# C_2016153EN.01000701.xml

| 29.4.2016 | EN | Official Journal of the European Union | C 153/7 |
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29.4.2016

EN

Official Journal of the European Union

C 153/7

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Communication from the Commission published pursuant to Article 27(4) of Council Regulation (EC) No 1/2003 in Case AT.39745 — CDS Information Market — ISDA

(2016/C 153/06)

1.   Introduction

Introduction

| (1) | According to Article 9 of Council Regulation (EC) No 1/2003 (1), the Commission may decide – in cases where it intends to adopt a decision requiring that an infringement be brought to an end and the parties concerned offer commitments to meet the concerns expressed to them by the Commission in its preliminary assessment – to make those commitments binding on the undertakings. Such a decision may be adopted for a specified period and shall conclude that there are no longer grounds for action by the Commission. According to Article 27(4) of the same Regulation, the Commission shall publish a concise summary of the case and the main content of the commitments. Interested parties may submit their observations within the time limit fixed by the Commission. A Commission decision pursuant to Article 9 does not find an infringement. |
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(1)

According to Article 9 of Council Regulation (EC) No 1/2003 (1), the Commission may decide – in cases where it intends to adopt a decision requiring that an infringement be brought to an end and the parties concerned offer commitments to meet the concerns expressed to them by the Commission in its preliminary assessment – to make those commitments binding on the undertakings. Such a decision may be adopted for a specified period and shall conclude that there are no longer grounds for action by the Commission. According to Article 27(4) of the same Regulation, the Commission shall publish a concise summary of the case and the main content of the commitments. Interested parties may submit their observations within the time limit fixed by the Commission. A Commission decision pursuant to Article 9 does not find an infringement.

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2.   Summary of the Case

Summary of the Case

| (2) | On 1 July 2013, the Commission adopted a Statement of Objections (SO) within the meaning of Article 10 of Commission Regulation (EC) No 773/2004 (2) concerning an alleged infringement of Article 101 of the Treaty and Article 53 of the EEA Agreement by The International Swaps and Derivatives Association (ISDA) in relation to credit derivatives. An SO sets out a preliminary competition assessment and can serve as basis for commitments within the meaning of Article 9 of Regulation (EC) No 1/2003. |
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(2)

On 1 July 2013, the Commission adopted a Statement of Objections (SO) within the meaning of Article 10 of Commission Regulation (EC) No 773/2004 (2) concerning an alleged infringement of Article 101 of the Treaty and Article 53 of the EEA Agreement by The International Swaps and Derivatives Association (ISDA) in relation to credit derivatives. An SO sets out a preliminary competition assessment and can serve as basis for commitments within the meaning of Article 9 of Regulation (EC) No 1/2003.

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| (3) | In its SO, the Commission assumed that there could be a one-direction one-off migration from the market of OTC trading of credit derivatives to the potential new market for exchange trading of credit derivatives, as exchange-traded credit default swaps (CDS) or credit futures would be reasonable substitutes for liquid and standardised OTC traded CDS. A CDS is comparable to an insurance policy on corporate or sovereign debt (i.e., a bond or a loan) where the CDS buyer pays a quarterly premium and the CDS seller promises to cover the losses on the debt should the debtor go into default. While in OTC trading investment banks are needed as bilateral intermediaries between buyers and sellers (referred to as ‘CDS dealers’), they play an important role as liquidity providers in the start-up phase of exchange trading and are later disintermediated in an all-to-all and anonymous trading environment. |
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(3)

In its SO, the Commission assumed that there could be a one-direction one-off migration from the market of OTC trading of credit derivatives to the potential new market for exchange trading of credit derivatives, as exchange-traded credit default swaps (CDS) or credit futures would be reasonable substitutes for liquid and standardised OTC traded CDS. A CDS is comparable to an insurance policy on corporate or sovereign debt (i.e., a bond or a loan) where the CDS buyer pays a quarterly premium and the CDS seller promises to cover the losses on the debt should the debtor go into default. While in OTC trading investment banks are needed as bilateral intermediaries between buyers and sellers (referred to as ‘CDS dealers’), they play an important role as liquidity providers in the start-up phase of exchange trading and are later disintermediated in an all-to-all and anonymous trading environment.

