Competition Law Enforcement in the Financial Markets

 focus – Competition and Regulation 

Botond Horváth – Szabolcs Szentléleky Competition law enforcement in the financial markets

Summary: The authors intend to give a comprehensive view on the most recent antitrust competition law developments in the financial markets. Within the field of restrictive agreements, the authors present the Commission’s decision on the manipulation of interbank reference rates, the Hungarian bank cartel case which resulted in a record fine, the Commission’s investigations concerning the credit default swap markets, and the EU and Hungarian competition authority proceedings concerning multilateral interchange fees. Within the field of abuse of dominance, the authors present two specific cases concerning the data-feed market, namely the cases of Standard & Poor’s and Thomson Reuters, which were both settled with commitments, while with respect to mergers, they sum up the competition law-related problems that arose in connection with the merger of the New York Stock Exchange Euronext and the Deutsche Börse.

Keywords: bank cartel, CDS, MIF, financial market data-feed, merger

JEL code: K21

The financial crisis which broke out in 2008 have the greatest risk or represent the highest posed grave challenges for the European Uni- restrictions on competition. In the majority of on. This was true for the application of law and cases presented in this paper, proceedings were legislation as well. Competition policy – as one launched after the onset of the crisis, therefore, of the most important policies of the EU – plays they illustrate EU measures aimed at mitigating a key role in promoting economic development the effects of the crisis well, at the levels of both Tand mitigating the damage caused by the crisis. law application and legislation. For this reason, it merits special attention what economic and legal approaches the European Commission (hereinafter: the Commission) Restrictive agreements employs in the financial sector, which sector was responsible for the crisis through – among The Commission and the national competition other things – the introduction to the mar- authorities have proven their commitment to ket of various new products which carried fight cartels at all times, well illustrated by great risk. The Commission and Member the number of proceedings opened and the State competition authorities have to face amount of fines imposed (Cartel Statistics). great difficulties since they have to select The cases presented in this paper reflect the from thousands of financial instruments position well that ensuring competition – to investigate those where abuse is likely to regardless of which economic sector this may be in – is of crucial importance with respect E-mail address: [email protected] to economic development, and thus ensuring [email protected] consumer welfare.

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The manipulation of interbank reference EIRD and YIRD cartel rates With respect to the manipulation of interbank rates, which has come to be known as the LI- Investigations related to interbank BOR scandal, the authorities investigated two reference rates potentially illegal activities. One of these was The LIBOR1 scandal, and the related EURIBOR that panel banks published false figures when manipulation scandal broke out in June 2012, calculating the LIBOR in order to reinforce when British bank Barclays settled with the trading positions2 or to communicate a UK Financial Services Authority, admitting to stronger financial position, thereby, diverting manipulating interbank rates. The authorities the media’s attention from the banks’ financial initially started to investigate the manipulation standing (Tween, D. M. – Murray, G., 2012). The of the LIBOR, which investigation was later other supposed infringement was committed extended to examining the manipulation of by bank traders who manipulated the LI- other interbank rates as well. A main difference BOR indicator in collusion with one another. between the investigations conducted by the Initially, the US authorities only investigated financial regulators and the Commission is the LIBOR manipulation of the USD, but as that the former investigated the behaviour the investigations progressed, it came to light of certain banks, while the latter investigated that the currencies of other countries were also and sanctioned participation in cartels of concerned, which led the article by Douglas several banks (European Commission – Tween and Grant Murray (2012) to state that MEMO/13/1090). In contrast with the financial the LIBOR scandal is a so-called ‘cascading regulatory bodies, in its proceedings launched at cartel’. In addition to the United States, the beginning of 2013 in relation to interbank there have been or there are investigations reference rate manipulation, the Commission currently in progress in, amongst others, the investigated whether the enterprises concerned European Union, Switzerland, Japan and violated competition law in any way, in this Canada as well. The reasons behind such case, whether there was any collusion between global cartel investigations can be traced back the competitors in the interest rate derivatives to globalisation, the repeat infringements market, thus violating Article 101 of the Treaty by diversified multinational companies on the Functioning of the European Union and the “Amnesty Plus”3 programme that is (hereinafter: TFEU). During the EIRD (euro part of the US leniency programme, which interest rate derivatives) and the YIRD (yen encourages those under investigation to interest rate derivatives) cartel proceedings, reveal information on other, as yet unknown the Commission concluded that bank traders cartels in exchange for immunity, which in consulted each other on negotiation and pricing turn allows authorities to uncover further strategies, on occasion sharing sensitive data cartels (Batchelor, B. – Pardo, C. – Funk, K. with one another, thereby participating in an et al., 2013). illegal cartel, which is prohibited under Article On 4 December 2013, the Commission 101 of TFEU. The responsibility of banks as announced in a press release that (we must note enterprises was determined in connection with that at the time of the writing of this article, the activities of bank traders, as pursuant to Eu- the text of the Commission’s decision was not ropean competition law, the enterprise is in all published yet) it had fined 8 banks a record cases responsible for the behaviour and conduct total of EUR 1,71 billion for participating of its employees. in illegal cartels in markets for interest

