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Expanding the Reach of the Commodity Exchange Act's EXPANDING THE REACH OF THE COMMODITY EXCHANGE ACT’S ANTITRUST CONSIDERATIONS Gregory Scopino* I. INTRODUCTION Many of the world’s largest banks have, over the past few years, paid billions of dollars to settle multiple civil and criminal government enforcement actions and private lawsuits alleging that bank employees conspired with their competitors to stifle competition in the derivatives markets and fix the benchmarks for, among other things, interest rates and foreign exchange rates that serve as critical reference points and price components to everything from trillions of dollars in consumer loans to financial derivatives.1 Derivatives, so named because their value derives from a reference asset, rate, or other item,2 include futures contracts, which are agreements to purchase or sell commodities for delivery in the future at prices that are determined at the initiation of the contracts,3 and swaps, which are agreements to swap (exchange) payment streams at regular intervals based on different factors or * Adjunct Professor of Law, Georgetown University Law Center; Special Counsel, Division of Swap Dealer and Intermediary Oversight (“DSIO”), U.S. Commodity Futures Trading Commission (“CFTC”). The research presented in this Article was authored by a CFTC employee writing in his personal capacity and not writing in his official capacity as a CFTC employee. The analyses and conclusions expressed in this Article are those of the author and do not reflect the views of other members of the DSIO, other CFTC staff, the CFTC itself, or the United States. I would like to thank Frank Partnoy, James Kwak, Tom C.W. Lin, Michael A. Carrier, Sharon E. Foster, George A. Hay, Zachary D. Clopton, and Andrew Verstein for their feedback. 1. For an illustrative, but not exhaustive, list of the settlements for such actions, see infra Tables 1–12. 2. See Kelly S. Kibbie, Dancing with the Derivatives Devil: Mutual Funds’ Dangerous Liaison with Complex Investment Contracts and the Forgotten Lessons of 1940, 9 HASTINGS BUS. L.J. 195, 196 n.1 (2013) (“Derivatives are broadly defined as financial instruments whose value is derived from other variables (referred to as ‘reference assets’ or ‘underliers’).”). 3. See Jerry W. Markham, Manipulation of Commodity Futures Prices—The Unprosecutable Crime, 8 YALE J. ON REG. 281, 282 n.1 (1991). 573 574 HOFSTRA LAW REVIEW [Vol. 45:573 formulas.4 Over-the-counter (“OTC”), meaning not traded on an exchange,5 derivatives have been a lucrative business for large, global banks, which have tended to dominate many derivatives markets, sometimes even to the point of oligopoly.6 By forming cartels to rig benchmarks that served as components of the prices of derivatives, banks could reduce the amounts they had to pay their trading counterparties, such as pension funds, municipalities, and university endowment funds, or increase the amount their counterparties had to pay them.7 For example, in a typical fixed-for- floating interest rate swap, one person pays a fixed interest rate at regular intervals in exchange for a floating interest rate that resets periodically based on a benchmark interest rate, such as a specified percentage above the U.S. dollar London interbank offered rate (“LIBOR”).8 Accordingly, moving LIBOR up or down would correspondingly increase or decrease the amount that the counterparty paying the floating leg of an interest rate swap would have to pay.9 Even moving LIBOR by a small amount, such as one basis point—or one hundredth of a percent (0.01%)—can significantly impact swap payment amounts.10 Although many people are aware of how LIBOR and other benchmark interest rates affect the payment amounts in connection with trillions of dollars in home loans, student loans, and credit card debt,11 4. MICHAEL DURBIN, ALL ABOUT DERIVATIVES 29-33 (rev. 2d ed. 2011). 5. See ANDREW M. CHISHOLM, DERIVATIVES DEMYSTIFIED: A STEP-BY-STEP GUIDE TO FORWARDS, FUTURES, SWAPS AND OPTIONS 1 (2d ed. 2010). 6. See infra Part III.A. 7. See In re LIBOR-Based Fin. Instruments Antitrust Litig., 935 F. Supp. 2d 666, 682-83 (S.D.N.Y. 2013); Press Release, European Comm’n, Antitrust: Commission Fines Banks €1.49 Billion for Participating in Cartels in the Interest Rate Derivatives Industry (Dec. 4, 2013), http:// europa.eu/rapid/press-release_IP-13-1208_en.htm (“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 a counterparty under interest-rate derivatives contracts.”). 8. See Adjustable Rate and Home Equity Conversion Mortgages—Additional Index, 72 Fed. Reg. 40,048, 40,049 (July 20, 2007) (to be codified at 24 C.F.R. pt. 203 and 206) (providing the definition of a swap and giving an example of an interest rate swap); 31 SAMUEL WILLISTON & RICHARD A. LORD, A TREATISE ON THE LAW OF CONTRACTS § 78:18 (4th ed. 2009) (describing an interest rate swap). 9. See Gelboim v. Bank of Am. Corp., 823 F.3d 759, 765 (2d Cir. 2016). 