Coordination and information exchanges in financial markets. What comes first: The chicken or the egg?

By Pablo Solano, expert in Competition and European Union Law

Intervention by competition authorities in financial markets is a complex and delicate task, given that financial service providers act not only as competitors but also as counterparties, intermediaries, and cooperation partners. In this context, contacts and information-sharing are necessary to create efficiencies such as the reduction of capital and transaction costs, or innovation and risk management.

This might explain why enforcement actions in the European Union (EU) have traditionally been limited to clear-cut serious infringements, such as classic cartels. However, in recent years the European Commission and certain national competition authorities have become increasingly worried about the legality of some practices that take hair-splitting. This is particularly the case of coordination and exchanges of information.

European Commission

The Yen Interest Rate Derivatives decisions[1] relate to banks belonging to the Japanese Yen Libor and the Euroyen Tibor panels.[2] Certain panel banks were charged with seven separate single and continuous bilateral infringements consisting of attempts to align their submissions with their trading positions regarding Yen interest rate derivatives (YIRDs) denominated in the relevant benchmark rate. Exchanges of sensitive information concerning either their respective trading positions or future submissions were also found, as well as discussions about the possibility to bring their trading interests in line.

The seven bilateral agreements were deemed to constitute restrictions by object insofar as they would have affected YIRD price elements, thereby restricting competition between the banks involved, and distorting competition vis-à-vis other competitors by creating information asymmetries.

In this setting, Icap and RP Martin, which acted as brokers, were held liable as facilitators because they were considered to be aware of the anticompetitive practices carried out with the same objectives, or to be able to have reasonably foreseen it and prepared to take the risk.^[3] Given that they would have availed of their contacts in other panel banks and their credibility in the market to disseminate misleading predictions of the benchmark rates, their contribution was considered essential to extend the potential impact of the practices to panel banks that were not involved therein.

In the Euro Interest Rate Derivatives decisions,[4] traders of certain Euribor panel banks involved in the infringement were found to have engaged in the bilateral exchange of information about (i) their respective banks’ trading positions regarding Euro interest rate derivatives (EIRDs); (ii) their intended Euribor rate submissions; (iii) their expectations and preferences for unchanged, lower or higher future Euribor fixings for certain maturities depending on their trading positions; and (iv) other information about their banks’ trading or pricing strategy.

Additionally, an agreement was held to exist among traders to request from their banks Euribor submissions in line with each other’s preferences. They would have in certain cases explored the possibility of aligning their trading positions and commented on the outcome of their attempts after publication. The ensemble of practices was considered to form a single and continuous infringement since traders were deemed to be aware all along of both their ability to influence the Euribor and others’ adherence to the common objectives.

In both cases, the Commission appears to treat information exchanges as instrumental to broader pre‑existing coordination rather than ascertaining whether they could effectively constitute concerted practices in their own right.

The same approach was taken in the Swiss Franc Interest Rate Derivatives decisions,[5] in which information exchanges were assessed as an instrument furthering the objectives of a broader single and continuous infringement.[6] Similarly, in the 2019 Forex decisions, the disclosure of (i) outstanding customers’ orders; (ii) pricing of specific transactions; (iii) open risk positions; and (iv) other details of current or planned trading activities was seen as “following the tacit understanding reached by the participating traders” to manipulate the spot foreign exchange market.[7]

Nevertheless, information exchanges are still fundamental in delineating the scope of the overall conduct. Therefore, one could argue that a full-fledged analysis of whether information exchanges in themselves are capable of supporting the whole broader infringement is required. Contrariwise, the Commission took the view that it would be artificial to differentiate individual occurrences of a few days’ duration, given that the benchmark rate setting is a daily process.

This seems to be the rationale behind the Court of Justice of the European Union’s partially annulling the Yen Interest Rate Derivatives non-settlement decision. It rejected Icap’s facilitation of those bilateral agreements in which it was found to have participated for periods where there was no evidence of regular intervention at very frequent intervals.[8] The General Court did not specifically ruled on whether it would have been possible for the mere exchange of information to support the infringement finding on the merits but accepted such theoretical possibility.[9]

British authorities

Competition authorities in the United Kingdom (UK) have shown more willingness to characterise information exchanges as restrictions by object in themselves without need to identify an overarching agreement but relying on the presumption of causal connection to subsequent conduct. The former Office of Fair Trading in its 2012 RBS/Barclays decision considered sufficient in this respect the disclosure by the Royal Bank of Scotland of (i) information regarding general future pricing of certain loan products; and (ii) the specific prices to be applied to certain customers. The scope of the conduct encompassed both types of disclosures as even general pricing information was considered to indicate less downward pressure on Barclays than otherwise expected.[10]

In 2019, the Financial Conduct Authority (FCA) took a similar stance in relation to the bilateral information exchanges that occurred between three bidders in two equity transactions. More specifically, on the day that the books were due to close in a particular placing, one of the asset managers disclosed to two competing bidders that it would submit a “chunky” order at a certain price per share, although both recipients ended up submitting a different bid.

Then, on the day that the books were closing in an initial public offering (IPO), the same asset manager sent out an email with its valuation of the issuer and the amount of the order that it said that it had placed that day. Out of the twelve bidders receiving the email, only the two asset managers participating in the first disclosure did not publicly reject the information and, in fact, placed orders at the disclosed level. The other recipients distanced themselves publicly from the email, and even withdrew from the IPO.