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rate derivatives (European Commission – and figures concerning future JPY LIBOR IP/13/1208). Four of these banks participated submissions. UBS received full immunity from in a cartel relating to interest rate derivatives the fine for revealing to the Commission the denominated in euro (EIRD cartel), while six existence of the cartel. The other participating banks participated in a cartel relating to inte- banks – RBS, Deutsche Bank, Citigroup and rest rate derivatives denominated in Japanese JPMorgan – were granted fine reductions yen (YIRD cartel). under the Commission’s leniency programme The EIRD cartel operated between for their cooperation and their admittance September 2005 and May 2008, and aimed to the infringement as part of the settlement at distorting the pricing components for with the Commission. euro-denominated interest rate derivatives. We must emphasise that these are the According to the Commission, traders of first two decisions by the Commission different banks discussed their bank’s rate concerning cartels in the financial sector since figures required for the calculation of the the start of the financial crisis. With the two EURIBOR in advance, as well as their decisions adopted in the two cartel cases, the trading and pricing strategies. In the case of Commission indicated the kinds of behaviour the EIRD cartel, Barclays Bank applied for banks should avoid in the future if they wish the leniency policy (Commission Notice on to comply with EU competition rules (Eu- Immunity from fines and reduction of fines ropean Commission – IP/13/1208). At the in cartel cases), and received full immunity time the decision was made public, Joaquin for revealing the existence of the cartel and Almunia, Commissioner Responsible for thereby avoided the fine. Pursuant to the Competition stated: “What is shocking about Commission’s Leniency Notice, enterprises the LIBOR and EURIBOR scandals is not only that voluntarily provide information on a the manipulation of benchmarks, which is be- cartel and cooperate with the authorities ing tackled by financial regulators worldwide, continuously during the proceedings may but also the collusion between banks who are receive partial or full immunity from the supposed to be competing with each other.” (Eu- fine which they would have to otherwise pay ropean Commission – IP/13/1208). for participating in a cartel. Thanks to the In addition to the EIRD and YIRD cartels, Commission’s leniency policy, the other banks the Commission is currently conducting participating in the cartel – RBS, Deutsche investigations in connection with CHF- Bank, Société Générale – received a reduction denominated interest rate derivatives of their fines for their cooperation with the products, as well as other products of the Commission and their admittance to the financial sector. infringement as part of the settlement with the Commission. With respect to the YIRD cartel, The Hungarian bank cartel case the Commission uncovered 7 bilateral infringements lasting between 1 and 10 On 23 November 2011, the Hungarian months in the period from 2007 to 2010. Competition Authority (hereinafter: GVH) In this case as well, similarly to the EIRD opened competition supervision proceedings cartel, the traders involved also exchanged against several Hungarian banks4 in their banks’ submissions needed to calculate connection with the following: the banks the JPY LIBOR, as well as trading positions under investigation “a) after 22 September

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2011, on a date nearly identical to one another, determining their market behaviours. All this significantly raised the interest rates for their retail leads the enterprises concerned to replace the mortgage loans, and introduced new, higher in- risks of competition with the cooperation with terest rate products, which was most likely due one another.”(Section 369 of the Resolution) to an agreement among the banks, according The Early Repayment Act (Act CXXI of to which the above named commercial banks 2011), which amended the provisions of the offered higher interest products related to the Credit Institution Act, ensured the option final repayment of foreign currency-denominated of fixed exchange rate final repayment for loans and restricted access to lower interest rate customers with foreign currency-denominated products, and b) these banks also took part in mortgage loans when it obligated credit the events now known as »retail risk« breakfasts, institutions to apply a fixed exchange rate where it is likely that information was exchanged when determining the HUF amount of the among participants regarding fixed exchange rate final repayment. Thus the statute created a final repayment of foreign currency-denominated special situation on the market, under which loans. The exchange of information probably the legislator allowed clients with foreign included – but was not limited to – information currency mortgage loans and home equity related to the future conduct, strategy, expected loans to repay these loans – within a certain behaviour and measures of participants in limited timeframe – in Hungarian forint connection with the fixed exchange rate final converted at a preferential foreign currency repayment of foreign currency-denominated exchange rate. However, the position of the loans. Thus the information shared was probably Competition Council proceeding in the case suitable for influencing the market behaviour is that the experiences of the period since the of market players in connection with the fixed entry into force of the final repayment Act exchange rate final repayment of foreign currency- on 29 September 2011 “show that the various denominated loans. c) The GVH considers financial institutions applied the regulations the activities connected to the aforementioned helping debtors differently from each other, and »retail risk breakfasts« an element of the conduct in certain cases in a manner that was not in line investigated as part of the competition supervision with the original legislative intent” (Section 70). proceedings and investigates these as such start- According to the position of the ing from August 2011, particularly with regard Competition Council proceeding in the case, to the restriction of access to the products related the market of real estate mortgage loans can to the fixed exchange rate final repayment of be considered the relevant market in this case, foreign currency-denominated loans.” (Section while the relevant geographic market is the 12 of the GVH Resolution filed under no. territory of Hungary (Section 104). Based Vj/74-873/2011). on the documents acquired, the relevant sales The proceedings were aimed at uncovering revenue of the enterprises under investigation whether the undertakings in question exceeded the turnover threshold set out in disclosed to one another their future market the European Commission’s Notice entitled behaviours and whether they encouraged their Guidelines on the effect on trade concept competitors to do the same. If an enterprise contained in Articles 101 and 102 of the Treaty, does so, “it can then reasonably assume that and the market weight and market share of the its competitors will exhibit behaviour in line undertakings concerned exceeded 5 per cent, with the information disclosed by it, or at least therefore, the appreciability requirement was will take such information into account when fulfilled, providing grounds for the application