| (4) | ISDA is a trade association representing the financial derivatives industry. ISDA has a broad membership including in particular also CDS dealers. In 2003 ISDA developed the Credit Derivatives Definitions which serve as standard documentation for OTC traded credit derivatives. The Credit Derivatives Definitions also incorporate a methodology to settle CDS contracts following a credit event by means of a credit event auction which provides the parties to a credit derivative contract with a price for the residual value of an underlying defaulted bond. This price is also referred to as the ‘Final Price’ or the ISDA Final Price. ISDA claims proprietary rights to the Final Price and in particular a right to license the use of the Final Price for the settlement of exchange traded credit derivative contracts. |
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(4)

ISDA is a trade association representing the financial derivatives industry. ISDA has a broad membership including in particular also CDS dealers. In 2003 ISDA developed the Credit Derivatives Definitions which serve as standard documentation for OTC traded credit derivatives. The Credit Derivatives Definitions also incorporate a methodology to settle CDS contracts following a credit event by means of a credit event auction which provides the parties to a credit derivative contract with a price for the residual value of an underlying defaulted bond. This price is also referred to as the ‘Final Price’ or the ISDA Final Price. ISDA claims proprietary rights to the Final Price and in particular a right to license the use of the Final Price for the settlement of exchange traded credit derivative contracts.

| (5) | According to the SO, Deutsche Boerse (Eurex) launched an exchange-traded credit futures product in March 2007 and CMDX, a joint venture between hedge fund Citadel and the Chicago Mercantile Exchange, intended to launch an exchange-traded credit futures product at the end of 2008. According to the SO, both entities sought licences to reference ISDA’s Final Price in their exchange traded credit derivatives in order to price their credit futures following the occurrence of a credit event. According to the SO, ISDA denied a licence for the Final Price to Eurex (in 2007) and to CMDX (in 2008). The SO also took the preliminary view that ISDA’s Board of Directors in 2007 adopted a resolution excluding the licensing of the Final Price for exchange-trading purposes. According to the SO, this resolution was implemented in a Use Agreement on the website www.creditfixings.com. The text of the Use Agreement remained unchanged since then and is still in force today. |
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(5)

According to the SO, Deutsche Boerse (Eurex) launched an exchange-traded credit futures product in March 2007 and CMDX, a joint venture between hedge fund Citadel and the Chicago Mercantile Exchange, intended to launch an exchange-traded credit futures product at the end of 2008. According to the SO, both entities sought licences to reference ISDA’s Final Price in their exchange traded credit derivatives in order to price their credit futures following the occurrence of a credit event. According to the SO, ISDA denied a licence for the Final Price to Eurex (in 2007) and to CMDX (in 2008). The SO also took the preliminary view that ISDA’s Board of Directors in 2007 adopted a resolution excluding the licensing of the Final Price for exchange-trading purposes. According to the SO, this resolution was implemented in a Use Agreement on the website www.creditfixings.com. The text of the Use Agreement remained unchanged since then and is still in force today.

| (6) | The SO raised the preliminary competition concern that ISDA’s conduct may have prevented potential entrants from successfully launching an all-to-all exchange trading platform for credit derivatives. ISDA contests that the Final Price was indispensable for settling exchange traded credit derivatives and it put forward a number of concerns for the integrity of the credit event auction if the Final Price were licensed for exchange trading purposes. A key concern of ISDA relates to the ability of bidders during a credit event auction to manipulate auction results in order to benefit from open contracts traded outside the auction on an exchange. |
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(6)

The SO raised the preliminary competition concern that ISDA’s conduct may have prevented potential entrants from successfully launching an all-to-all exchange trading platform for credit derivatives. ISDA contests that the Final Price was indispensable for settling exchange traded credit derivatives and it put forward a number of concerns for the integrity of the credit event auction if the Final Price were licensed for exchange trading purposes. A key concern of ISDA relates to the ability of bidders during a credit event auction to manipulate auction results in order to benefit from open contracts traded outside the auction on an exchange.

| (7) | The SO preliminarily qualified ISDA’s alleged licensing refusals as decisions of an association of undertakings which restricted potential competition within the meaning of Article 101 of the Treaty and Article 53 of the EEA Agreement. |
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(7)

The SO preliminarily qualified ISDA’s alleged licensing refusals as decisions of an association of undertakings which restricted potential competition within the meaning of Article 101 of the Treaty and Article 53 of the EEA Agreement.

