Of lending rates, information exchange agreements and competition-the Libor scandal and Article 101 TFEU

Banks are, once again, topping the news sheets, if they had ever stopped… And now it is for allegations of rigging the Libor exchange rate.  It is already rather disconcerting that such an important element in the determination of banking rates-whose value affects the lives of so many people-is, at least in its face, set up relatively informally (the Beeb have a good piece on it: http://www.bbc.co.uk/news/business-18613988). What is even more worrying is that, it is alleged, a number of traders have used this mechanism to manipulate these offer rates, in other words, to artificially alter their value. 

Determining artificially the value of Libor by declaring , however, is not a victimless crime, as the US authorities who have exacted an admission of liability from Barclays and other major banks, including the taxpayer owned RBS, have pointed out. Libor is the benchmarks for rates throughout the banking industry, affecting anything from mortgage to personal loan rates.

Apart from these considerations, the way in which these rates is set raises a number of potentially significant competition law questions: every day at 11am GMT, the "panel banks" communicate their offer rates to Thomson Reuters which collect these data on behalf of the BBA, for the purpose of setting an average rate of reference, which is then made public at 11:45am GMT (For an agile and easy to understand explanation of how the rate is determined see http://www.global-rates.com/interest-rates/libor/libor-information.aspx). So, nothing particularly "scientific", right?  However, what is problematic is that this is a mechanism through which sensitive, "fresh" and commercially significant information are pooled: while the identity of each of the bank giving details of their interchage rate is only known to ThomsonReuters, who the "panel banks" actually are is openly known.  It is therefore undeniable that the LIBOR calculation mechanism is the outcome of an information exchange arrangement among competitors, leading to the determination of a "reference rate" affecting a widespread variety and number of financial transactions and, therefore, impacting considerably on the trading conditions applied by key players on the banking market.

The legality ofinformation exchange agreements is a vexed issue in competition law, which has been examined by the EU courts in a number of cases.  In the banking market a parallel can be drawn with the credit rating information register at issue in the Asnef Equifax preliminary ruling (case C238/05, [2006] ECR I-11125), for instance.  As is well known, in that case  the Court of Justice took the view that an agreement for the exchange among banks of information relating to the "creditworthiness" of their clients, for the purpose of facilitating future decisions on whether to, inter alia, granting loans or other banking services to them, would not infringe Article 101 TFEU if a number of conditions were satisfied-in light of the domestic court's appreciation of each scheme (para. 54-56).  Access to the register had to be granted in a non-discriminatory fashion, in the sense of being open to any bank of financial institution that may be interested in obtaining these services; the information concerned customers and not the members of the scheme-in other words, lenders should not be identified or identifiable; and perhaps most importantly, the market must not be excessively concentrated, for, if that was the case, enhancing its transparency could allow the existing competitors to reciprocally align their behaviour, thus distorting any remaining competition (see para. 57-60).

It is acknowledged that the LIBOR mechanism presents several distinguishing features from those of a "credit rating register", such as the one in issue in Asnef: it concerns a "hypothetical" offer rate for borrowing from which banks can derogate.  Also, the circumstance that, at least in its face, the identity of each bank is unknown to the others, thus not allowing them to "match" rates to institutions, should prevent tacit coordination from arising.  However, it is undeniable that there are a number of significant similarities: just as with credit registers the identity of those to which the data refers (i.e the "panel banks") is openly known; also, the final figure is the result of an average calculation that takes into account each of the rates submitted to the data pooling organisation. Perhaps most importantly, LIBOR is a "key reference rate"-a  bit of a peg on which pretty much any other "significant" rate hangs.  On this point, it should be reiterated that according to the Court of Justice in Asnef, information exchange arrangements do not, at least in principle, infringe Article 101 TFEu by reason of their 'object' and that regard should be had to their actual context. Thus, this analysis could well reveal that these agreements may escape being caught by Article 101 TFEU on the ground that they are likely to facilitate the provision of banking and financial system and therefore represent a "reasonable" restraint on the freedom of trade of the parties (see Ausbanc, mutatis mutandis, para.  47-49). 

