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From Antitrust Law Daily, December 04, 2013

European Commission imposes record fines on financial institutions for participating in cartel activity in interest rate derivatives industry

By Jody Coultas, J.D.

Eight international financial institutions have been fined a total of €1,712,468,000 for participating in cartels in the interest rate derivatives industry in violation of European competition law, the European Commission (EC) announced today.

Four of these institutions participated in a cartel relating to interest rate derivatives denominated in the euro currency, while six institutions participated in one or more bilateral cartels relating to interest rate derivatives denominated in Japanese yen.

Interest rate derivatives are financial products used by banks or companies for managing the risk of interest rate fluctuations, and play a key role in the global economy. They derive their value from the level of a benchmark interest rate, such as the London interbank offered rate (LIBOR)—which is used for various currencies including the Japanese yen (JPY)—or the Euro Interbank Offered Rate (EURIBOR), for the euro.

The fines were set based on the EC’s 2006 Guidelines on fines, and took into account the banks’ value of sales for the products concerned within the European Economic Area, the very serious nature of the infringements, their geographic scope, and respective durations.

These are the first two decisions concerning cartels in the financial sector since the start of the financial crisis in 2008, and the eighth and ninth settlement decisions since the introduction of the settlement procedure for cartels in June 2008. Anti-cartel enforcement is a top priority for the Commission, especially in the financial sector. The decisions were one of the swiftest cartel settlements decided by the EC, according to the announcement.

Euro currency cartel. The euro interest rate derivative cartel included Barclays, Deutsche Bank, Royal Bank of Scotland (RBS), and Société Générale, and operated between September 2005 and May 2008. After unannounced inspections in October 2011, the Commission opened proceedings in March 2013. The cartel aimed at distorting the normal course of pricing components for these derivatives. Traders of different banks discussed their bank’s submissions for the calculation of the EURIBOR as well as their trading and pricing strategies.

Proceedings were opened against Crédit Agricole, HSBC, and JPMorgan, and the investigation will continue under the standard (non-settlement) cartel procedure.

Barclays received full immunity for revealing the existence of the cartel and thereby avoided a fine for its participation in the infringement. Deutsche Bank, RBS, and Société Générale received a reduction of their fines for their cooperation in the investigation. These companies received a further fine reduction of 10% for agreeing to settle the case.

Yen cartel. UBS, RBS, Deutsche Bank, JPMorgan, Citigroup, and RP Martin were involved in one or several of the infringements of EU competition rules in the Yen interest rate derivatives sector. The Commission uncovered 7 distinct bilateral infringements lasting between 1 and 10 months in the period from 2007 to 2010. The collusion included discussions between traders of the participating banks on certain Japanese Yen LIBOR submissions, and the exchange of commercially sensitive information relating either to trading positions or to future Japanese Yen LIBOR submissions.

An investigation into United Kingdom-based cash broker ICAP relating to the same investigation is still on-going under the standard (non-settlement) cartel procedure.

UBS received full immunity for revealing the existence of the cartels and thereby avoided a fine for its participation in five of the seven infringements. Citigroup also received full immunity for one of the infringements in which it participated. The EC granted fine reductions to Citigroup, Deutsche Bank, RBS, and RP Martin under the EC’s leniency program. The companies have also been granted a fine reduction of 10 percent for agreeing to settle the case with the Commission.

Financial institutions’ reactions.

Philip Hampton, RBS Chairman, said of the fines: “We acknowledged back in February that there were serious shortcomings in our systems and controls on this issue, but also in the integrity of a very small number of our employees. Today is another sobering reminder of those past failings and nobody should be in any doubt about how seriously we have taken this issue. The RBS board and new management team condemn the behavior of the individuals who were involved in these activities.”

Jürgen Fitschen and Anshu Jain, Co-Chief Executive Officers of Deutsche Bank, said: “Today’s settlement marks one important step in our efforts to resolve the Bank’s legacy issues. The settlement relates to past practices of individuals which were in gross violation of Deutsche Bank’s values and beliefs.”

The EC issued a Frequently Asked Questions memo for a more technical explanation of the derivatives involved.

Companies: Barclays; Deutsche Bank; Royal Bank of Scotland; Société Générale; RP Martin; UBS; Citigroup; JPMorgan

MainStory: TopStory Antitrust

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