The FCA found that both practices fulfilled the traditional four-fold test for information exchanges to amount to restrictions by object: (i) mental consensus – at least consisting of the unilateral disclosure of strategic information not followed by public distancing by the recipient; (ii) between actual or potential competitors; (iii) followed by subsequent market conduct; (iv) causally connected to the exchange – which is presumed in the absence of concrete and objective evidence to the contrary.[11]

In this light, the strategic nature of the information relating to prices and volumes, the timing of the contacts upon books’ closing, and the bidding character of the market were viewed as allowing unilateral one-off disclosures to be apt to eliminate or significantly reduce uncertainty. Additionally, the parties’ participation in the issues following the contacts was presumed to amount to subsequent market conduct causally linked to the exchanges. This presumption failed to be refuted by the arguments put forward by the recipients that they had differing commercial interests and eventually placed different bids from the disclosed level.

Nevertheless, the exchanges taking place in the context of a second IPO were examined and discounted because contacts between two asset managers in relation to one of them pushing the share price down to a specific range were not considered to constitute the disclosure of strategic information. The reasons were the absence of specific prices and the fact that contacts happened between three and two weeks before the books closed. Hence, the FCA appears to compensate for its heavy reliance on presumptions by being stricter on the timing and specificity of information to be considered strategically valuable, although the limit is not clearly defined.

Spanish and Portuguese authorities

The Spanish National Markets and Competition Commission (CNMC) opted for a more cautious approach regarding syndicated loans and hedging financial derivatives.[12] While not criticising syndication itself as reducing competitive pressure among potential competitors in lending, the CNMC set the bar for coordination and information exchanges among syndicate banks on the competitive outcome of the process to establish the price and other conditions.

Therefore, any discussions among syndicated banks would be acceptable if they eventually lead to the terms offered to the borrower reflecting market levels. The CNMC proposed transparency vis-à-vis the borrower as the manner in which the competitive setting of commercial terms is ensured. However, it fined the investigated banks on the merits because it found what in its view was evidence of the conditions offered to the borrower in the specific case departing from market levels.

Finally, the Portuguese Competition Authority has gone further by accepting commitments in 2017 regarding the information disclosure system implemented by the Portuguese Association of Leasing, Factoring and Renting Companies.[13] The information exchanged on a reciprocal basis consisted of individualised monthly and quarterly data from its associates on volumes, number of contracts, or interests and commissions. The commitments included not disclosing information dating back to less than six months, and granting access to associates not contributing data and non-associated companies.

Some say chicken, some say egg

Over the last years, some competition authorities have tended to intervene in financial markets beyond traditional infringements squarely caught under the restriction-by-object box. Consequently, the risk of impairing the functioning of a complex sector that enforcers are not always familiar with has risen. In the specific area of collusion, differing solutions have been devised by EU and national watchdogs depending on their appetite to take the chances of chilling those information flows that may give rise to efficiencies.

For that matter, the Commission’s approach still focuses on the existence of an understanding among competitors participating in the conduct to which the information exchange would be instrumental – albeit necessary to define the scope of the infringement. This would arguably relax the standard for information exchanges to constitute concerted practices – which might have already resulted in at least one judicial setback in the Icap case. In contrast, UK authorities rely on presumptions to find information exchanges to amount to concerted practices in themselves but adopt a stricter view on whether the information effectively has strategic value.

Finally, the Spanish and Portuguese authorities have opted for a more nuanced approach respectively by placing the emphasis on the competitive outcome of the joint setting of conditions by competitors, and by accepting commitments in order to preserve potentially efficient information sharing systems.

Pablo Solano is an associate at the Competition and European Union Law department at Uría Menéndez.  His practice focuses on EU and Spanish competition law and EU law. He works on a wide variety of national and international cases before the Spanish and EU authorities in relation to abuse of dominance, agreements and strategic alliances, mergers, and state aid, on implementing compliance programmes, and on assignments regarding EU fundamental freedoms, market unity and proceedings for unfair competition infringements affecting the public interest.

Note: The views expressed by the author of this paper are completely personal and do not represent the position of any affiliated institution.

[1]  See case AT.39861 Yen Interest Rate Derivatives (YIRD) (settlement) [2013], and case AT.39861 Yen Interest Rate Derivatives (YIRD) (non-settlement) [2015].
[2]  Panels are composed of banks submitting estimates of interbank loan interest rates for calculation of specific benchmark interest rates.
[3]  See case C-194/14 P AC-Treuhand v Commission [2015], point 46.
[4]  See case AT.39914 Euro Interest Rate Derivatives (settlement) [2013], and case AT.39914 Euro Interest Rate Derivatives (non-settlement) [2016].
[5]  See case AT.39924 Swiss Franc Interest Rate Derivatives (CHF Libor) [2014], and case AT.39924 Swiss Franc Interest Rate Derivatives (Bid Ask Spread Infringement) [2014].
[6]  See case AT.39924 Swiss Franc Interest Rate Derivatives (CHF Libor) [2014], point 36.
[7]  See case AT.40135 Forex [2019].
[8]  See case T-180/15 Icap and others v Commission [2017], and case C-39/18 P Commission v Icap and others [2019].
[9]  See case T-180/15 Icap and others v Commission [2017], points 73-75.
[10]  See case CE/8950/08 Loans to large professional services firms [2011], points 322-323.
[11]  See, among others, case C-286/13 P Dole Food v Commission [2015], point 134, case C-8/08 T-Mobile and others [2009], point 43, 53 and 59, and joined cases T-25, 26, 30-32, 34-39, 42-46, 48, 50-65, 68-71, 87, 88, 103 and 104/95 Cimenteries and others v Commission [2000], point 1849.
[12]  See case S/DC/0579/16 Financial Derivatives [2018].
[13]  See case PRC/2015/8 Association of Leasing, Factoring and Renting Companies and its associates [2017].