Last month’s $1.865 billion settlement of a US class action against 12 major banks for antitrust activity in the credit default swaps market presents a timely opportunity to review where things have got to in the European Commission’s investigation of anticompetitive conduct in the same market, and to consider what litigation may lie ahead.

Credit default swaps (or “CDSs”) are financial instruments that permit parties to trade the risk of a third party defaulting on a payment obligation.

The Plaintiffs in the US class action traded CDSs with the Defendant banks and, in their Consolidated Complaint, they made two key allegations:

  1. That the banks acted together to reduce transparency of CDS prices, enabling them to maintain bid/ask spreads – i.e. the difference between a bank’s buy price and sell price – that were wider than would have been possible in a transparent environment.
  2. That the banks conspired to frustrate attempts – principally through a joint venture by CME Group Inc. and Citadel LLP – to establish an exchange for trading CDSs which would have:
  • alleviated this problem of price opacity; and
  • given Plaintiffs an alternative to trading with the banks; and, indeed, a preferable alternative (even if the banks’ prices had been competitive) since exchanges permit transactions directly between those wishing to buy and sell, as opposed to over-the-counter (“OTC”) trading with banks who buy and sell as a service by which they profit through the bid/ask spread.

The class action was settled on 11 September 2015, but not all losses from the alleged activity were included in that action because the US court’s jurisdiction is restricted by Federal law: the Foreign Trade Antitrust Improvements Act. The Complaint specified that all Plaintiffs purchased CDSs from or sold CDSs to the Defendant banks“in the United States”.

What then are the prospects of pursuing claims in Europe for those whose alleged losses were excluded from the US action?

The European Commission investigation

On 1 July 2013, the European Commission sent a Statement of Objections (“SO”) to the same banks as were Defendants in the US action, but relating only to the second allegation in that action, that they prevented establishment of a CDS exchange.

The SO set out the Commission’s preliminary conclusion that, between 2006 and 2009, the banks infringed EU antitrust laws by colluding to prevent the establishment not only of an exchange by CME, but also one by Deutsche Börse, not mentioned in the US Complaint. According to the press release publicising the SO, the Commission’s view was that:

"the banks acted collectively to shut out exchanges from the market because they feared that exchange trading would have reduced their revenues from acting as intermediaries in the OTC market."

The SO was also addressed to two other institutions; the International Swaps and Derivatives Association (“ISDA”) and the financial information service Markit

ISDA and Markit were Defendants in the US action too, and the allegation against them in both proceedings was the same; that, pursuant to instructions from the Defendant banks that controlled them, they denied CME and (according to the SO) Deutsche Börse the licences for data and index benchmarks that they needed to operate an exchange.

The investigation is ongoing; the most recent news of it being aBloomberg report last May suggesting that the Commission was considering sending a revised SO to “smooth over cracks exposed at a May 2014 hearing”.

Litigation in England

Those with claims that could not be included in the US action may choose to litigate in England for various reasons.

There is a far heavier disclosure obligation on Defendants in England than in most European jurisdictions.

Claimants could take advantage of a new regime which came into being on 1 October 2015, which included:

  • an expansion of the jurisdiction of the Competition Appeal Tribunal (the “CAT”) to make it a centre of excellence for antitrust damages claims; and
  • the creation of an “opt out” collective actions procedure in the CAT similar in many respects to the US class action.

If the Commission finds there was an infringement of European antitrust laws, that decision will be binding on the English courts, so those who believed they suffered from the infringement could bring a follow on claim in which they need not prove liability. The court would only have to decide whether the infringement caused loss to the Claimant and, if so, how much.

The English Court would have jurisdiction as some addressees of the SO are English banks, which can serve as “anchor” Defendants to allow European addressees - BNP Paribas and Deutsche Bank - to be joined to the proceedings by virtue of Article 8(1) of the Brussels Regulation. Indeed, the basic rule is that the English Court accepts jurisdiction over non-European Defendants if they can be served in England; and all the adressee banks have a place of business or carry out activities in England so they can be served by virtue of Rule 6.9(2) of Part 6 of the Civil Procedure Rules.

As far as funding is concerned:

  • Own costs: English law changed in 2013 to permit lawyers to be remunerated from a share of the damages, but firms have not embraced this model and it is not available anyway for “opt-out” collective actions. However, third parties can fund the claim in return for remuneration on that basis.
  • Adverse costs: There is of course a “loser-pays” rule in English litigation, but this risk can be mitigated or eradicated by an insurance policy, the premium for which can be deferred so it is paid out of the damages or, in the event of loss, from the payout under the policy itself.

Liability for infringement of Article 101, the European law against anticompetitive agreements, is joint and several so adverse costs may be managed to an extent, as it is unlikely that all banks would have to be sued for there to be a full recovery.

Potential scope of English litigation

Frustration of exchange

The banks' preparedness to agree to such a large settlement in the US class action might indicate significant claims. However, given the apparent scope of the SO, any infringement decision by the Commission is expected to concern only the second allegation in that action; that the banks impeded a CDS exchange.

To successfully recover any damages in that regard, Claimants would probably have to prove on the balance of probabilities that, but for the collusion:

  1.  at least one of those exchanges would have been a success; and
  2.  either that:
    1. they would have used it, or
    2. at least the existence of the exchange would have improved OTC prices.

Chronological scope

The SO states the Commission’s preliminary view that the collusion lasted from 2006 to 2009, but this would not necessarily preclude damages sustained in later years.

The claim could include “run off” damages relating to the period where the infringement, although over, still affected prices. CME and Deutsche Börse never established their exchanges, so Claimants could potentially recover damages sustained up to 2013, or beyond. The SO notes that, in June 2013, an exchange was established by Intercontinental Exchange (“ICE”) but says:

"Whether this entry attempt will succeed is currently uncertain."

OTC price opacity

The SO does not appear to address the first allegation in the US action. Still, Claimants might wish to advance that allegation since, if they could show the banks infringed Article 101 by colluding in uncompetitive bid/ask spreads, it should increase the damages assessed by comparison between the OTC trading in fact done and the counterfactual trading the Claimants would have done had a CDS exchange existed.

The action could therefore be a hybrid one, in which liability for stifling the foundation of an exchange followed on from an infringement decision but the claim of collusion in OTC price opacity was standalone.

The suite of documents maintained by the Commission of its CDS investigation is maintained here.