By Jeffrey I. Shinder

The steady stream of cartel investigations and lawsuits on both sides of the Atlantic in recent months highlights the need for vigilant antitrust enforcement to protect consumer welfare, despite the views of those, like the Wall Street Journal editorial page, who question the wisdom of antitrust law.

These alleged cartels range from the apparently venal manipulations of the financial services industry, where pure greed and opaque markets have resulted in the Libor, Euribor, and foreign exchange market investigations, to claimed conspiracies of expedience in stagnant or depressed industries, where the protagonists are alleged to have colluded to manage supply and “maintain” price in the face of weak demand.  Given the slow growth that has plagued the industrialized world in recent years, we almost certainly will be hearing about more such cartels.  Rigorous antitrust enforcement is often the only check against consumers suffering massive overcharges in numerous, even critical, industries.

At the end of last week, European Union (“EU”) regulators disclosed yet another significant investigation with their announcement of an inquiry into whether 14 of the world’s major container shipping companies—including the two leading firms of Danish shipping group A.P. Moller-Maersk A/S and Swiss-based MSC Mediterranean Shipping Company S.A.—have been coordinating price hikes on European routes dating back to 2009.

This new investigation follows raids on some of these companies two years ago by the European Commission (the “Commission”).  According to the Commission, major shipping companies have been using press releases on their websites to signal impending price increases to each other.  While such signaling, standing alone, would be insufficient to support an antitrust violation in the United States, it could be found to violate EU law if it has resulted in higher prices and harm to competition.  However, the targets of the investigation undoubtedly will argue that their price increases were necessitated by competition in the industry and that their conduct reflected individual, and lawful, conduct that did not harm competition.

Notably, this investigation is taking place against the backdrop of separate U.S. and EU regulatory scrutiny of the planned “P3” vessel-sharing alliance among Maersk, MSC and France’s CMA CGM S.A.  The alliance would purportedly address persistent overcapacity and declining freight rates through an agreement to share ships and engage in related cooperative operating activities, under a common management, while retaining individual commercial status and control of consignments.

Last month, the three shipping companies filed their proposed agreement with the U.S. Federal Maritime Commission (“FMC”) under the U.S. Shipping Act of 1984.  The FMC is taking public comments on the agreements until November 29, 2013.  If the FMC declines to enjoin the alliance or require additional information, the agreement will become effective on December 8, 2013.  While that would confer antitrust immunity under U.S. law on the alliance, in this instance such immunity is not available under EU competition law.

Although EU law does exempt certain agreements among shipping companies from Article 101(1) of the Treaty on the Functioning of the European Union, the proposed alliance does not meet the requirements of that exemption.  Thus, even if the alliance survives FMC scrutiny, which is not a given, it may receive a rougher ride in the EU.

Moreover, while the Commission claims that its price-signaling investigation is separate from its ongoing review of the P3 alliance, the cartel investigation could conceivably influence the Commission’s willingness to approve the alliance.  It would not be surprising if the price-signaling investigation causes the Commission to impose additional restrictions on the alliance, even if it is approved.

Given the significance of the shipping industry to the global economy, the progress of these regulatory efforts in Brussels is well worth watching.

— Edited by Gary J. Malone

On 24 July 2013, the European Commission adopted a package of proposed legislative measures to improve the current payment services framework. Alongside a new Payment Services Directive (PSD), the package includes a proposal for a Regulation on interchange fees.

Interchange fees are fees paid by a merchant’s bank (the acquiring bank) to the cardholder’s bank (the issuing bank) for card-based payment transactions. Even though the fees can be agreed bilaterally between individual banks, it is common that they are collectively set by the banks through a payment card scheme or organisation. These are the so-called Multilateral Interchange Fees (“MIFs”). Interchange fees paid to the issuing bank are recouped by the acquiring bank from the merchant as part of the fee they charge for processing their card payment transactions.

Background

Over the last 15 years, the European Commission and many national competition authorities have investigated the card payments market and found that the level of MIFs set by card schemes, in combination with certain of their business rules, restrict competition between acquiring banks and hinder market entry and market integration in the European Union. Moreover, MIFs ultimately lead to higher retail prices for all consumers (including those who do not pay with a card), who tend to be unaware of the fees paid by the merchants for accepting payment cards and are, at the same time, incentivised through reward programs to use the cards generating the highest fees for issuing banks.