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of Article 101 of theTFEU. The banks under and data discussed at the breakfast pertaining investigation are the largest participants of to strategy and inquiring customers qualifies the domestic banking system, with their joint as business secret (Section 473). market share exceeding 90 per cent (Section In addition to these “retail risk” breakfasts 626). – based on internal correspondence seized According to the resolution (Sections at an on-site inspection at one of the banks 119–133), in 2011 the undertakings under under investigation (Sections 174–176) –, the investigation participated at so-called banks also conducted bilateral negotiations, “retail risk” breakfasts, to which employees which led to “the uniform, complex and responsible for risk management of banks continuous infringement being elevated to active in mortgage lending were invited. a multi-level infringement” (Section 485). With respect to these retail risk breakfasts, According to the position of the Competition the Competition Council proceeding in the Council proceeding in the case, the strategic case investigated whether the undertakings information shared during the bilateral in question disclosed to one another their consultations qualify as business secrets future market behaviours and whether they (Sections 486 and 493). According to the encouraged their competitors to do the same. resolution, “the bilateral consultations among Pursuant to the resolution, based on the the banks were conducted as part of a uni- evidence available it can be determined that form, comprehensive plan, as the given banks the goal of the banks under investigation in the specifically exchanged information of strategic period examined, from 15 September 2011 to nature that was suitable to harmonise their 30 January 2012, as discussed at the “retail risk” individual strategies aimed at restricting final breakfasts was to hold back final repayments repayments through the restriction of access to (Section 386). According to the position of loan refinancing loans” (Section 499). the Competition Council proceeding in the The Competition Council proceeding in case, “all enterprises that attended the »retail the case concludes that at the “retail risk” risk« breakfast on 15 September 2011 agreed to breakfast of 15 September 2011, the entities restrict the provision of loan refinancing loans as under investigation “harmonised their strategies part of a uniform, comprehensive plan, which in order to reduce the number of fixed rate final they planned to consistently implement during repayments, by way of limiting access to loan the final repayment period, until 30 January refinancing loans; which strategies were aimed 2012,” (Section 453), while “the »retail risk« at avoiding intense competition in the field of breakfast of 3 October 2011 can be considered providing loan refinancing products” (Section to be a direct continuation of the breakfast on 504). Based on the great number of written 15 September 2011” (Section 456). Regarding evidence, the position of the Competition the two “retail risk” breakfasts, in addition to Council proceeding in the case is that the statement made by the protected witness the banks under investigation – with the and the customer declarations, during the exception of certain banks – kept themselves dawn raids on the entities under investigation, to the uniform comprehensive plan accepted the GVH came into possession of written at the “retail risk” breakfast of 15 September evidence (emails, written records, notes) 2011, which was aimed at restricting final (Sections 136–152 and 159–172). According repayment, until 30 January 2012, however, to the Competition Council proceeding in the Competition Council proceeding in the the case, the great majority of the information case found no evidence that the banks had

32 Public Finance Quarterly  2014/1  focus – Competition and Regulation  also agreed on the method of the restriction of of 1996 on the prohibition of unfair and final repayment (Section 505–506). The banks restrictive market practices (hereinafter: Un- under investigation restricted the provision of fair Market Practices Act), infringes Article loans by way of 11(1)5 of the same Act; furthermore, by • raising interest rates, violating the provisions of Point b) of Article • the limited provision of loan refinancing 101(1) of theTFEU, infringes Article 101(1)6, products, due to which infringements, the Competition • distinguishing between own and new Council proceeding in the case imposed a customers, and HUF 9 488 200 000 fine on the undertakings • the combination of the above three in question (Section 601). methods (Section 506). The resolution stipulates that the undertakings under investigation not only CDS markets drew up a comprehensive plan aimed at hindering final repayments but actually In 2011, the European Commission implemented this plan (Section 513). (hereinafter: Commission) also opened two Pursuant to the resolution, “the Competition investigations in a relatively new financial Council proceeding in the case, based on the field, namely the so-called Credit Default evidence available, determines that the entities Swaps7 (hereinafter: CDS) market. under investigation harmonised their strategies On 29 April 2011, the Commission in order to reduce the number of fixed rate final launched investigations against 16 banks8 as repayments, by way of limiting access to loan well as Markit (Markit Group Limited), the refinancing loans. This infringement qualifies leading provider of financial information as an issuing restriction which is viewed by the in the CDS market. In its press release (Eu- practice of competition law as hardcore cartel ropean Commission – IP/11/509), the activity” (Section 515). The comprehensive Commission stated that the aforementioned plan implemented by the banks under banks may have colluded with Markit and investigation, which manifested itself as a uni- abused their collective dominance by making form, continuous and complex infringement of the most recent key market data available only law, restricted competition between the banks and exclusively to Markit, as a result of which under investigation that was actively generated other information service providers did not by consumers (Section 519). The severity of have access to required data. Through this this infringement is well illustrated by the fact behaviour, they were presumably in violation that the banks under investigation consistently of Articles 101 and 102 of theTFEU. implemented the unlawful plan accepted at the Some time during the examined period “retail risk” breakfast of 15 September 2011, (2006–2009), CDS were traded over despite the GVH’s competition supervision the counter, which means that they were proceedings opened against them on 23 Nov- negotiated privately and bilaterally, rather ember 2011 (Section 520). than traded on exchanges. In this period, Pursuant to the resolution of the adapting to investor needs, Deutsche Börse Competition Council proceeding in the and the Chicago Mercantile Exchange case, the infringement committed by the (CME) attempted to launch central clearing entities under investigation, by violating and exchange trading specifically for such the provisions of Article 11(2) of Act LVII derivatives, which attempt failed. This activity

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would have required a license from Markit should be restricted to the re-regulation of and the International Swaps and Derivatives the sector or should it be complemented Associations (ISDA), which – presumably by competition law regulations, adherence upon instructions from the banks – they to which would be ensured by way of were refused and thus were unable to en- stricter audits. (European Commission – ter the market. (European Commission – SPEECH/13/593, and Lebrun B., Balthazar SPEECH/13/593.) The exchange-trading T., 2011) One thing is for certain, the increased of CDS increases transparency and thereby enforcement of competition regulations, and contributes to market stability, as during thus the increasing of competition, improves such transactions counterparty risk is much stability in the financial sector, therefore, the more predictable because transactions are Commission is currently on the position that settled through a central clearing house. This the reinforcement of prudent regulations, would reduce the risk of the bankruptcy of along with the stricter enforcement of a major financial service provider, such as competition rules, would jointly establish a Lehman Brothers for instance, destabilising more appropriate regulatory environment. the global financial market, as the system of (Lebrun B. ‒ Balthazar T., 2011) the off-exchange trading of derivatives carries great risk. The Commission stated: the banks under investigation presumably delayed the Multilateral interchange fees introduction of exchange trading of these financial products on purpose, because they Recently, the Commission once again focused feared that it would considerably reduce its investigations on the system of bank their profits. (European Commission – card use fees (multilateral interchange fees, SPEECH/13/593.) hereinafter: MIF). The only information on the proceedings The present article does not allow for a de- in progress is that on 1 July 2013, the tailed presentation of the four-party card sys- Commission sent its preliminary position to tem of multilateral interchange fees, therefore, the 13 banks concerned as well as Markit and we will only draw attention to issues that carry the ISDA. competition law significance. The second investigation concerns 9 of the The interchange fee is the fee paid by the aforementioned 16 banks as well as the ICE credit institution enabling the acceptance of Clear Europe (Intercontinental Exchange Gro- payment cards to the credit institution issu- up, Inc.) clearing house. The banks concerned ing the card in the course of the card payment may have concluded agreements, based on transaction. (Keszy-Harmath Z. – Kóczán G. which they would use only ICE as a clearing – Kováts S. et al., 2011) house, thereby preventing the entry of other The Commission investigated the inter- clearing operators and limiting the choice of change fee systems of the two large card com- other banks for clearing their transactions. panies, namely Visa and MasterCard, on sev- (Lebrun B. & Balthazar T., 2011) eral occasions. We must note that the investigations in With some interruptions, there were pro- progress may have greatly contributed to ceedings in progress against Visa, and its pre- whether the planned amendment of the decessor Ibanco, from 1977 to 2002, during MiFID Directive (Directive 2004/39/EC of which two resolutions were reached. The in- the European Parliament and of the Council) vestigation extended to Visa’s relationships

