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12 December 2016

Penalty rates: X-rated chats land banks with benchmark fines

The EU Commission has imposed a total penalty of € 485 million on three banks for infringing the prohibition on anti-competitive behaviour, laid down in Article 101 of the EU Treaty.  In particular, it found that a number of banks had been involved in illegal cartels, which had moved to fix the benchmark rates of interests on derivative instruments. 

The European Commission fined JP Morgan (€337 million), Crédit Agricole (€114 million) and HSBC (€33 million) on 7 December for participating in a cartel in euro interest rate derivatives initially unveiled in December 2013.  Interest rate derivatives (e.g. forward rate agreements, swaps, futures, options) are financial products which 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 who are members of a panel (panel banks).

Background to investigation

The Commission’s inquiry began in 2011 with unannounced inspections at the premises of certain businesses under suspicion, which unearthed two cartels, one relating to Euro based derivatives and the other Yen based instruments.    The Commission found out that a group of traders and bankers working for seven banks had used messaging platforms to alter “the normal course of pricing components” of several euro interest rate derivatives.  Speaking about these practices, EU Commissioner for Competition, Margot Vestager said: “[t]hey exchanged sensitive and confidential information about their trades and their strategy for trading,”, adding that the bankers often spoke in vulgar language ….I would be seriously blushing if I were to repeat any of the [communications] in that chat room”.  

The Commission has moved to emphasise that financial markets such as these require transparency and healthy competition. These ingredients are seen as essential to restoring trust in the financial sector and also as an essential component for a successful and sustained recovery of the European economy.  It has said it “expects antitrust rules [to] be complied with in the financial sector as in all other economic sectors. Market players should compete, not collude. This is why antitrust enforcement in this area complements the efforts of financial regulators and authorities.  Antitrust investigations into the financial sector are therefore a top priority for the Commission”.

At an earlier stage of the investigation, Barclays, Deutsche Bank, RBS and Société Génerale reached a settlement with the EU Competition watchdog for €1.5 billion.  Other Commission investigations of cartels involving financial benchmarks and related financial instruments have already led to prohibition decisions concerning Yen (December 2013, February 2015) and Swiss Franc (October 2014 (Libor), October 2014 (bid ask spreads)) interest rate derivatives cartels.

The collusive fixing of interest rates has been a long-standing focus of several regulators around the world and sanctions have not been limited to financial penalties.   In July 2015, for example, four former bankers received jail sentences in the UK for their part in manipulating London Interbank Offered Rates (“LIBOR”) interest rates between 2005 and 2007.  LIBOR is an average interest rate calculated through submissions of interest rates by major banks across the world and is estimated to underpin $350 trillion in derivatives.  The convictions arose from the individuals falsely inflating or deflating their rates so as to profit from trades.

The December decision is unlikely to be the last word in the saga.  J P Morgan and Crédit Agricole are contesting the Commission’s decision and have announced their intention to appeal to the European Court of Justice.  There is also now a real prospect of follow-on damages actions against the banks by parties who may have bought rates at inflated benchmark rates.  This could include class actions in the US or litigation suits brought by bodies representing consumers in the EU.  As the LIBOR case indicates, there could even be fraud prosecutions brought against individual protagonists. 


The rates derivatives investigation appears to have presented several instances of clear-cut infringements.  Aside from this case, however, there are many situations in the financial services sector where it is not clear whether proposed commercial behaviour (such as co-operation between financial institutions) could be anti-competitive.  Aside from the inherent complexity of financial markets, the sector depends to a large degree on co-operation; the classic example being a requirement for insurers to enter “pools” and to share risk data.  There are specific rules addressing these forms of behaviour which are in themselves far from straightforward and require significant legal expertise. 

This case shows, however, that financial markets are a keen focus of competition regulators (indeed, in the UK they are the focus of the EU Commission, the CMA and the FCA) and it is important for organisations to have their finger on the button in terms of the operational practices within their organisation.  We emphasise to our clients the imperative to train employees to make them of the need to be competition law compliant, as well as working with them to ensure the proper policing and enforcement of antitrust policies.   

Throughout 2016, we have been active in assisting businesses in the financial service sector to put in place comprehensive and effective competition law compliance programs, designed to avoid the sorts of problems the Commission encountered in this investigation.  Please do not hesitate to contact us if compliance measures would be of interest to your organisation.

This article was written by Paul Henty. For more information please contact Paul on +44 (0)20 7427 6506 or