Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Major banks allegedly blocked competition in interest rate swap market, (Nov 30, 2015)

By Linda O’Brien, J.D., LL.M.

The defined benefit retirement system administrator for Chicago public school teachers has filed a complaint in the federal district court in New York City, alleging that major domestic and foreign financial institutions engaged in a conspiracy to manipulate the market for interest rate swaps by boycotting companies that attempted to launch public exchanges of the derivatives (Public School Teachers’ Pension and Retirement Fund of Chicago v. Bank of America Corporation, November 25, 2015).

The Public School Teachers’ Pension and Retirement Fund of Chicago (CTPF) is the administrator of a defined benefit public employee retirement systems providing retirement, survivor, and disability benefits for certain teachers and employees of the Chicago Public Schools.

Interest rate swaps (IRS) are a financial tool that allows investors to manage risk from rising interest rates. The most common type of IRS is an agreement between two parties to exchange interest-rate cash flows on a specific notional amount of principal for a fixed time period. Bank of America, Barclays Bank, BNP Paribas, Citigroup, Credit Suisse Group, Deutsche Bank, Goldman, Sachs, JPMorgan Chase, and The Royal Bank of Scotland are major banks that act as dealers in the IRS market.

According to the complaint, in the over-the-counter (OTC) market, investors must obtain quotes from one or more dealers and then negotiate a final actionable price. This outdated form of trading does not allow for competitive price shopping by customers and denies them immediate execution and access to real-time price information. As a result of the lack of transparency and limited price competition, the dealer banks allegedly were able to buy IRS lower and sell IRS higher than they would have been able to in a competitive market.

The dealer banks trade IRS with each other on electronic, exchange-like platforms and make sure that they are the only dealers allowed to trade IRS on these platforms. Beginning in 2007, the defendants agreed to block every potential market entrant that threatened to bring competition and transparency to the IRS market. Specifically, the defendants allegedly boycotted any entity or practice that had the potential to bring exchange trading to investors in the IRS market. Most recently, the defendants boycotted swap execution facilities (SEFs), which are exchange trading platforms, the complaint charges.

The complaint alleges that the dealer banks’ success in blocking recent market entrants is due to their tight control of the IRS market. There is no procompetitive justification for keeping the benefits of exchange trading for the dealers only. The only reason the current OTC market structure has persisted is the “greed and collective will” of the defendants, the lawsuit charged. The defendants’ collusion was responsible for “business as usual” prevailing in the IRS market, and bank representatives acknowledged they “desperately” want to preserve the status quo in order to protect their extraordinary profits made on IRS. Absent a conspiracy, the IRS market would be more efficient and transparent for investors, the plaintiff claimed.

The plaintiff asserts claims for unjust enrichment and violations of Section 1 of the Sherman Act. The action seeks declaratory and injunctive relief, treble damages, pre- and post-judgment interest, costs of suit, attorneys’ fees, and any other just and proper relief.

The case is No. 1:15-cv-09319.

Attorneys: J. Douglas Richards (Cohen Milstein Sellers & Toll PLLC), Joseph M. Burns (Jacobs Burns Orlove & Hernandez), and Daniel L. Brockett (Quinn Emanuel Urquhart & Sullivan, LLP) for Public School Teachers’ Pension and Retirement Fund of Chicago.

Companies: Bank of America Corporation; Bank of America, N.A.; Merrill Lynch, Pierce, Fenner & Smith Inc.; Barclays Bank PLC; BNP Paribas, S.A.; Citigroup, Inc. Citigroup Global Markets Inc.; Citibank, N.A.; Credit Suisse Group AG; Deutsche Bank, AG; Goldman, Sachs & Co.; JPMorgan Chase & Co.; JPMorgan Chase Bank; The Royal Bank of Scotland Group PLC; Tradeweb Markets LLC; UBS AG

News: Antitrust NewYorkNews