However, two further aspects merit consideration: the first concerns the state of the banking market.  According to the Asnef preliminary ruling, one of the conditions for the lawfulness of the credit rating register arrangement was that the market not be "excessively concentrated", for, if that was the case, any further exchange of "sensitive information" could make coordination among competitors more likely and thereby render the agreement capable of appreciably distorting any remaining competition.  On this point, it is accepted that the banking and financial markets are regarded as being worlwide: however, when regard is had to the state of the industry in the UK, one cannot deny that the British "domestic" segment of this market is characterised (for one reason or another) by the presence of a relatively small number of big players vis-a-vis which smaller banks can only represent a relatively limited countervailing factor when it comes to exerting competitive pressure.  Against this background, it could be questioned whether reducing the uncertainty as to the fixing of key rates via the Libor mechanism could further limit the "space of manuevre" left to rivals on this market to the point that the arrangement may no longer represent a "reasonable" restraint on competition for the purpose of securing "meritorious" objectives of stablity and good management in the provision of credit and other services.

The second consideration relates more closely to the alleged "rigging" of Libor rates, i.e. to the uncovered evidence that some banks had released artificial rates, i.e. rates that did not reflect the reality of their practices.  In a recent post, my colleague Andreas Stephan expressed doubts that this practice could amount to, and should therefore be treated as a cartel, with all the consequences (especially criminal) that this carries (see: http://competitionpolicy.wordpress.com/2012/07/11/should-libor-rigging-be-treated-like-price-fixing/): he emphasised among other features the fact that these figures "(…) are taken collectively as an indicator of how healthy those banks are individually and as a group. (…)"  It  may be agreed with Andreas that "(…) in this setting, some level of manipulation and tacit collusion seem inevitable (…)" due to the nature of the arrangement; nonetheless, it may wondered whether, given the centrality of Libor within the baking industry and, perhaps most importantly, the artificial nature of the Libor value determined as a result of the alleged "rigging", the implementation of the scheme could have led to conditions of competition on the credit market that did not correspond to the actual nature and to the features of the market itself.

Against this background, the "big" question is whether, despite being in principle a "reasonable" restraint on the freedom to trade of banks and financial institution, the Libor arrangement may represent, due to the manner in which it was implemented, a unlawful restriction on competition'by effect'.  While it is acknowledged that (as Andreas does in the blog post I previously referred to) the "criminal response" may not be appropriate, due to the regulated nature of the industry and to the "systemic" concerns characterising its functioning, this is a central question in respect to the "civil" responses to the Libor scandal: could bank customers for instance seek compensation for damages allegedly suffered as a result of an "artificially high" interest rate, by reason of their bank having taken Libor as its "benchmark"? This is admittedly a scenario that is taking shape in the US; however, as the BIS Consultation document seems to harbour a "new age" for standalone competition claims, it may not be excluded that the Libor scandal could lead to litigation in the UK courts as well.

It is however beyond doubt that the most concerning aspect of the Libor scandal lies in the perceived inability of regulators to constrain and discipline the behaviour of a relatively small and supposedly "well-educated" group of undertakings that act in a prima facie tightly surveilled market: it is acknowledged that "rough traders" are to blame for many of these practices.  However, it is equally clear that whoever was supposed to did not "see" or "hear" what was happening on the trading floor, thus revealing quite significant gaps in the internal governance as well as in the regulatory structure of an industry which should support the economy at this critical moment, just as the taxpayer did to it when banks really needed help.

Once more on the news-the Intel appeal gathers speed!

The Intel appeal is among the major and best known cases pending before the General Court so far: lodged in 2009 to challenge a decision in which the Commission had fined the applicant for allegedly abusing its dominant position, this case is likely to give more headache to DG Competition, since it is likely to reignite the discussion as to the extent to which its investigative proceedings comply with basic tenets of due process, equality of arms and rights of defence.

