Overview
Last week, an investor class action was filed accusing a a group of banks dealing in interest rate swaps (IRS) of collusion. According to the complaint, the banks have long dominated the market, and, in recent years, have worked together to stop buy-side investors from gaining the benefit of newly-developed exchanges that should have reduced their dominance:
Absent collusion, the lack of transparency and limited price competition that pervades the IRS market would have disappeared long ago. Because of the benefits of transparency, competitive pricing, and immediacy, markets for financial products historically move to exchange-trading platforms soon after the products become sufficiently standardized and liquid. Because of its maturity, size, and high-level of standardization, the IRS market has long been primed for exchange trading. In fact, the Dealer Defendants themselves trade IRS with each other on electronic, exchange-like platforms. But they have made sure that only the dealers are allowed to trade IRS on these platforms. Thus, even as they enjoyed the benefits of exchange trading among themselves, the Dealer Defendants were able to deny those benefits to their customers. Pursuant to their conspiracy, the Dealer Defendants met and agreed to work together to maintain the bifurcated market for trading IRS. They agreed to squash every potential market entrant that threatened to bring competition and transparency to the IRS market. Since at least 2007, as detailed herein, the Dealer Defendants have jointly threatened, boycotted, coerced, and otherwise eliminated any entity or practice that had the potential to bring exchange trading to buy-side investors in the IRS market. More recently, the Dealer Defendants boycotted potential market entrants known as Swap Execution Facilities, or “SEFs,” which are exchange-like trading platforms. In the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank” or the “Dodd-Frank Act”), Congress sought to bring more competition to derivatives markets, including the IRS market. Dodd-Frank mandates, for example, that standard IRS move to exchanges or SEFs with central clearing. But the Dealer Defendants have, through coordinated action, made sure that no new entrants emerge to bring any of the benefits of exchange trading to the market.The proposed class is comprised of pension funds, university endowment funds, corporations, insurance companies, and municipalities who entered into interest rate swap transactions from 2008 to the present. The complaint includes a claim for conspiracy to restrain trade under the Sherman Act as well as a claim for unjust enrichment. The case is before Judge Scheindlin.