10. For example, a derivatives trader could make as much as $3 million due to moves of one basis point in LIBOR. Philip Stafford et al., ICAP Agrees to Pay £55m to Settle Libor Claims, FIN. TIMES (Sept. 25, 2013), https://www.ft.com/content/885dc438-2522-11e3-9b22-00144feab7de. 11. Sharon E. Foster, Harm to Competition and the Competitive Process: A Circular Charade in the LIBOR Antitrust Litigation, 10 BYU INT’L L. & MGMT. REV. 91, 91-92 (2014) (“Libor is an interest rate benchmark used by about 75% of interest rate sensitive financial products around the world. Control of the benchmark equates to control of the price of interest.”); Liam Vaughan, Libor Lowballing Never Ended as Global Probes Accelerated, BLOOMBERG (Dec. 7, 2014, 7:01 PM), http://www.bloomberg.com/news/articles/2014-12-08/libor-lowballing-never-ended-as-global- probes-accelerated (“Libor is used in more than an estimated $300 trillion of securities, from 2016] COMMODITY EXCHANGE ACT’S ANTITRUST CONSIDERATIONS 575 the public is understandably less informed about the role of benchmark interest rates in calculating the payment streams for interest rate swaps and other interest rate derivatives. But make no mistake, the markets for derivatives are an important part of the global economy. The market for OTC interest rate derivatives is enormous, with OTC interest rate derivatives contracts totaling $384 trillion in 2015 ($289 trillion of which were swaps) and representing seventy-eight percent of the OTC derivatives market.12 During the relevant time, LIBOR was supposed to represent the average interest rate at which a designated panel of banks could borrow unsecured funds in the interbank market in London.13 Panels of banks with approximately eleven to eighteen members submitted LIBOR numbers each day that were supposed to reflect the rate at which the banks could borrow unsecured funds in the interbank market in the relevant currency.14 LIBOR and related benchmark interest rates are issued daily for multiple currencies, including U.S. dollar, euro, and yen, in fifteen tenors (durations for interest rates), ranging from overnight to twelve months, with one, three, and six months being the most common tenors referenced in LIBOR-indexed derivatives and transactions.15 Under the rules that governed LIBOR submissions at the time, each panel bank was to independently submit an interest rate based upon its own knowledge of market conditions and its ability to borrow. The submissions were to remain confidential until after LIBOR was computed and published, at which point all sixteen individual submissions would be published with the final daily rate.16 Although the various LIBOR interest rates were set jointly, the banks were horizontal competitors in selling and buying derivatives and other financial instruments that were premised, to some extent, on LIBOR.17 As a result, the benchmark interest rate-rigging conspiracies and schemes by banks interest-rate swaps to mortgages and student loans.”). 12. MONETARY & ECON. DEP’T, BANK FOR INT’L SETTLEMENTS, STATISTICAL RELEASE: OTC DERIVATIVES STATISTICS AT END-DECEMBER 2015, at 3 (2016), http://www.bis.org/publ/otc_ hy1605.pdf. 13. Gelboim, 823 F.3d at 764. 14. The U.S. dollar LIBOR having a panel of sixteen banks. Id. at 765. 15. See In re RP Martin Holdings Ltd., CFTC No. 14-16, 2014 WL 2003211, at *3 (May 15, 2014). 16. Gelboim, 823 F.3d at 765-66. From 1986 to February 1, 2014, LIBOR was set under the auspices of the British Bankers’ Association (“BBA”) a private trade association for the financial- services sector in the United Kingdom. See id. at 765; In re RP Martin Holdings, 2014 WL 2003211, at *3 n.3. 17. Gelboim, 823 F.3d at 766. 576 HOFSTRA LAW REVIEW [Vol. 45:573 violated U.S. antitrust laws through “the warping of market factors affecting the prices for LIBOR-based financial instruments.”18 From approximately 2005 to 2012, employees at several of the world’s largest banks and interdealer brokers conspired internally, with their co-workers, and externally, with employees at competing banks and interdealer brokers, to rig LIBOR and other benchmark interest rates of various tenors and currencies by coordinating their submissions to panels that set those rates.19 The employees communicated through emails, electronic instant messages, and telephone calls, with the electronic communications containing many abbreviations, trader jargon, misspellings, grammatical errors, varying degrees of capitalization, and, in some cases, expletives.20 Derivatives traders routinely asked LIBOR submitters at their own banks and competing banks to change the interest rates that would be submitted to LIBOR-setting panels.21 The traders would seek to fix LIBOR rates and other benchmarks when they had derivatives trading positions that were scheduled to reset and whose payment amounts were tied to the benchmarks.22 Additionally, during the financial crisis, some bank LIBOR submitters artificially lowered LIBOR rates out of fear that submitting high rates would indicate the banks that employed them could not borrow unsecured funds from other banks at low interest rates and, therefore, were on shaky financial footing.23 One of the most active conspirators in rigging LIBOR and related benchmark interest rates was Tom A.W.
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