These adverse effects were confirmed by the public consultation following the Commission’s 2012 Green Paper “Towards an integrated European market for cards, internet and mobile payments”, after which both the Commission and the European Parliament agreed on the need to tackle these problems through ex ante regulation. Once adopted, the Regulation will be directly applicable across the EU.

The Commission’s proposal

The proposed Regulation will apply to interchange fees associated with payment card transactions carried out within the EU when both the payer’s and the payee’s payment service providers are established in the EU. However, it will not apply to cards that can be used only within a limited network.

Interchange fees

The Chapter on Interchange Fees does not apply to transactions with commercial cards (payment cards that are limited in use for business expenses of employees or self-employed natural persons), cash withdrawals at automated teller machines and transactions with cards issued by three party payment card schemes, such as American Express or Diners, unless they license the issuance or acquiring of payment cards to third payment service providers.

The Regulation introduces maximum levels of interchange fees for transactions based on consumer cards. Caps are set at 0.2% of the value of the transaction for debit cards and 0.3% for credit cards. These levels are based on the “Merchant Indifference Test” (i.e., an estimate of the fee level at which a merchant would be indifferent between being paid by card or in cash) and have already been accepted by competition authorities for a number of transactions with cards branded MasterCard, Visa or Cartes Bancaires.

Initially, the caps will only apply to cross-border transactions (i.e., where the acquiring and the issuing banks are established in different Member States). After a transitional period of two years, the caps will also apply to domestic transactions. The cap levels will be revised four years after the Regulation enters into force.

Business rules

The Chapter in the Regulation on business rules will apply to all categories of card-based payment transactions (including those carried out with commercial cards and three party scheme cards). The proposed measures introduce limits on certain business rules.

• Licensing: card schemes licensing to issuing or acquiring entities should not restrict licences to a specific territory but licences should cover the entire European Union.
• Separation of payment card scheme and processing entities: card scheme and processing entities should be independent in terms of legal form, organisation and decision making. Discrimination in processing rules is prohibited and processing entities’ systems must be technically interoperable.
• Co-badging and choice of application: the issuer of the payment card cannot be prevented from co-badging different brands in the same payment instrument but this decision must not be discriminatory and any difference in treatment must be objectively justified. The consumer will remain free choose the payment application, which must not be pre-selected by the issuer through automatic mechanisms.
• Unblending: acquiring banks must not impose a single price but charge merchants individually for the different categories and brands of payment cards.
• Honour All Cards Rule: a merchant cannot be obliged to accept all cards of the same brand or category unless it is subject to the same regulated interchange fees.
• Steering rules: merchants may not be prevented from informing consumers about the cost of a particular payment method or from steering them towards the use of specific payment instruments. This is without prejudice to the rules on surcharges under the PSD according to which merchants must not charge fees for the use of a given means of payment that exceed the cost associated with the use of such means.

Enforcement

Finally, the proposed Regulation mandates Member States to designate competent authorities responsible for its application to establish rules on sanctions for breaches and their notification to the Commission, as well as out-of-court complaint and redress procedures.

Next steps

The two proposals (the Regulation and the Directive) will have to be adopted by the European Parliament and the Council under the ordinary legislative procedure. The proposals have been referred to the Economic and Monetary Affairs Parliamentary Committee for examination of its substance. On 10 September 2013 the Committee’s Vice-Chair, MP Pablo Zalba Bidegain (European People’s Party Group) was appointed rapporteur for the MIF Regulation, and MPs Bas Eickhout (Greens/European Free Alliance Group) and Ashley Fox (European Conservatives and Reformists Group) were appointed shadow rapporteurs. The Parliament’s first reading under this procedure has no time-limit, so it is unclear when the proposed regulation will be adopted. However, according to the Parliament’s forecasts, on 20 February 2014 the report on the proposal will be voted in the Committee and the indicative plenary sitting date is 2 April 2014. The European Commission currently expects that key political agreement will be reached before the European Parliament elections due in May 2014.

A two-year European Commission investigation has preliminarily concluded that some of the world’s largest investment banks -in addition to two bodies that they control:  Markit and the International Swaps and Derivatives Associations (ISDA) -have infringed EU antitrust rules by colluding to prevent exchanges from entering the credit derivatives market between 2006 and 2009. As a result, rival firms were unable to set up competitive clearing trading platforms and the banks under investigation were able to maintain their position as intermediaries for CDS transactions. The banks involved are Bank of America, Merrill Lynch, Barclays, Bear Stearns (now part of JP Morgan), BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, UBS and the Royal Bank of Scotland. The CDS investigation is one of several by the European Commission into the financial industry (e.g., the investigation into U.K. (Libor) and European (Euribor) benchmark interest rate manipulation). The EU investigation follows a similar probe by the U.S Justice Department into potentially anticompetitive practices in the CDS market.

