Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Safeguarding competition in European financial markets is top priority: Alumnia, (Oct 17, 2013)

By John W. Arden, J.D., LL.M.

Since the proper functioning of Europe’s financial system is of crucial importance to funding the economy, safeguarding competition in the banking sector remains a top priority of the European Commission, Joaquin Alumnia, Vice President of the European Commission responsible for Competition Policy, said today in an address to the annual conference of the National Bank of Belgium in Brussels.

“We will spare no effort to make sure that market players abide by EU competition law, from State Aid to merger control, from abuses of dominance to fight against cartels,” Almunia remarked.

The official observed that the state of competition in Europe’s capital markets is “uneven,” with strong competition in the trading and clearing of equity, but weak competition in other financial instruments, such as derivative contracts.

Regulatory efforts. The Markets in Financial Instruments Directive of 2007 opened up equity markets, improving transparency and enabling new types of trading platforms to compete with traditional exchanges, Alumnia noted. The directive “has shown the benefits of more competition between financial operators” and has lowered prices and improved technology to the benefit of consumers.

Regulatory work is still ongoing with regard to the derivatives market, with the MiFIR regulation having been adopted by the Commission in 2011 and currently being discussed in the European Parliament and the Council. “To address the concentration in these markets, the measures proposed in MiFIR would lower the barriers of entry in exchange-traded derivatives markets and make them more contestable,” he explained.

The draft MiFIR regulation strikes a good balance between opening up markets to competition and ensuring the markets remain safe and stable, according to the official. The European Parliament has requested some amendments and discussions are ongoing.

Banking directive. The soon-to-be-adopted Bank Recovery and Resolution Directive will offer a set of instruments that can tackle potential banking crises at three stages: preventive, early intervention, and resolution. “Under the draft Directive, a bank under resolution can be recapitalised via the imposition of losses or the conversion into capital on shareholders and unsecured creditors, including junior and senior bondholders and some categories of depositors.”

“More importantly, the introduction of bail-ins would help break the vicious circle between banks and sovereign in which failing banks can undermine the financial stability of whole countries and ultimately erode their credibility vis-à-vis the markets.”

Antitrust and merger control. The competition chief concluded his speech with a review of enforcement efforts in antitrust and merger control.

The Competition Commission has investigated the market for credit default swaps (CDS), focusing on the attempts of Deutsch Borse and the Chicago Mercantile Exchange to enter the credit derivates business. According to preliminary findings, some of the world’s largest investment banks decided to block exchanges from entering the credit derivatives business in order to protect the revenues they gain by acting as intermediaries in over-the-counter deals.

“This practice is harmful because exchange-trading of credit derivatives could have made the trading of these contracts cheaper and could have improved the transparency and market stability,” he said. Once the investigation is completed and the investment banks respond, the EC will make a final decision.

With regards to the area of interest rate derivatives, the EC is investigating suspected cartel arrangements between traders involving a number of international banks and brokers. “We are trying to find out if traders of interest-rate derivatives colluded to manipulate the Euribor and Libor benchmarks in order to obtain a benefit in their own trading positions.” Such collusive behavior can be caught by antitrust rules, Alumnia noted. “Our cartel investigations are very well advanced, and there will be news soon.”

The EC will act if there are clear indications of manipulation of benchmarks in other markets, he said. Inspections were carried out last May at the premises of several companies active in providing services to the crude oil, refined oil, and biofuels sectors. “Our concerns in this case are that price benchmarks for a number of oil and biofuel products were distorted; in particular as a result of collusion between companies in the reporting process.”

Almunia used two mergers involving exchanges to illustrate the EC’s merger analysis. The proposed merger of Deutsche Borse and NYSE Euronext was prohibited in February 2012, since it would have created a monopoly. On the other hand, the acquisition of NYSE Euronext by InterContinental Exchange (ICE) was cleared in June 2013, because there remained a number of meaningful competitors in the market.

“In both cases, our assessment focused on the impact that each deal would have on the trading and clearing of derivatives,” he said.

The competition chief concluded by stating that financial markets will be treated “like any other” when it comes to competition control. “They will not receive special treatment from us, only special attention when financial stability is at stake.”

News: Antitrust