34 Public Finance Quarterly  2014/1  focus – Competition and Regulation  with card issuer and card acquiring banks, as a cap on MIF rates. [Case No COMP 29.373 well as the relationships between merchants – Visa International, 2002/914/EC Sections and acquiring banks, in particular interchange (21)–(24).] The third component was Visa’s fees. The so-called Visa I Decision (Case undertaking, pursuant to which in the future No COMP/29.373 – Visa International, it will disclose the MIF rates to merchants, 2001/782/EC) dealt with the relationships of and fourthly, separate MIFs would be deter- card issuer and card acquiring banks. Reacting mined with respect to mail order/telephone to the Commission’s Statement of Objections orders. [Case No COMP 29.373 – Visa In- published on 6 May 1999, Visa considerably ternational, 2002/914/EC Sections (25)– amended its rules related to – among other (26)]. It was in light of these undertakings, things – its cross-border services. As a result of that the Commission’s individual exemption the amendments made, the Commission felt decision (Case No COMP 29.373 – Visa In- that the rules amended by Visa do not violate ternational, 2002/914/EC Section 1) on Visa’s Article 81(1) of the EC Treaty [today: Article regional multilateral interchange fee structure 101(1) of theTFEU] with respect to regional was born. Visa’s argument that the MIF was authorisations, prohibition of discrimination, introduced in order to promote the wider dis- cross-border issuing, cross-border acquiring, tribution and acceptance of Visa cards and all prohibition of premiums and honouring all the services they provide met the exemption cards. An independent decision was reached requirements set out in Article 81(3) of the in connection with Visa’s interchange fee EC Treaty. According to the Commission, the system, which is usually called Visa II. As a amended MIF rates contribute to technologi- result of the contents of the Commission’s cal and economic development, of which con- additional statement of objections, Visa un- sumers (namely card-holders and merchants) dertook to amend its MIF structure accord- can get a fair share [Case No COMP 29.373 ing to the following four main aspects. Firstly, – Visa International, 2002/914/EC Sections it undertook to introduce fixed-rate MIFs for (74) and (91)]. With respect to indispensabil- debit card transactions, therefore, the yearly ity, the Commission noted that former MIF weighted average MIF rate drops to at least values, which the banks were entitled to de- EUR 0.28 [Case No COMP 29.373 – Visa termine without any objective criteria, had an International, 2002/914/EC Section (18)]; anticompetitive effect, and that the modified and with respect to fees related to transaction MIF values are based on an appropriate crite- values, it undertook to reduce these continu- ria-system and are appropriately transparent, ously over a five-year period, which would and thus have lower anticompetitive effect leave the weighted average MIF at 0.7 per [Case No COMP 29.373 – Visa Internation- cent by 2007 [Case No COMP 29.373 – Visa al, 2002/914/EC Section (99)]. In connection International, 2002/914/EC Section (19)]. with the exemption criteria pursuant to Ar- Secondly, in connection with the cost analy- ticle 81(3) of the EC Treaty, the Commission sis, Visa undertook to determine, as part of a determined that the MIF does not eliminate cost study, the costs concerning the process- competition between issuers, which remain ing of transactions, the free funding period for free to set their respective customer fees. cardholders and the cost of providing the pay- Moreover, (although it sets de facto a floor in ment guarantees in relation to immediate deb- merchant fees), it does not eliminate competi- it cards, deferred debit and credit cards, the tion between acquirers either, since the MIF sum of which cost elements would establish is just one cost component among the fees