CDS market: background

A credit default swap (CDS) is a derivative contract designed to transfer the credit risk (i.e., the risk of default) linked to a debt obligation referenced in a contract. CDS are by far the most important type of credit derivatives. In 2013, there were almost 2 million active CDS contracts world-wide exceeding €10 trillion in gross nominal amount [Source: Depository Trust & Clearing Corporation]. In the period under investigation (2006-2009), CDS were privately and bilaterally negotiated between banks (over-the-counter or “OTC”) rather than on an exchange. In OTC transactions, investment banks act as intermediaries matching supply and demand in the market for credit derivatives thereby rendering the banks indispensable for CDS trading. By contrast, exchange trading automatically matches supply and demand on an exchange’s trading platform and constitutes, according to the  European Commission, a safer, less costly way of dealing.

Antitrust investigation by the European Commission

On 29 April 2011, the European Commission announced that it had opened two separate investigations into suspected breaches of Article 101 and/or Article 102 of the Treaty on the Functioning of the European Union (TFEU) in the CDS market.

The first investigation concerns the CDS information market, focusing on 16 banks active on the CDS market which supply their transaction data (pricing and indices) exclusively to Markit, the leading financial information provider in the CDS market, owned  in part by the same banks. The European Commission is investigating allegations that other information providers were excluded from this market either because of collusion between the banks (contrary to Article 101 TFEU) or as the result of abuse of a position of collective dominance (contrary to Article 102).

The second investigation concerns the CDS clearing market. The investigation focuses on a series of agreements between nine of the same banks and ICE Clear Europe (ICE), a clearing house. A number of clauses were included in the agreements (profit-sharing agreements) which arguably had the effect of incentivizing banks to use ICE exclusively as a clearing house. As a result, other clearing houses may have had difficulties entering the market and other CDS players may have been deprived of a real choice as to their transaction clearing options.

During its investigation of the CDS information market, the Commission found preliminary indications that the International Swaps and Derivatives Association (ISDA), a professional organisation involved in the trading of OTC derivatives, may have colluded with investment banks to delay or prevent exchanges from entering the credit derivatives market. Consequently, on 26 March 2013, the Commission announced that it had extended its investigation of the CDS information market to include ISDA. On 1 July 2013, the European Commission sent a statement of objections to 13 investment banks, as well as to ISDA and Markit, alleging that they had colluded to prevent exchanges from entering the credit derivatives market between 2006 and 2009, in breach of Article 101 TFEU. According to the Commission’s preliminary view, the banks colluded in this way due to fears that exchange trading would reduce their revenues from acting as intermediaries in the OTC market.

The European Commission reached the preliminary conclusion that the companies under investigation may have coordinated their behaviour in order jointly to prevent exchanges from entering the CDS market between 2006 and 2009. German Exchange Deutsche Boerse and U.S. commodities exchange the Chicago Mercantile Exchange attempted unsuccessfully  to enter the market and launch central clearing and exchange trading of CDS, for which there was a widespread demand among investors. In order to launch exchange-traded credit derivatives, the exchanges needed licences for data and index benchmarks, which ISDA and Markit refused to provide. The two companies were unable to obtain CDS exchange-trading licences from Markit and ISDA, which were allegedly acting on instructions from investment banks. As a consequence, Deutsche Boerse and the Chicago Mercantile Exchange were unable to enter the market.

The separate investigation introduced by the European Commission into the CDS clearing market is still active.

What’s next ?

A statement of objections is a formal step in Commission investigations into suspected violations of EU antitrust rules. It does not prejudge the outcome of the investigation. If, after the parties have exercised their rights of defence, the Commission concludes that there has been an infringement of competition rules, it can issue a decision prohibiting the conduct and impose a fine of up to 10% of a firm’s annual worldwide turnover. Rumours from Brussels suggest that settlement negotiations between the banks and the Commission are currently underway. In a typical settlement case, the parties under investigation decide, having seen the evidence in the Commission’s file, agree to acknowledge their involvement in the cartel and their liability for it. In exchange, the Commission reduces the fine that it would otherwise have imposed by 10 per cent. In total, seven cartels have been settled pursuant to the settlement procedure since the introduction of a settlement option by the Commission in 2008.

