDNY)

14 FX rates $5.3 trillion a day market 40% of the market in the UK Most important fix was the London or WM/Reuters Fix based on actual currency deals 30 seconds before and 30 seconds after 16:00 London time Also other fixes e.g. ECB 1:15 pm fix

15 FX allegations Traders exchanged confidential customer information in chat rooms (The Cartel, The Bandits Club, The Mafia) and co-ordinated their trading to manipulate FX rates Banging the close: traders colluded with counterparts and pushed through large trades before and during the 60-second window when the benchmark was set Front running: using inside information of client transactions by trading ahead of client orders to make a profit for the bank Conspiracy between banks to fix prices by agreeing wider bid/ask spread prices on FX spot trades

16 FX regulatory actions 12 November 2014: FCA fined Citigroup, HSBC, JPMorgan, RBS, UBS 1.1bn 12 November 2014: CFTC fined Citigroup, HSBC, JPM, RBS, UBS $1.4bn 20 May 2015: FCA fined Barclays 284m 20 May 2015: US Federal Reserve fined UBS, Barclays, Citigroup, JPMorgan, RBS and BoA $1.8bn 20 May 2015: US DOJ fined Citigroup, JPMorgan, Barclays and RBS $2.5bn

17 FX regulatory actions Findings of collusion between the banks: The CFTC found that currency traders at five banks coordinated their trading to manipulate the FX benchmarks, including the 4 pm WM/Reuters rate Traders used chatrooms to communicate and plan their attempts to manipulate FX rates. They disclosed confidential customer order information and trading positions, changed trading positions to benefit their own interests and agreed on trading strategies

18 FX US civil actions 2013: Claim alleged that banks had conspired to manipulate the WM/Reuters Closing Spot Rates Defendants incuded Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche, Goldman Sachs, HSBC, Morgan Stanley, RBS and UBS Some have settled JP Morgan, HSBC, Barclays, BNP Paribas and Goldman Sachs for $2bn Case continues against non-settling banks - In re Foreign Exchange Benchmark Rates Antitrust Litigation, Case No. 1:13-cv (SDNY) Three UK traders with JPMorgan, Citigroup and Barclays are due to stand trial in NY in 2017 for conspiracy to rig FX markets.

19 ISDA Fix What is it? Global benchmark for interest rate products established by the International Swaps and Derivatives Association (ISDA) Sets daily market rate for fixed leg of standard fixed for floating interest rate swaps in various currencies Also used to calculate prices for corporate bonds, options on swaps and to value asset portfolios, including pensions, as well as the break costs for early termination of swap agreements. The rate influences all ISDA derivatives contracts Calculated by averaging daily panel bank submissions to Thomson Reuters or to the electronic broker ICAP of the rate at which they would buy a certain swap

20 ISDA Fix Allegations: Distorted bank s submissions Bid/offered interest rate swap spread transactions in a way designed to influence the published ISDA Fix to benefit the bank As an example, manipulation of the ISDA Fix rate upwards may have increased early termination costs on swap agreements to the benefit of the banks Possibly manipulated ISDA Fix by executing a large number of transactions before the submission deadline Asking ICAP to delay the publication of some rates in order to profit from the existing rate.

21 ISDA Fix regulatory actions 20 May 2015: CFTC fined Barclays $115m 21 December 2016: CFTC fined Goldman Sachs $120m 3 February 2017: CFTC fined RBS $85m No regulatory findings in the UK or EU and no findings of collusion

22 ISDA Fix US civil actions Claim by purchasers of interest rate derivatives whose value was tied to ISDA Fix rate. 2016: Dealers who sold the interest rate derivatives attempted unsuccessfully to have the case dismissed held to be anti-competitive behaviour. Claimants have since settled with Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche, JP Morgan, RBS and Goldman Sachs for $380m. The case continues against other Defendants - Alaska Electrical Pension Fund v Bank of America No. 1:14-CV (SDNY)

23 Claims for damages for anticompetitive behaviour 28 June 2017 Presented by Stephen Critchley Head of Competition Law

24 Overview of the Damages Regime Standalone v follow-on Standalone: MasterCard s and Visa s Interchange fees Credit Default Swaps (aborted) Consumer Rights Act 2015 Collective Actions In the Competition Appeal Tribunal (the CAT ) but not the High Court CAT jurisdiction to hear standalone claims Limitation CAT rules harmonised with those of the High Court

25 Potential claims Aviation insurance? Interest rate benchmarks? LIBOR and EURIBOR ISDAfix Foreign Exchange?

26 Questions? Grant Saggers Robin Henry Stephen Critchley collyerbristow.com nera.com

The updated claim filing deadline is May 16, Mailing of Claim Assessment Notifications will commence on May 31, 2018.

The updated claim filing deadline is May 16, Mailing of Claim Assessment Notifications will commence on May 31, 2018. Must be Postmarked or Electronically Submitted No Later Than May 16, 2018 In re Foreign Exchange Benchmark Rates Antitrust Litigation c/o GCG P.O. Box 10239 Dublin, OH 43017-5739 1-888-582-2289 (if you