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charged to merchants, and acquiring banks ject of the investigation, within six months, can still compete on the other components. in other words to abolish the MIF, and fur- [Case No COMP 29.373 – Visa Internation- thermore, to repeal all its decisions related to al, 2002/914/EC Section (106)] Furthermore, the MIF, and to inform all financial institu- the Commission also noted that the five-year tions that are part of the MasterCard network exemption is sufficient to examine and assess of these actions. (COMP/34.579. Article 5) the newly established MIF structure, in addi- MasterCard complied with the Commission’s tion to the possibility of launching a repeated decision, but requested legal remedy against investigation [Case No COMP 29.373 – Visa the decision. The case is currently before the International, 2002/914/EC Section (93)] Court of Justice of the European Union (Case In 1992, the Commission started investi- No. C 382/12. P.), regarding which Advocate gating – among other things –the underly- General Paolo Mengozzi submitted his opin- ing interchange fees applied to cross-border ion on 30 January 2014. (Opinion of Advo- transactions of the other large card company, cate General Paolo Mengozzi) In his opinion, MasterCard. The Commission’s decision of 19 the advocate general stated that despite the December 2007 (COMP/34.579) determined fact that the Commission applied a differ- that the impact of the currently applied in- ent approach than in the 2002 Visa decision, terchange fee system restricts competition its findings are correct, therefore, he recom- between acquiring banks, as in effect, it sets mends the dismissal of the appeal and pro- a threshold with respect to the service fees poses that the plaintiffs bear the costs of the charged to merchants. (COMP/34.579. Ar- proceedings. (Opinion of Advocate General ticle 1) In its decision, the Commission stated Paolo Mengozzi, Sections 50 and 168) that the interbank commission system applied Following the expiration of the individual by MasterCard infringes the law and cannot exemption period, on 26 March 2008, the be exempted, as MasterCard has failed to ap- Commission opened proceedings against propriately prove that the operation of MIFs Visa (Case AT.39398 – Visa-MIF), inves- would lead to economic and technological tigating the rate of MIFs for cross-border benefits and, furthermore, that all consum- transactions, as well as the adherence of ers would share fairly in the benefits resulting the ‘Honour-All-Cards-Rule’9. (European from the MIF. (COMP/34.579. Sections 701, Commission – MEMO/08/170) In its pro- 740 and 747) The Commission also found posed commitments (Commitments CASE it indeterminable whether the MIF, and the COMP/39.398), Visa undertook to cap its ensuing restriction of competition, is indis- yearly weighted average intra-regional MIF pensable to achieve the supposed advantages. applicable to immediate debit transactions at (COMP/34.579. Section 751) At the same 0.2%, and to abolish so-called blending10, and time, the Commission noted, that is does not furthermore, to continue to apply the Honour dispute that there may exist an interchange All Cards Rule as well as to a introduce a series fee system that is appropriate from the aspect of measures that serve transparency. (Com- of competition law, which also complies with mitments CASE COMP/39.398) These com- the exemption requirements set out in Article mitments were accepted by the Commission 81(3) of the EC Treaty [today: Article 101(3) on 8 December 2010. These commitments, of theTFEU]. (COMP/34.579. Section 679) however, did not concern consumer credit TheC ommission called on MasterCard to re- cards. Accordingly, the proceedings currently peal the interchange fees, that were the sub- cover the following:

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• intra-regional multilaterally agreed credit Competition Council proceeding in the case interchange fees set by Visa (hereinafter: also determined that “within the framework of intra-regional MIFs), applying either the Bank Card Forum, Hungarian banks (sup- directly to cross-border transactions or by ported by the card companies), concluded an default to domestic transactions, agreement with the objective of hindering the ex- • country-specific credit MIFs set by Visa aggerated drop in merchant fees.” (Competition Europe, Council Resolution No. Vj-18/2008 Section • the potential default application of inter- 198) Furthermore, it is presumable that in the regional MIFs in the absence of equivalent absence of such an agreement, commission interchange fees and their direct rates would have changed in a different man- application to transactions when using ner, which in turn would also have had an im- cards issued outside the EEA at merchants pact on merchant commissions. (Competition located in the EEA, and Council Resolution No. Vj-18/2008) • the rules relating to cross-border acquiring It must also be noted that during the com- as a restriction of competition. petition supervision proceedings, the banks TheC ommission wishes to make its deci- terminated their MIF-related agreements with sion after analysing the responses to the mar- the two card companies, and submitted com- ket test. (Communication of the Commission mitments to the GVH. Following the termi- in Case AT.39398 — VISA –MIF) nation of the agreement, Visa began to apply On 31 January 2008, the Hungarian Com- the fees valid for cross-border transactions (as petition Authority opened competition su- also contained in the commitments proposed pervision proceedings under No. Vj-18/2008 in the Visa–MIF case), while MasterCard in- against 23 issuing banks as well as Visa and troduced new fees. (Competition Council MasterCard. The investigation extended to Resolution No. Vj-18/2008) As regards the the rate of applied interchange fees, which commitment, the Competition Council pro- the banks investigated determined as part of a ceeding in the case concluded that “the detri- horizontal agreement. (Competition Council mental effects arising from past overpricing due Resolution No. Vj-18/2008) In its resolution, to the nature of the cartel cannot be eliminated the Competition Council proceeding in the through commitments. According to current case determined that the MIF is an artificially practice, the proceedings cannot be terminated standardised cost factor which “represented the either by way of proposing commitments in case lower threshold of the price of acquiring service, of past behaviours that have already ended. It thus the agreement on interchange fees led to a also became clear that the fate of the interchange restriction of price competition among acquir- fee to be applied in Hungary is not directly in ing banks on the market of acquiring services.” the hands of credit institutions, but rather the (Competition Council Resolution No. Vj- card companies.” (Competition Council Reso- 18/2008 Section 199) In its resolution, the lution No. Vj-18/2008, Section 228) In terms Competition Council stated that the fact that of objective as well as effect, the behaviour of the agreement treated the cards of both com- those under investigation was competition panies in a uniform manner and that Visa and restricting according to the opinion of the MasterCard commissions were also recorded Competition Council proceeding in the case, in a uniform manner distorted competition which based its approach on that employed between the two large card systems and thus by the Commission in the MasterCard case. had a detrimental effect on competition. The The Competition Council proceeding in the