At the end of September, London interdealer broker ICAP agreed to pay £55 million in settlement of allegations of wrongdoing to UK and US regulators.  The investigations alleged that ICAP traders had participated in Libor rate fixing.  ICAP is the fourth financial institution to enter into a financial settlement with regulators in the UK and the US.  Previous global Libor settlement figures agreed by Barclays, UBS and RBS have totalled over $2.5 billion.

According to the UK Financial Conduct Authority (FCA) and the US Commodity Futures Trading Commission (CFTC), ICAP brokers “knowingly disseminated false and misleading information” about the true costs of Yen borrowing rates to Panel banks and market participants in an attempt to “manipulate the official fixing of the daily Yen Libor”.  The (attempted) manipulation took place between at least October 2006 and January 2011.  According to the CFTC, ICAP brokers on the Yen derivatives cash desk manipulated figures in order to aid and abet an important client employed by UBS in the latter’s attempt to improve his trading positions tied to the benchmark.

On the back of the financial settlement, three ICAP employees, one of them described by himself and others as “Lord Libor”, were also charged with criminal offences.

Libor is the average rate for which a leading bank can obtain unsecured funding for a given currency over a certain period.  It is reportedly used in approximately $10 trillion worth of loans and $350 trillion worth of other transactions and swaps each year.

The daily rates are calculated from individual submissions by a panel of the British Bankers’ Association banks.  Each day, the panel members submit rates of what it would cost them to borrow funds for certain periods of time and in different currencies.  Thompson Reuters, an independent agency, collates these submissions and calculates the rate by creating an average of the figures provided, after discarding the four highest and lowest submissions.  From early 2014, the administration of Libor will be taken over by NYSE Euronext, a London-based company regulated by the FCA.

Generally, the allegations in respect of Libor manipulation are that panel banks conspired to set rates by artificially lowering them.  They did this to lower their borrowing costs and give the impression that the banking system was more stable than it actually was.

According to the CFTC, ICAP was well placed to facilitate and participate in the benchmark manipulation, because of its role as an intermediary between banks and other financial institutions, which gave it an overview of individual banks’ borrowing costs.  ICAP provided a daily service to banks, distributing suggested daily rates which banks increasingly relied on during the financial crisis when submitting their own rates.

Rabobank, Citi, Deutsche Bank, and several other banks are expected to reach settlements with regulators within the next year, which may give a further indication of the scale of the manipulation.

At EU level, the Commission is conducting its own investigation into the alleged manipulation.  The results of the Commission investigation are still awaited.  Joaquin Almunia, the Vice President of the Commission, has frequently stated that the investigation is likely to conclude by the end of 2013.  It is widely expected that banks will agree a settlement with the Commission.  Under a settlement, banks review the evidence in the Commission’s file, and subsequently admit their involvement in the alleged cartel.  In return for their cooperation, banks receive a discount of 10 percent on the fines that would otherwise have been imposed.

The U.S. Department of Justice Antitrust Division and the Federal Trade Commission (“FTC”) have announced that they are issuing a new joint model waiver of confidentiality designed to facilitate international antitrust investigations.

The Antitrust Division and the FTC often ask individuals and companies involved in civil investigations to permit the agencies to share confidential information provided in the investigation to foreign antitrust enforcers that are investigating the same matter.  According to a press release from the Antitrust Division and the FTC, the revised “model waiver is designed to streamline the waiver process to significantly reduce the burden on individuals and companies, as well as to reduce the agencies’ time and resources involved in negotiating waivers.”

One of the most important revisions in the model waiver is its treatment of privileged information by the federal agencies.  According to the press release, the waiver “provides the terms on which an individual or company agrees to waive statutory confidentiality protections to the agency that originally received the company’s confidential information.”  The press release also states that the revised model waiver “reflects both agencies’ recent experience with waivers, incorporating updated language and provisions.”

In updating the waiver, the Antitrust Division and the FTC are attempting to improve cooperation in international antitrust investigations as well as protect confidential information.  The agencies stated that “by permitting cooperating agencies to discuss and otherwise exchange the individual’s or the company’s confidential information, a waiver enables agencies to make more informed, consistent decisions and coordinate more effectively often expediting the review.”