EURIBOR investigation closed but financial services in the spotlight

On 07 December 2016, the European Commission announced the closure of its five-year long investigation into the Euro Interbank Offered Rate (EURIBOR) cartel. This concluded in a total fine of over €485m for three institutions. However, the European Commissioner for competition, Margarethe Vestager, emphasised that the European Commission’s work in this sector is “not done”.

The closure of the EURIBOR cartel investigation

The European Commission began investigating the trading of Euro interest rate derivatives (EIRD) linked to EURIBOR in 2011. In 2013, Deutsche Bank, Société Générale, Barclays and RBS were fined in relation to a cartel involving the manipulation of the EURIBOR rates. All of these institutions had entered into settlement discussions with the Commission and the fines imposed resulted from that settlement procedure.

The Commission also brought proceedings against HSBC, JP Morgan and Crédit Agricole. These three institutions did not settle with the Commission in 2013 and it took the Commission a further three years to prove its case against these institutions. HSBC received a fine of €33,606,000 and has already lodged its appeal against its fine with the General Court, claiming that it was not part of an “anticompetitive EURIBOR cartel”. Crédit Agricole received a fine of €114,654,000 and it has stated that it intends to appeal to the General Court. JP Morgan received a fine of €337,196,000 and is still considering its next steps.

The Commission’s approach to financial benchmark cases

Although the individual cases involving this type of conduct relate to different financial products in a variety of currencies, the Commission’s approach to them is often similar. For instance, the majority of the cases involving this type of behaviour were brought to light by leniency applicants (eg EURIBOR, Yen LIBOR). The secretive nature of these cartels means that it would be very difficult for the Commission to uncover them independently. Moreover, leniency applicants are required to genuinely, fully, and continuously cooperate with the Commission’s investigation and to do so expeditiously. Barclays blew the whistle on the EURIBOR cartel, gaining full immunity from fines. It settled its case with the Commission in 2013, but continued to cooperate with the Commission and provide it with evidence that was ultimately used by the Commission to strengthen its case against the institutions fined in December 2016.

Another hallmark of the Commission’s approach is that significant time and resource is required for the Commission to gather its evidence and produce its findings, as highlighted by the closure of the EURIBOR investigation five years after it was opened. The Commission’s decision into the foreign exchange manipulation case has also not been issued, despite investigations by the European Commission beginning in summer 2014.

However, whilst the Commission’s process may be lengthy, this does not mean that its penalties are light when they are eventually imposed. All the penalties imposed in the EURIBOR case were substantial, with the most recent three fines being imposed for very short periods of infringements of no more than five months. In the Swiss Franc Derivatives decision of 2014, three institutions were fined over €32m. In the Yen Interest Rate Derivatives case, where the JPY LIBOR and Euroyen TIBOR were affected, institutions were fined over €669m for periods of infringement that were again relatively short. Indeed, when the first decision was issued in 2013 (for the EURIBOR and Yen LIBOR settlement), the €1.49bn fine was, at the time, the largest fine ever imposed by the Commission, for conduct over a single maximum period of 32 months. By contrast, the larger fine of €2.6bn, issued in summer 2016 to truck producers, related to infringing conduct that took place over a period of 14 years.

The enormity of these fines is likely due to the fact that the Commission calculates fines by reference to the parties’ “value of sales” of the products concerned by the infringement. In the case of cartelised goods, this “value of sales” approach (in theory) accounts for harm posed to consumers by the higher prices charged as a result of the cartel. However, in financial benchmarks or derivatives cases, the “value of sales” may represent an artificially high figure in relation to behaviour that is not necessarily harmful to consumers and/or a benefit to the institution.

For instance, in a benchmark manipulation case such as EURIBOR, the effects of the manipulation of an underlying benchmark for a particular product may be minimal (or even non-existent if the influenced submission is cancelled out by other market movements), whilst the cash received by the institution from transactions using the manipulated benchmark will be worth several million Euros. In spite of this, the Commission does not account for whether the parties’ actually benefited from the cartel; only that the parties’ intended to restrict competition during a particular period (as is consistent with the principles of EU competition law) - leading to the vast fines that we see today.

The Commission’s next steps

Commissioner Vestager noted that “the Commission will not hesitate to investigate and sanction any new cartel it may uncover in the future in the financial industry”, even when announcing the closure of the EURIBOR cartel.

The continued focus on the financial services sector is not particularly surprising. The Commission is yet to issue its decision on the manipulation of foreign exchange benchmarks, despite the numerous penalties issued by several financial services regulators to banks involved in the conduct. There may well be others that are currently with the Commission or set to be reported, as greater numbers of financial institutions develop a culture of approaching regulators to report problems.

Furthermore, a new EU Benchmarks Regulation is set to come into force in 2018, which will impose (amongst other things) requirements for greater transparency of benchmark submissions and require notification to financial regulators where manipulation has been suspected. The EU Benchmarks Regulation will also make it a violation of capital markets rules to manipulate benchmarks.

In proposing this Regulation, the Commission expects to help prevent the behaviour it has uncovered in recent anti-trust cases, as well as empowering financial regulators to take action. This approach suggests that its aim of preventing cartels in the financial services sector may be realised by a number of routes, but that it has not yet been fully achieved.