The European Commission has accepted legally binding commitments from the International Swaps and Derivatives Association Inc. (ISDA), a trade organisation in the market for over-the-counter derivatives, and Markit, a financial information service provider, to license their IP on fair, reasonable and non-discriminatory (FRAND) terms (see here). This forms part of an EU-wide initiative to make financial markets more efficient, resilient and transparent.
The Commission opened an investigation into the credit default swaps (CDS) market in March 2011. A CDS is a contract designed to transfer the credit risk linked to a debt obligation – it can be traded ‘over the counter’ or ‘on an exchange’. The vast majority of CDS trading takes place over the counter, despite limited price transparency and high transaction costs.
The Commission was concerned that the parties had blocked or delayed the emergence of exchange traded products, which could be more effective, safer and cheaper. In particular, it found that:
- ISDA had refused to license (or restricted the use of) its proprietary rights in the ‘Final Price’ which determines the payment to be made following the default of a debt obligation; and
- Markit had refused to license its CDS indices which are essential to support new exchange products.
To address these concerns, the Commission has accepted legally binding commitments from ISDA and Markit to license their IP rights on FRAND terms. They have also committed to exclude CDS dealers from taking individual licensing decisions, as well as influencing such decisions.
It remains to be seen how the parties will go about setting FRAND terms particularly as they operate outside of the usual FRAND arena of telecoms where there is the most legal precedent and a more developed legal framework. Notably, the commitments are subject to mandatory third-party arbitration in case of dispute. This goes further than the Court of Justice’s only decision on FRAND which requires the parties’ agreement for any arbitration (Huawei v ZTE in relation to standard essential patents – see here). This decision is in a different context, but it is a useful reminder that remedies provided for by way of commitments may end up going further than what is required by law, despite there being no actual finding of infringement.