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case fined the entities under investigation ducing a cap with respect to interbank com- that were actively involved in concluding the missions and the fees to be paid by merchants. competition distorting agreement to a total This regulation, however, was repealed as of amounting to more than HUF 1.9 billion. 1 January 2011, which means there are cur- (Competition Council Resolution No. Vj- rently no regulations on this matter. (Keszy- 18/2008) Harmath Z. – Kóczán G. – Kováts S. et al., With respect to exemption, it must be em- 2011.) The GVH welcomed legislative efforts phasised that those under investigation had to regulate the rate of interchange fees. Ac- the opportunity to request individual exemp- cording to the GVH’s position, it would be tion until 1 January 2004, however, they opt- an appropriate solution if it were possible to ed not to take advantage of this opportunity review the effects of regulation from time to and also failed to prove this exemption during time or, should market dynamics so require, the competition supervision proceedings. It is adjust the interchange fee rates to a neces- also interesting that the entities investigated sary degree, taking into account the aspects lined up the same, inappropriately proven ar- of long-term consumer welfare. (GVH Press guments to support their exemption that were Release, 2009) referenced by MasterCard during its Com- At the EU level, the Commission prepared mission proceedings. (Competition Council a proposal that would cap the interchange fees Resolution No. Vj-18/2008) for cross-border card payments for consumer The Hungarian Competition Authority debit cards at 0.2 per cent, while in the case of currently has open competition supervision credit cards, this would come to 0.3 per cent. proceedings against MasterCard under No. [2013/0265 (COD)] Pending approval, the Vj-46/2012, and a decision is expected in directive could enter into force in 2015 at the the second quarter of 2014. The GVH press earliest, and Member States would have two release states that MasterCard “is allegedly in years to adapt these regulations into national a dominant position on the Hungarian market law. (Electronic Money Association) of cards, as in addition to its market share ex- In light of all this, we can see that at the ceeding 75%, its sole competitor, Visa is facing a levels of both the EU and individual Member pricing barrier regarding debit cards as a result States, competition authorities acted and are of the competition proceeding conducted by the still acting strictly and consistently against European Commission earlier. In contrast to this, competition restricting agreements. MasterCard does not have to face the pricing barriers that Visa does and therefore, it is presumed that the prices (multilateral interchange fees) ap- Abuse of dominance on the plied by MasterCard are sufficient for disclosing financial data-feed market competitors.” (GVH Press Release, 2012) The GVH’s proceedings were aimed at uncovering The efficient operation of financial markets whether it has abused the dominance under requires access to information, as well as review in the period investigated. reliable and up to date market data on The regulation of interchange fees arose at financial instruments. The world’s largest the level of legislation during the proceed- financial institutions and information services ings of both the European and the Hungar- providers enjoy significant market power on the ian competition authorities. Act CL of 2009 financial data-feed market. These markets are amended the Payment Services Act by intro- characterised by a high degree of concentration

38 Public Finance Quarterly  2014/1  focus – Competition and Regulation  which raises competition law concerns (Report not charge, for the distribution of ISINs, on Competition Policy, 2011). With respect more than necessary to recover the costs to financial data services, there have been two incurred for such distribution and only if cases connected to grave abuse of dominance they are the direct supplier of ISINs. (Case on the financial markets. In these two cases, COMP/39.592 – Section 29) In accordance the Commission investigated whether the with the principle, if they do not directly undertakingsdominant in different markets provide the ISIN, there should be no charges abused their dominant positions. at all to users. In its decision, the Commission stated that by charging unfairly high fees to direct users, and by charging a licensing The Standard and Poor’s case fee for indirect users, S&P failed to comply with the aforementioned principle (Case Following complaints received, in 2009 the COMP/39.592 – Sections 31 and 37). Commission opened formal proceedings In order to address the Commission’s against Standard & Poor’s (hereinafter: S&P) competition-related concerns, S&P made with respect to access to financial data, as it commitments, of which the amended presumed that the enterprise, abusing its commitments submitted on 13 September market dominance, set unfairly high prices 2011 were accepted in November 2011 by on the market of International Securities the Commission, which in its decision made Identification Numbers (ISINs) (European these compulsory for S&P for a period of five Commission – MEMO/09/6). In its decision years. Pursuant to Article 9 of the 1/2003/ (Case COMP/39.592 – Standard & Poor’s), EC Regulation, the Commission may accept the Commission stated that pursuant to its commitments from enterprises against statement of objections, S&P had infringed which there is suspicion of competition law • point a) of Article 102 of the TFEU infringement, provided these commitments (directly or indirectly imposing unfair are in line with the expectations set out for purchase or selling prices or other unfair them by the Commission in its preliminary trading conditions;), and assessment. Such decisions can be accepted for • Article 54 of the EEA Agreement by setting a fixed period, and stipulate that no further unfairly high fees for the supply of US Inter- measures may be justified on the Commission’s national Securities Identification Numbers part. In accordance with the commitments (Case COMP/39.592 – Section 2). offered, S&P undertook S&P has a dominant position on the mar- • to abolish all charges to indirect users for ket of the distribution and licensing of ISINs the use of US ISINs within the EEA (Case as it has a monopoly on the market for the COMP/39.592 – Section 45); allocation of ISINs (Case COMP/39.592 • in respect of direct users and information – Sections 24–25). Pursuant to the ISO service providers that decide to obtain cost-recovery principle (the ISO-system was US ISINs from S&P, to distribute these developed by the International Organisation for them separately from other added for Standardisation, and is a wholly value information, on a daily basis (Case unique, standardised and internationally COMP/39.592 – Section 46); recognised securities identifier system – Case • to ensure that direct and indirect users COMP/39.592 – Sections 15–16), national as well as ISPs which currently have a numbering agencies – such as S&P – must contractual relationship in place with