3.   The Main Content of the Offered Commitments

The Main Content of the Offered Commitments

| (8) | ISDA disagrees with the preliminary conclusions set out in the SO. ISDA nevertheless offers behavioural and organisational commitments pursuant to Article 9 of Regulation (EC) No 1/2003 (the ‘Commitments’) to meet the Commission’s preliminary competition concerns in relation to the licensing of its Final Price. The key elements of the Commitments are described below. |
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(8)

ISDA disagrees with the preliminary conclusions set out in the SO. ISDA nevertheless offers behavioural and organisational commitments pursuant to Article 9 of Regulation (EC) No 1/2003 (the ‘Commitments’) to meet the Commission’s preliminary competition concerns in relation to the licensing of its Final Price. The key elements of the Commitments are described below.

(a)   Behavioural Commitments

Behavioural Commitments

| (9) | ISDA commits to granting licences to use the Final Price for the purposes of exchange trading to any Applicant on fair, reasonable and non-discriminatory (FRAND) terms and conditions within a negotiating period of 120 days (with a possible agreed extension of 30 days). |
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(9)

ISDA commits to granting licences to use the Final Price for the purposes of exchange trading to any Applicant on fair, reasonable and non-discriminatory (FRAND) terms and conditions within a negotiating period of 120 days (with a possible agreed extension of 30 days).

| (10) | ISDA is relieved from its obligations under its Commitments, and may, in particular, file a claim against any Applicant for Injunctive Relief before any court or tribunal for infringement of ISDA’s rights in the Final Price, without so doing constituting a breach of the Commitments, if:






  (i) | the Applicant fails to agree or comply with the provisions of a Final Price Trading Licence agreement, |
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(10)

ISDA is relieved from its obligations under its Commitments, and may, in particular, file a claim against any Applicant for Injunctive Relief before any court or tribunal for infringement of ISDA’s rights in the Final Price, without so doing constituting a breach of the Commitments, if:

(i)

the Applicant fails to agree or comply with the provisions of a Final Price Trading Licence agreement,

| (ii) | the Applicant is facing Imminent Default and fails to provide guarantees for the payment of its licensing fees, |
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(ii)

the Applicant is facing Imminent Default and fails to provide guarantees for the payment of its licensing fees,

| (iii) | a Final Price Trading Licence is terminated under the circumstances provided for in paragraph 17 of the Commitments. |
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(iii)

a Final Price Trading Licence is terminated under the circumstances provided for in paragraph 17 of the Commitments.

| (11) | According to paragraph 17 of the Commitments, ISDA may also terminate a licence under certain strict conditions where it demonstrates that Auction participants manipulate a credit event auction due to specific features of an exchange traded credit derivative that has been licensed by ISDA. ISDA considers this safeguard necessary to protect the integrity of the auction should other less disruptive measures fail to provide relief to the auction manipulation concern. |
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(11)

According to paragraph 17 of the Commitments, ISDA may also terminate a licence under certain strict conditions where it demonstrates that Auction participants manipulate a credit event auction due to specific features of an exchange traded credit derivative that has been licensed by ISDA. ISDA considers this safeguard necessary to protect the integrity of the auction should other less disruptive measures fail to provide relief to the auction manipulation concern.

| (12) | ISDA may also ask licensed trading venues to cooperate in good faith with the auction administrator by providing certain anonymous and aggregated information such as on the net open interest of licensed credit futures. ISDA may moreover seek good faith cooperation from licensed trading venues in improving the credit event auction rules specifically to reduce the risk of auction manipulations by reference to exchange traded credit derivatives. |
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(12)

