Antitrust Law Daily Wrap Up, ANTITRUST NEWS: ISDA, Markit offer EC commitments in credit derivatives trading dispute, (Apr 28, 2016)

By Greg Hammond, J.D.

The European Commission is seeking public comment on certain commitments offered by the International Swaps and Derivatives Association Inc. (ISDA) and Markit Ltd., an information service provider. A statement of objections was sent to the two companies in July 2013, outlining the EC’s preliminary concerns that ISDA and Markit refused to license to exchange trading platforms certain data and indices used by the industry for the pricing of credit default swaps.

Credit default swaps—or CDS—are derivative contracts that are designed to transfer the credit risk, or risk of default, linked to a debt obligation. The EC holds the preliminary view that ISDA did not license rights to the “Final Price” indices, which is used industry-wide to price CDS after the default of a reference entity. Similarly, the EC believes that Markit did not license CDS indices to attract liquidity, such as its iTraxx and CDX indices. The failure to license these inputs for exchange trading, the EC said, may have blocked or delayed the emergence of exchange trading, possibly in violation of EU antitrust rules.

According to the EC, ISDA offered commitments to: (1) license all its rights in the Final Price for the purpose of exchange trading, clearing and/or settling of credit derivatives on fair, reasonable and non-discriminatory (FRAND) terms; (2) submit to a third-party arbitration procedure with binding effect in the event of a disagreement on the FRAND terms and conditions; (3) prevent investment banks from influencing ISDA’s decisions on licensing the Final Price by transferring the responsibility for the decision to license from ISDA’s Board of Directors to the Chief Executive Officer who must not seek the views of the banks; and (4) refrain from unilaterally terminating a Final Price license due to “auction manipulation concerns” unless ISDA demonstrates these concerns to the satisfaction of a monitoring trustee and proves that no other less stringent measure could address this risk.

Similarly, Markit has offered commitments to: (1) license its rights in the iTraxx and CDX indices on FRAND terms for exchange traded financial products based on the indices; (2) submit to binding third-party arbitration in the event of a disagreement on the FRAND terms and conditions; and (3) prevent investment banks from influencing Markit’s management in taking individual licensing decisions, in particular by reducing their influence in Markit’s Advisory Committees and by precluding them from discussing the merits of individual licensing requests.

Companies: International Swaps and Derivatives Association Inc.; Markit Ltd.

News: Antitrust