Public Finance Quarterly  2014/1 39  focus – Competition and Regulation 

S&P for the use and/or distribution for the damages caused to consumers as well of US ISINs, will have a right to early as for restricting competition on the market termination of their existing contracts for real-time data-feeds [Case COMP/39.654 (Case COMP/39.592 – Section 47). – Reuters Instrument Codes (RICs) – Section According to Joaquín Almunia, Commissioner 43]. According to the Commission’s findings, Responsible for Competition, by abolishing Thomson Reuters appears to be dominant in the unreasonably high and unreasonable fees the worldwide market for consolidated real- of S&P licensing fees, the costs of banks and time data-feeds [Case COMP/39.654 – Reu- other financial service providers will be reduced ters Instrument Codes (RICs) – Section 33]. significantly, which will improve the efficiency Dominance in itself is not anti-competition, of European financial markets (European however, if a given enterprise uses said Commission – IP 11/1354). dominance to reduce or eliminate competition in the market – as Thomson Reuters did in the opinion of the Commission –, this must The Thomson Reuters case be viewed as if said enterprise abused its dominant position and shall be considered a In 2009, the Commission opened formal violation of Article 102 of theTFEU. proceedings against Thomson Reuters for On 7 November 2012, Thomson Reuters, the abuse of its dominant market position while disagreeing with the Commission’s in the area of real-time market data-feeds opinion, submitted a proposal for commitments and in connection with the rules accepted in to the Commission, a proposal amended connection with the use of Reuters Instrument several times. Pursuant to this, it would offer Codes (RICs are short, alphanumerical codes a license (an ERL) to customers that, at the developed by Thomson Reuters that identify time of applying for the ERL, are subscribed securities and their trading locations) (Eu- to a Thomson Reuters Consolidated Real- ropean Commission – IP/09/1692). The Time Data-feed Service [Case COMP/39.654 Commission voiced its concerns over the fact – Reuters Instrument Codes (RICs) – Section that Thomson Reuters violated competition 49]. This license comprises all applications law when it prevented consumers as well as authorised as part of Thomson Reuters’s competitors from using the RIC codes to access consolidated real-time data-feed. The ERL data from consolidated real-time data-feeds allows customers to license additional RIC offered by other service providers. One of the symbology usage rights for the purpose of concerns was that Thomson Reuters prohibits switching providers of consolidated real-time third parties from creating and maintaining data-feeds. [Case COMP/39.654 – Reu- mapping tables incorporating RICs that ters Instrument Codes (RICs) – Section 50]. would allow the systems of Thomson Reuters’ In addition, Thomson Reuters undertook customers to interoperate with consolidated to provide ERL licensees with regular and real-time data-feeds of other providers [Case timely updates of the relevant RICs [Case COMP/39.654 – Reuters Instrument Codes COMP/39.654 – Reuters Instrument Codes (RICs) – Section 3]. The Commission came to (RICs) – Section 51]. Customers can use ERLs the preliminary conclusion that the practices worldwide. In its decision, the Commission of Thomson Reuters create substantial barriers accepted the commitments proposed by Thom- for datafeed providers who are looking to son Reuters [Case COMP/39.654 – Reuters switch. As a result, it is deemed to be liable Instrument Codes (RICs) – Section 98].

40 Public Finance Quarterly  2014/1  focus – Competition and Regulation 

The competition law significance of the sent to industry players. [C(2012) 440 final] Commission’s decision is multi-layered. In its decision, the Commission determined According to the study by Mairi McMartin that authorising the transaction would create (2014), this decision reaffirms that the a quasi-monopoly (over 90 per cent) on the Commission is determined to enforce global on-exchange derivatives market. Due to competition law on the market of financial the high barriers to entry, it would be practically services, which objective is also reinforced by impossible for other players to enter the market, the LIBOR/EURIBOR decision of 4 Decem- players that would be able to compete with the ber 2013. We must also draw attention to the post-merger mammoth company. Thus would fact that with this decision, the Commission eliminate competition on a global scale, and made a market, where until now there was would thus also have a negative effect on the no competition due to Thomson Reuters’ European economy. (European Commission monopoly, competitive. At the same time, – IP/12/94) In their commitments, NYSE the decision also contributed to greater and and DB – amongst other things – argued that more transparent access by consumers to real- consumers would pay a lower amount to insure time market data, which plays a crucial role in their investments. Furthermore, they also making investments, and thus contributed to proposed that in the case of certain agreements, the more efficient and transparent operation they would ensure access to the post-merger of financial markets. company’s clearing services. The Commission felt that these potential benefits do not offset the disadvantage caused to consumers by the Mergers merger. Pursuant to Article 2(3) of Council Regulation (EC) No 139/2004 Merger Deutsche Börse/NYSE Regulation): a concentration which would significantly impede effective competition, in On 29 June 2011, NYSE Euronext (hereinafter: the common market or in a substantial part of NYSE) and Deutsche Börse (hereinafter: DB) it, in particular as a result of the creation or requested the Commission to authorise the strengthening of a dominant position, shall merger of the two companies, which companies be declared incompatible with the common qualify as major market players on the market market. Consequently, on 1 February 2012, in of exchange-traded financial derivatives. If decision No. C(2012) 440, the Commission the NYSE and DB merger had been allowed did not clear the merger. Deutsche Börse to go ahead, it would have created the largest appealed against the decision at the Curia and exchange in the world. [C(2012) 440 final] On the case is currently in progress under case no. 4 August 2011, the Commission announced T-175/12. (Curia) that it is declaring the proposed merger to be a second-phase (so-called in-depth) merger procedure. A proposed concentration is declared Summary to be a second-phase procedure if the given competition authority must examine the given With its decisions regarding the EIRD and sector more thoroughly and comprehensively YIRD cartels, the Commission made its first to see what impact the merger would have decisions on the financial markets since the on the given market(s). During the second- onset of the 2008 economic crisis. These may phase procedure, over 150 questionnaires were be considered sort of guidelines for banks

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with respect to the future, but shall also must note that the Commission granted serve as guidelines for proceedings already individual exemption to Visa in 2002, whereas in progress, thus the two decisions definitely it employed a different approach in its 2007 have outstanding significance. With the record decision concerning MasterCard, where the fine imposed, the Commission reaffirmed entity under investigation was unable to its already declared position that it would prove that its anticompetitive behaviour fully act in the strictest manner possible against meets all four exemption criteria. During cartels, which position will presumably also its competition supervision proceedings, be reflected in future decisions. We must note the Hungarian Competition Authority – that in addition to the investigations launched in line with the most recent Commission in connection with the manipulation of approach – employed the approach utilised interbank reference rates, the re-regulation in the MasterCard case. At the EU level, the of the calculation of these rates was also Commission prepared a proposal that would started, as the authorities concluded that the cap the interchange fees for cross-border card calculation method cannot be replaced by payments for consumer debit cards at 0.2 per another system, and as such, the method must cent, while in the case of credit cards, this be regulated more prudently. would come to 0.3 per cent. The directive In the Hungarian bank cartel case, could enter into force in 2015 at the earliest, the Hungarian Competition Authority and Member States would have two years to determined that banks, that otherwise compete implement these rules into national law. with each other, harmonised their behaviour, In the two cases that arose on the mar- and thus while exhibiting anti-competitive ket of financial information provision, the conduct, they participated in illegal cartel Commission dissolved arising competition law activity in order to restrict the provision of concerns by making commitments pursuant loan refinancing loans. For this reason, the to Article 9 of Regulation 1/2003/EC made Hungarian Competition Authority fined the by enterprises mandatory, as opposed to banks under investigation to a record amount. the fines applied in connection with the It is clear that over-the-counter trading of manipulation of interbank reference rates. credit default swaps carries grave economic This proves that not all anti-trust decisions risks, which is why it shifted into the focus end with fines, and this is especially true for of regulatory efforts at the EU level as well. swiftly changing markets such as the market of With respect to the issues arising in relation financial information provision for instance. to the planned amendment of the MiFID Through the strict commitments, amended Directive, we can determine that the increased several times, the Commission showed its enforcement of competition rules, and thus determination to enforce competition law on the increasing of competition, improves the market of financial services, thus allowing stability in the financial sector, therefore, the consumers more accurate and transparent Commission is currently on the position that access to market data, in which credit rating the reinforcement of prudent regulations, agencies and other financial information along with the stricter enforcement of providers play a key role. competition rules, would jointly establish a The most recent significant merger case more appropriate regulatory environment – related to money markets was the planned amongst others – on the CDS market as well. merger of the NYSE and DB. During the In connection with interchange fees, we investigation that was declared to be second-