ISDA may also ask licensed trading venues to cooperate in good faith with the auction administrator by providing certain anonymous and aggregated information such as on the net open interest of licensed credit futures. ISDA may moreover seek good faith cooperation from licensed trading venues in improving the credit event auction rules specifically to reduce the risk of auction manipulations by reference to exchange traded credit derivatives.

| (13) | The Commitments foresee two types of dispute resolution mechanisms. |
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(13)

The Commitments foresee two types of dispute resolution mechanisms.

| (14) | If a dispute arises regarding the commercial terms of the licence agreement, i.e., the ‘FRAND’ terms, ISDA commits to accepting arbitration by an independent senior lawyer chosen by the Applicant. If no arbitral award is issued within a certain delay, ISDA and the applicant will follow court adjudication. |
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(14)

If a dispute arises regarding the commercial terms of the licence agreement, i.e., the ‘FRAND’ terms, ISDA commits to accepting arbitration by an independent senior lawyer chosen by the Applicant. If no arbitral award is issued within a certain delay, ISDA and the applicant will follow court adjudication.

| (15) | If a dispute arises in relation to a concrete auction manipulation concern and ISDA intends to terminate a licence, a technical expert acting as Monitoring Trustee will hear ISDA, the licensed trading venue and the auction administrators. Based on proposals of all parties and its own experience, the Trustee shall decide whether it is necessary to approve ISDA’s request for terminating a licence or whether other less disruptive means are available to protect the integrity of the credit event auction, including changes to the auction rules and/or changes to the design of the exchange traded credit derivative. The Monitoring Trustee is appointed by the EU Commission’s DG Competition based on three proposals of ISDA. Every candidate must have professional experience with the conduct of auctions on trading venues. |
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(15)

If a dispute arises in relation to a concrete auction manipulation concern and ISDA intends to terminate a licence, a technical expert acting as Monitoring Trustee will hear ISDA, the licensed trading venue and the auction administrators. Based on proposals of all parties and its own experience, the Trustee shall decide whether it is necessary to approve ISDA’s request for terminating a licence or whether other less disruptive means are available to protect the integrity of the credit event auction, including changes to the auction rules and/or changes to the design of the exchange traded credit derivative. The Monitoring Trustee is appointed by the EU Commission’s DG Competition based on three proposals of ISDA. Every candidate must have professional experience with the conduct of auctions on trading venues.

| (16) | Decisions of the Monitoring Trustee are final for the Parties but not prejudicial for the European Commission. |
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(16)

Decisions of the Monitoring Trustee are final for the Parties but not prejudicial for the European Commission.

| (17) | ISDA finally also commits to instructing the administrator(s) of the www.creditfixings.com website to remove any restrictions inhibiting the use of the Final Price for exchange trading purposes. |
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(17)

ISDA finally also commits to instructing the administrator(s) of the www.creditfixings.com website to remove any restrictions inhibiting the use of the Final Price for exchange trading purposes.

(b)   Organisational Commitments

Organisational Commitments

| (18) | ISDA commits to modifying its procedures for licensing requests regarding the Final Price to exclude CDS dealers from ISDA’s licensing decisions. The authority to award licences of the Final Price will no longer rest with ISDA’s Board of Directors or a sub-committee thereof, on which CDS dealers may sit, but be vested with ISDA’s Chief Executive Officer. While ISDA may continue to consult its members on purely technical issues to develop the credit event auction methodology, such consultation shall neither directly nor indirectly relate to the merits of individual licensing requests. Where individual licensing requests require changes to the process or the organisation of the auction, ISDA may seek technical advice from independent experts. |
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(18)

ISDA commits to modifying its procedures for licensing requests regarding the Final Price to exclude CDS dealers from ISDA’s licensing decisions. The authority to award licences of the Final Price will no longer rest with ISDA’s Board of Directors or a sub-committee thereof, on which CDS dealers may sit, but be vested with ISDA’s Chief Executive Officer. While ISDA may continue to consult its members on purely technical issues to develop the credit event auction methodology, such consultation shall neither directly nor indirectly relate to the merits of individual licensing requests. Where individual licensing requests require changes to the process or the organisation of the auction, ISDA may seek technical advice from independent experts.

