Expanding the Reach of the Commodity Exchange Act’s Antitrust Considerations

Gregory Scopino is an Adjunct Professor of Law at Georgetown University Law Center and a Special Counsel with the Division of Swap Dealer and Intermediary Oversight (DSIO) of the U.S. Commodity Futures Trading Commission (CFTC). This post is based on a recent article authored by Professor Scopino, who wrote the article in his personal capacity and not in his official capacity as a CFTC employee. The analyses and conclusions expressed in the article (and this post) are those of Professor Scopino and do not reflect the views of other members of DSIO, other CFTC staff, the CFTC itself, or the United States.

In recent years, a small group of financial institutions have paid billions of dollars to settle civil and criminal claims that they formed cartels to rig the prices of certain critically important financial instruments and to stifle competition in others. For example, bankers would rig global benchmark interest rates, such as the London Interbank Offered Rate (LIBOR), for the purposes of benefitting their trading positions in over-the-counter (OTC) interest-rate swaps, which are bets on future interest rate movements. By conspiring with horizontal competitors to fix the benchmarks that were components of the prices of financial instruments, financial institutions and their employees harmed competition by distorting the normal market factors that governed the prices of those instruments. These collusive schemes were facilitated by the fact that the markets for certain types of derivatives are oligopolies dominated by a handful of global banks.

The U.S. regulator for these markets, the Commodity Futures Trading Commission (CFTC), has been at the forefront of investigating these schemes. Congress created the CFTC in 1974 to serve as the congressionally-designated expert on the markets for derivatives. Congress gave the agency civil enforcement powers and broad rulemaking authority to achieve the objectives of the statute that provides the regulatory framework for U.S. derivative markets—the Commodity Exchange Act (CEA). The statute’s objectives include providing market participants with a means for managing and assuming price risks and discovering prices, as well as promoting fair competition among market participants. From an institutional perspective, the CFTC is the in the best position to investigate and pursue misconduct in the markets that it oversees.

Yet an analysis of the existing laws and regulations governing the derivatives markets reveals gaps in the CFTC’s ability to combat anticompetitive schemes. The CFTC has broad authority to combat fraud and market manipulation, but it is not feasible to place all relevant forms of anticompetitive conduct into one of those two categories. Antifraud claims generally require proof of misrepresentations or deceit, but institutions can engage in anticompetitive conduct without being deceptive. Likewise, market manipulation claims require proof that the defendants acted with the specific intent to cause an artificial price, which is nearly unprovable. As a result, fraud and market manipulation causes of action cannot reach all types of anticompetitive schemes, such as group boycotts in which cadres of financial institutions collectively decide to refuse to deal with other competitors. Antitrust law, however, is an excellent vehicle to combat all manner of actions that harm competition. Under U.S. antitrust law, conspiracies by horizontal competitors to rig prices are strictly prohibited, even if the conspiracy in question only fixes a component of the price of a product, as was the case when groups of financial institutions rigged interest rates that served as components of the prices of interest-rate derivatives.

An overlooked provision of the Dodd-Frank Act of 2010 gave the CFTC “Antitrust Considerations” authority to combat anticompetitive conduct, but this provision only applies to 100 or so large firms, called swap dealers, which is a loophole so wide that the vast majority of market participants are beyond the provision’s reach. Indeed, several of the financial entities that have, in the past several years, reached settlements in enforcement actions and private lawsuits over anticompetitive conduct in the derivatives markets were not regulated swaps dealers. The CFTC regulation implementing the Antitrust Considerations did not take effect until much of the benchmark rate-rigging conduct had already taken place, but the fact that the provision only applies to swap dealers will greatly limit its reach and effectiveness as a tool for combatting future anticompetitive schemes in the markets for derivatives.

As it stands, the CFTC cannot combat anticompetitive conduct by non-swap dealers who do not engage in some form of fraud or act with the specific intent to cause an artificial price. Fortunately, the CFTC has been able to fit existing benchmark-rate rigging misconduct within the ambit of fraud or market manipulation prohibitions, but that might not always be the case.

Accordingly, Congress should amend the CEA to expand the reach of the Antitrust Considerations to prohibit any person who causes (or attempts to cause) unreasonable restraints of trade or material anticompetitive burdens in the markets for derivatives. Alternatively, the CFTC should promulgate such a regulation. A broad prohibition against anticompetitive conduct in these markets would help achieve the CEA’s objectives of providing market participants with a means for managing price risks and discovering prices, along with helping to ensure that market participants compete fairly with one another. Conspiracies to fix the prices of derivatives not only harm the price discovery process and prevent market participants from accurately managing price risks, they also are antithetical to the fair competition that Congress sought to achieve with the CEA. Therefore, my article makes the case that the reach of the Antitrust Considerations should be expanded to provide the agency that is the congressionally-designated expert on the markets for derivatives with broad authority to prevent anticompetitive conduct in those markets.

The full article is available for download here.

Both comments and trackbacks are currently closed.