To date the Commission has sought to rebut criticism largely on the ground that in its view the overall "fairness" of its enforcement mechanisms would ultimately be guaranteed by the powers, conferred to the General Court and, on appeal on points of law, to the Court of Justice, to scrutinise its decisions, in accordance with Article 263 TFEU.  At the same time, the Commission has sought to refine its procedures, by adopting new Best Practices Guidelines and in general by aiming at making its procedures more transparent and with greater opportunities for dialogue with the investigating parties. In this context, the disclosure of evidence on which the Commission has relied to establish an infringement, contained in the case file, has represented a long standing bone of contention.  It may be argued that it is legitimate to limit, if not altogether to deny, access to evidence on grounds of confidentiality of business secrecy; this may be especially important when dominant companies are under investigation, as the disclosure of, e.g. evidence originating from a rival or downstream business partner, may expose the informant to the risk of retaliation.  However, how far can this justification be relied on?  The Court of Justice has repeatedly said to the Commission, in short, that "if you don't disclose it, you can not then rely on a specific piece of evidence".  Against this background, it is perhaps not surprising that the Intel appeal, currently being heard in Luxembourg, hinges more on issues of procedure than on questions of substance.

It is in fact well-established that dominant companies cannot engage in "loyalty inducing" practices, such as tying arrangements, albeit at advantageous prices for the buyer, discounts and rebates, even at the request of the counterpart; it was often held that these practices would result in competition being irremediably impaired by locking in customers in a long relationship with the market leader.  

This is not central, it seems, to Intel's case.  Bloomberg reports today (see: http://www.bloomberg.com/news/2012-07-02/intel-to-say-eu-withheld-evidence-mitigating-1-34-billion-fine.html) that before the General Court counsel for Intel (Nicholas Green QC) has argued that "the EU [Commission] failed to use mitigating evidence or to allow it respond to all of the allegations."  Intel has also contexted the complex legal assessment of the allegedly unlawful practices in light of Article 102 TFEU, on the ground that the Commission's case would be "simplistic", "static" and unable to capture the features of competition on the IT market.  It could eb argued that these pleas are surely not unconvincing: after all, the Commission's "short term" view of competition in new economy industries has been repeatedly criticised, as was the case in relation to, e.g., the Microsoft case, on the ground that it would not be able to gauge in full the implications of operating in a market characterised by network effects and where, as a result, industry leaders are likely to emerge and "rule the roost" for a limited temporal horizon (see e.g. the brilliant piece by Pierre Larouche-available at: http://socrates.berkeley.edu/~scotch/DigitalAntitrust/Larouche.pdf)  

However, it would appear that the applicant may have more luck in litigating the case on procedural grounds.  These arguments were at the core of the original appeal-see my interview with Charles Forelle on the WSJ, among other more important pieces… http://online.wsj.com/article/SB124826913522171933.html).  However, since then it has been uncovered that the Commission has been responsible for repeated procedural shortcomings in the course of the 8 year investigation against Intel-according to the EU Ombudsman, for instance, the failure to keep regular, full and accurate minutes of the meetings with Intel executives accounted to "maladministration" (see http://www.ombudsman.europa.eu/cases/summary.faces/en/4399/html.bookmark); the Ombudsman also highlighted the circumstance that complainants in the case, i.e. AMD, were allowed unusually ample access to the case file, thus raising suspicions of further procedural infringements (this time of the Commission's duty of confidentiality) to the detriment of Intel itself. 

Against this background, it is legitimate to ask if Intel's pleas will be upheld by the Court: surely, this will depend on a number of factors, although it is undeniable that the EU Ombudsman report could have a significant weightin assessing whethr these arguments are well-founded.  However, what is also certain is that, should Intel be successful, this would represent an indictment, to some degree, of the procedures before the EU Commission, who, as a result, may no longer be able to "duck these issues in the water" in public, by reiterating the overall soundness of its due process standards, and then quietly address any perceived shortcomings by the back door of its administrative practice.

The hearing is expected to last for another 4 days, according to Bloomberg and to the EU Courts' calendar (see http://curia.europa.eu/jcms/jcms/Jo1_6581/?tri=juridiction&dateDebut=4/07/2012&dateFin=4/07/2012).   Nonetheless, it is perhaps already justifiable to wonder whether Intel will be the decisive factor in prompting a root and branch reassessment of the DG Competition investigative and decision-making practices, with a view to secure effective, true and full compliance with principles of equality of arms, due process and fairness that are now an essential part of the fundamental rights' catalogue of the EU itself.