| (19) | ISDA commits to implementing these Commitments with effect from the date of notification of the Commission’s commitment decision for a period of 10 years. The Monitoring Trustee will report annually to the Commission on the implementation of the Commitments. |
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(19)

ISDA commits to implementing these Commitments with effect from the date of notification of the Commission’s commitment decision for a period of 10 years. The Monitoring Trustee will report annually to the Commission on the implementation of the Commitments.

| (20) | The Commitments are published on the website of the Directorate-General for Competition at:
  http://ec.europa.eu/competition/index_en.html |
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(20)

The Commitments are published on the website of the Directorate-General for Competition at:

http://ec.europa.eu/competition/index_en.html

4.   Invitation to make Comments

Invitation to make Comments

| (21) | Subject to market testing, the Commission intends to adopt a decision under Article 9(1) of Regulation (EC) No 1/2003 declaring binding the commitments summarised above and published on the internet, on the website of the Directorate-General for Competition, to be binding. |
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(21)

Subject to market testing, the Commission intends to adopt a decision under Article 9(1) of Regulation (EC) No 1/2003 declaring binding the commitments summarised above and published on the internet, on the website of the Directorate-General for Competition, to be binding.

| (22) | In accordance with Article 27(4) of Regulation (EC) No 1/2003, the Commission invites interested third parties to submit their observations on the proposed commitments. These observations must reach the Commission not later than one month following the date of this publication. Interested third parties are also asked to submit a non-confidential version of their comments, in which any information they claim to be business secrets and other confidential information should be deleted and replaced as required by a non-confidential summary and by the words ‘business secrets’ or ‘confidential’. Third parties may also in exceptional circumstances submit observations on an anonymous basis and in such hypothesis may provide a non-confidential version which redacts the company’s identity. |
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(22)

In accordance with Article 27(4) of Regulation (EC) No 1/2003, the Commission invites interested third parties to submit their observations on the proposed commitments. These observations must reach the Commission not later than one month following the date of this publication. Interested third parties are also asked to submit a non-confidential version of their comments, in which any information they claim to be business secrets and other confidential information should be deleted and replaced as required by a non-confidential summary and by the words ‘business secrets’ or ‘confidential’. Third parties may also in exceptional circumstances submit observations on an anonymous basis and in such hypothesis may provide a non-confidential version which redacts the company’s identity.

| (23) | Observations and comments should preferably be reasoned and should set out the relevant facts. If you identify a problem with any part of the proposed commitments, the Commission would also invite you to suggest a possible solution. |
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(23)

Observations and comments should preferably be reasoned and should set out the relevant facts. If you identify a problem with any part of the proposed commitments, the Commission would also invite you to suggest a possible solution.

| (24) | Observations can be sent to the Commission under reference number AT.39745 CDS Information Market either by e-mail (COMP-GREFFE-ANTITRUST@ec.europa.eu) or by post to the following address:





  European Commission |
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| Directorate-General for Competition |
| Antitrust Registry |
| 1049 Bruxelles/Brussel |
| BELGIQUE/BELGIË |

(24)

Observations can be sent to the Commission under reference number AT.39745 CDS Information Market either by e-mail (COMP-GREFFE-ANTITRUST@ec.europa.eu) or by post to the following address:

European Commission

Directorate-General for Competition

Antitrust Registry

1049 Bruxelles/Brussel

BELGIQUE/BELGIË

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(1)  OJ L 1, 4.1.2003, p. 1. With effect from 1 December 2009, Articles 81 and 82 of the EC Treaty have become Articles 101 and, respectively, 102 of the TFEU. The two sets of provisions are in substance identical. For the purposes of this notice, references to Articles 101 and 102 of the TFEU should be understood as references to Articles 81 and 82 of the EC Treaty when applicable.

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(2)  OJ L 123, 27.4.2004, p. 18.

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