42 Public Finance Quarterly  2014/1  focus – Competition and Regulation  phase, it was determined that the entity be noted that in this case, the Commission thus created would have a more than 90 viewed the global financial derivatives mar- per cent market share on the global market as the relevant market, which reflects ket of exchange traded financial derivatives, how carefully the Commission acts in its therefore, the Commission prohibited the competition supervision proceedings. proposed concentration pursuant to Article In light of all this, we can observe that 2(3) of the Merger Regulation, despite the competition authorities at both EU and fact that the parties were ready to make several national level have made considerable effort commitments in the interest of authorisation. to mitigate the damages caused by the global The Commission concluded that these financial crisis, and are thus promoting the potential benefits do not offset the disadvantage protection of consumers and the transparent caused to consumers by the merger. It must and efficient operation of the various sectors.

Notes

10 London Interbank Offered Rate = benchmark with the internal market: all agreements between interbank interest rate offered to banks in London. undertakings, decisions by associations of undertakings and concerted practices which may affect trade between 2 If a panel bank were to receive short term interbank Member States and which have as their object or effect credit for a large loan amount, it would in essence the prevention, restriction or distortion of competition admit having liquidity problems, whereas if it within the internal market […]” submits a lower number, it signals that it considers itself financially sound and stable. 7 “The essence of CDS transactions […] is that the issuer of the CDS provides insurance against the default of the 3 As part of the Amnesty Plus programme, US issuer of a debt security for a specific, regular fee. The fee prosecutors may offer and grant immunity or fine paid by the buyer of the CDS is called the CDS spread. reduction to those that during cartel investigations Since the developments in CDS spreads follow the provide the authorities with valuable information probability of default of the issuer (companies, states) regarding an undetected anti-trust infringement of the insured product, the spread has become one of the or another undetected cartel. For more details see: most important indicators of risk assessment in recent Criminal Enforcement Of Antitrust Laws: The U.S. years.” (Horváth D. – Kuti Zs. – Ligeti I., 2013) Model. Online: http://www.justice.gov/atr/public/ speeches/218336.pdf 8 JP Morgan, Bank of America Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, 4 Against OTP, Erste, MKB, Raiffeisen, CIB, Crédit Suisse First Boston, Deutsche Bank, Gold- Unicredit, Budapest Bank, Citibank, FHB, K&H, man Sachs, HSBC, Morgan Stanley, Royal Bank of Magyar Cetelem, Takarékbank and UCB. Scotland, UBS, Wells Fargo Bank/Wachovia, Crédit Agricole and Société Générale 5 “The following shall be prohibited: all agreements and concerted practices between undertakings […] which 9 The honour-all-cards rule: “According to the honour- have as their object or effect the prevention, restriction all-cards rule, the merchant is obliged to accept all or distortion of competition.” types of cards issued by a given card company.” (Keszy- Harmath Z. – Kóczán G. – Kováts S. et al., 2011, 6 “The following shall be prohibited as incompatible p. 10)

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10 Blending is a method applied by card acquirer banks, In such cases, the acquirer bank charges the same where in contracts concluded with merchants, they merchant fee, irrespective of the card used for do not discriminate between the cards of different payment. (Keszy-Harmath Z. – Kóczán G. – Kováts card companies with respect to the merchant fee. S. et al., 2011)

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European Commission – SPEECH/13/593. On- Markit Group Limited. Online: http://www.markit. line: http://europa.eu/rapid/press-release_SPEECH- com/Company/About-Markit) 13-593_en.htm?locale=en Competition Council Resolution No. Vj-18/2008. Merger Regulation: Council Regulation (EC) Online: http://www.gvh.hu//data/cms992218/Vj018- No 139/2004 of 20 January 2004 on the control of 2008_m.pdf concentrations between undertakings , OJ L 024, 29/01/2004, p. 1–22 Curia. Online: http://curia.europa.eu/juris/documents.jsf?pro=&lgrec=hu&nat=or&oqp=&lg=&da GVH Press Release, 2009 Online: http://www.gvh. tes=&language=hu&jur=C%2CT%2CF&cit=none hu/sajtoszoba/sajtokozlemenyek/2009-es_sajtokozle- %252CC%252CCJ%252CR%252C2008E%252C menyek/6238_hu_korultekintoen_szabalyozna_a_ %252C%252C%252C%252C%252C%252C%2 bankkozi_jutalekot_a_gvh.html 52C%252C%252Ctrue%252Cfalse%252Cfalse&t d=ALL&pcs=Oor&avg=&page=1&mat=or&parties GVH Press Release, 2012 Online: http://www.gvh. =Deutsche%2BB%25C3%25B6rse&jge=&for=&c hu/sajtoszoba/sajtokozlemenyek/2012-es_sajtokozleme- id=502093 nyek/7752_hu_versenyhivatali_eljaras_indult_a_master- card_europe_sprl-lel_szemben.html?query=MasterCard Competition Council Resolution No. Vj-74/2011. Online: http://www.gvh.hu//data/cms994226/Vj074_ IntercontinentalExchange Group, Inc. Online: 2011_m_v.pdf https://www.theice.com/about.jhtml

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