United States: EU Competition Law Enforcement Continues To Focus On Financial Services

Last Updated: August 12 2013
Article by Matthew Hall and Alessandro Nucara

On 1 July 2013, the European Commission (EC) sent a Statement of Objections (SO; a preliminary statement of its case) to 13 investment banks, as well as to the International Swaps and Derivatives Association (ISDA) and data service provider Markit, for an alleged infringement of the EU competition rules in the market for Credit Default Swaps (CDS).

According to the EC, the banks acted in a collective fashion to prevent exchanges from entering the CDS market. The idea was to delay the emergence of exchange trading of these financial products so as to maintain their own revenue levels.

At the time of the alleged breach of the EU competition rules (2006-2009), CDS were traded privately and bilaterally (so-called over the counter, OTC) instead of being traded on exchanges. In the EC's view, trading on exchanges increases stability and transparency of the whole system, which the EC is also trying to achieve through regulatory means (for example by reviewing the Directive on Markets in Financial Instruments, the MiFID Directive). Specifically, the alleged anticompetitive behaviour consisted of preventing ISDA and Markit from licensing the necessary data and index benchmarks to the exchanges so that their entry into the CDS market would be made more difficult, as well as coordination of the banks behaviour so far as concerns the choice of their preferred clearing house. The EC made it clear that this investigation and the regulatory action both have the same objective: "ensuring that derivatives trading is safer and more transparent".

This is one of a number of EC investigations in the financial services sector (which include the LIBOR investigation), which remains a priority area for the EC. Financial services providers should therefore continue to focus on compliance so as to minimize the risks of breaching competition rules.

First Car Parts Cartel Case in the EU Finishes

After more than three years of investigation, the EC has closed cartel proceedings against a number of car parts suppliers using its settlement procedure. The companies involved in the cartel bid-rigged (or attempted to bid-rig) a series of tenders for the supply of wire harnesses to a number of car manufacturers, including Toyota, Nissan, Honda and Renault. This is the first of what are likely to be several cartel decisions concerning car parts supplies in the EU.

As an immunity applicant under the EC's Leniency Notice, Sumitomo escaped the imposition of any fine; all the other participants in the cartel had their fines reduced for their cooperation in the investigation. Fines were further reduced under the settlement procedure by 10% for each infringer.

It is possible that the customers affected by this case will launch private damages actions against the cartelists, particularly since particular identified bids were involved. Although the parties chose in this case to use the settlement procedure, the interplay between it and the private enforcement of antitrust rules through actions for damages still constitutes a potential disincentive for companies to do so. In order to overcome this hurdle, the EC has proposed legislation on private enforcement which addresses the disclosure of settlement (and leniency) submissions before national courts (see EU Competition Newsletter of 1 July 2013).

EU State Aid: New Rules for Support Measures to Banks During the Financial Crisis

In order to respond to the financial crisis, the EC adopted in 2008-2009 a number of communications allowing State support to banks while seeking to minimize resulting distortions of competition. These rules have been updated from time to time since then, to adapt to market changes. The EC recently further revised these rules and issued a new Communication on the subject on 10 July 2013.

Although the main focus of the EC's assessment is still to guarantee financial stability, the new rules, which have applied as from 1 August 2013, require banks in most cases to present a detailed restructuring plan that ensures their long-term viability before they can receive recapitalizations or asset protection measures. In addition, the EC now requires that the burden of dealing with capital shortfalls is properly shared; shareholders and junior creditors will now have to contribute before any taxpayer's money is spent to support the bank. The new rules also introduce a requirement that failed banks implement strict executive remuneration policies.

As with previous communications, the new rules will have to be adapted to changes in market circumstances in the future. It also remains to be seen how these new rules will interact with (and whether they will need to be amended because of) the evolving EU regulatory framework covering the banking sector. More generally, the adoption of new rules for restructuring aid specific to the banking sector is a sign that the EC expects State aid measures in favour of banks due to the crisis to continue in the near future. However, the EC wants to take into account the different financial situations in the EU Member States and to guarantee, through less flexible rules, that everyone abides by the same rules.

State aid: EC Consults on a Range of New Rules

In the framework of its State Aid Modernisation Plan (SAM), in July the EC launched a number of consultations on both general and sector-specific State aid rules. With the SAM, the EC aims at clarifying and streamlining current State aid rules so that public support to specific companies or sectors "become more efficient, effective and targeted at growth-promoting policies that fulfil common European objectives". With this in mind, the EC launched the most recent wave of consultations (after consulting on rules for State aid to broadband, regional aid, environmental aid, R&D aid and procedural rules), seeking stakeholders' views on (i) a new General Block Exemption Regulation (GBER), (ii) de minimis aid, (iii) rules on State aid to support risk finance, and (iv) rules for State aid to airports and airlines.

The current GBER allows aid to be granted for specific purposes (e.g. regional development, job creation/preservation, environmental objectives, risk capital etc.) without the need for notification to and approval by the EC. The EC is now consulting on additional categories of aid to be covered by a GBER II, such as aid for making good damage caused by natural disasters, social aid for transport for residents of remote regions, certain broadband infrastructure, innovation, culture and heritage, sports and multifunctional infrastructure. Other aid categories (e.g. aid for port infrastructure) could be included if there is specific and sufficient request from stakeholders. Interested parties can provide comments on the draft GBER II by 10 September 2013.

De minimis aid is aid of such a small amount that the EC deems it does not distort competition. Member States can currently grant a maximum of €200,000 on each three-year rolling period to companies for any project (under certain conditions). The EC proposes to maintain this ceiling. Failure to increase the de minimis threshold by the EC has been criticised by many stakeholders and no doubt we will see pressure to increase this ceiling during the consultation. Stakeholders can submit their comments up to 9 September 2013.

The risk capital measures under consultation would apply where such measures are not covered by the GBER II. Based on the results of a first consultation carried out in July 2012, the draft proposes more flexibility in defining eligible companies and forms of financing, with a view to further enhancing the ability of SMEs to access finance. The consultation will close on 17 September 2013.

Finally, the proposed rules for airports and airlines concern in particular investment in airport infrastructure, operating aid to airports and aid to airlines for the start-up of new routes. Interested parties can submit their views up to 25 September 2013.

Participating in these public consultations is a way to make one's views and concerns known to the EC before new rules are adopted. Companies as well as public bodies should consider participating in the public consultations in order to influence the decision-making process, if they feel they can benefit from or be impacted by the proposed rules.

Additional European competition law news coverage can be found in our news section.

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