The European Commission has fined eight international financial institutions – including Citigroup and JPMorgan Chase – a total of €1,712,468, 000 (approximately US$2.3 billion) for allegedly participating in illegal cartels in markets for financial derivatives covering the European Economic Area (EEA). According to the Commission, four of these institutions participated in a cartel relating to interest rate derivatives denominated in the euro currency and six of them participated in one or more bilateral cartels relating to interest rate derivatives denominated in Japanese yen.
Collusion between competitors is prohibited by Article 101 of the Treaty on the Functioning of the European Union (TFEU) and Article 53 of the EEA Agreement. Both decisions were adopted under the Commission’s cartel settlement procedure; the banks’ fines were reduced by 10 percent for agreeing to settle.
Joaquín Almunia, the Commission vice president in charge of competition policy, said, ”What is shocking about the LIBOR and EURIBOR scandals is not only the manipulation of benchmarks, which is being tackled by financial regulators worldwide, but also the collusion between banks who are supposed to be competing with each other. Today’s decision sends a clear message that the Commission is determined to fight and sanction these cartels in the financial sector. Healthy competition and transparency are crucial for financial markets to work properly, at the service of the real economy rather than the interests of a few.”
Interest rate derivatives (e.g. forward rate agreements, swaps, futures, options) are financial products that are used by banks or companies for managing the risk of interest rate fluctuations. These products are traded worldwide 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. These benchmarks reflect an average of the quotes submitted daily by a number of banks that are members of a panel (panel banks). They are meant to reflect the cost of interbank lending in a given currency and serve as a basis for various financial derivatives. Investment banks compete with each other in the trading of these derivatives. The levels of these benchmark rates may affect either the cash flows that a bank receives from a counterparty, or the cash flow it needs to pay to the counterparty under interest rate derivatives contracts.
According to the Commission, the Euro interest rate derivatives (EIRD) cartel operated between September 2005 and May 2008. The settling parties are Barclays, Deutsche Bank, RBS, and Société Générale. The Commission said that 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, the Commission said.
The Commission’s investigation started with unannounced inspections in October 2011. The Commission opened proceedings in March 2013. Barclays was not fined as it benefited from immunity under the Commission’s 2006 Leniency Notice for revealing the existence of the cartel to the Commission, the Commission said. It added that Deutsche Bank, RBS, and Société Générale received a reduction of their fines for their cooperation in the investigation under the Commission’s leniency program. These banks received a further fine reduction of 10 percent for agreeing to settle the case with the Commission.
The Commission noted that, in the context of the same investigation, proceedings were opened against Crédit Agricole, HSBC, and JPMorgan and the Commission’s investigation will continue under the standard (non-settlement) cartel procedure.
The Commission said that in the Yen interest rate derivatives (YIRD) sector, the Commission uncovered seven distinct bilateral infringements lasting between one and 10 months in the period from 2007 to 2010. The collusion included discussions between traders of the participating banks on certain JPY LIBOR submissions, the Commission said. The traders involved also exchanged, on occasions, commercially sensitive information relating either to trading positions or to future JPY LIBOR submissions (and in one of the infringements relating to certain future submissions for the Euroyen TIBOR – Tokyo interbank offered rate), according to the Commission. The Commission said that the banks involved in one or more of the infringements are UBS, RBS, Deutsche Bank, Citigroup, and JPMorgan. Additionally, the Commission said, the broker RP Martin facilitated one of the infringements by using its contacts with a number of JPY LIBOR panel banks that did not participate in the infringement, with the aim of influencing their JPY LIBOR submissions.
The Commission opened proceedings in February 2013. The Commission said that UBS received full immunity under the Commission’s 2006 Leniency Notice for revealing to the Commission the existence of the infringements; that Citigroup also benefited from full immunity for its participation in one bilateral infringement; and that for their cooperation with the investigation, the Commission granted fine reductions to Citigroup, Deutsche Bank, RBS, and RP Martin under the Commission’s leniency program. The Commission said that the companies have also been granted a fine reduction of 10% for agreeing to settle the case with the Commission.
The Commission said that in the context of the same investigation, the Commission has also opened proceedings against the cash broker ICAP. This investigation continues under the standard (non-settlement) cartel procedure, the Commission said.
The Commission said that in setting the level of fines, the Commission took into account the banks’ value of sales for the products concerned within the EEA, the very serious nature of the infringements, their geographic scope, and respective durations.
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