Antitrust Law Daily Boycott claims advance against banks alleged to have blocked CDS trading platform
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Monday, August 5, 2019

Boycott claims advance against banks alleged to have blocked CDS trading platform

By Nicole D. Prysby, J.D.

Claims against six of the defendant banks go forward, as the plaintiff sufficiently alleged that they engaged in parallel conduct to prevent the plaintiff’s electronic trading platform from entering the market, while claims against five of the other banks failed.

Tera Group, Inc. adequately alleged that a group of financial institutions conspired to block the plaintiff’s electronic credit default swap trading platform from entering the market, held the federal district court in New York City. With respect to six of the defendant banks, the allegations were sufficient to show the conspiracy, through the parallel conduct of the defendants, which included contacting the plaintiff the day after the platform made its first successful trade, and using near-identical language to demand pretextual audits of the plaintiff’s system. However, the allegations were not sufficient for five of the defendant banks, because the plaintiff failed to provide details that linked them to the alleged conspiracy. For example, the allegations against several of the banks were merely that they had dominant stakes in a clearinghouse, but there were no allegations tying them to the alleged scheme to withhold clearing services and take other actions to keep the plaintiff’s platform out of the market (Tera Group, Inc. v. Citigroup, Inc., July 30, 2019, Sullivan, R.).

Alleged boycott. Tera Group, Inc. and related companies alleged that financial institutions conspired to block Tera’s electronic credit default swap (CDS) trading platform from entering the market. Specifically, Tera alleged that the defendants (who control 95 percent of the CDS market) imposed a Request-for-Quote (RFQ) system for buying CDS. The RFQ system had no transparency and allowed the defendants to set CDS prices and generate massive profits for themselves. The Dodd-Frank reforms sought to end the RFQ-only model by requiring CDS to be traded on a regulated exchange (the Swap Execution Facility, or SEF). Tera developed a trading platform ("TeraExchange") that would allow anonymous electronic trading among all market participants, received a SEF certification in 2013, and executed its first trade in June 2014. Immediately after that trade, Tera alleged, the defendants began working together to shut down TeraExchange. They refused to conduct business with TeraExchange and used their control over the CDS clearinghouse to block trades on TeraExchange. Tera was forced out of the market and brought a Sherman Act Section 1 claim against the defendants.

The defendants include Citigroup, Citibank, Citigroup Global Markets Inc., and Citigroup Global Markets Limited ("Citi"); Bank of America Corporation, Bank of America N.A., and Merrill Lynch ("Bank of America"); Barclays PLC, Barclays Bank, and Barclays Capital Inc. ("Barclays"); BNP Paribas, S.A. and BNP Paribas Securities Corp. ("BNP Paribas"); Credit Suisse Group AG, Credit Suisse AG, Credit Suisse International, and Credit Suisse Securities (USA) LLC ("Credit Suisse"); Deutsche Bank AG and Deutsche Bank Securities Inc. ("Deutsche Bank"); Goldman Sachs Group, Goldman Sachs & Co., Goldman Sachs Bank USA, Goldman Sachs Financial Markets, L.P., and Goldman Sachs International ("Goldman Sachs"); HSBC Holdings plc, HSBC Bank plc, HSBC Bank USA, N.A., and HSBC Securities (USA) Inc. ("HSBC"); JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, and J.P. Morgan Securities plc ("JP Morgan"); Morgan Stanley, Morgan Stanley Bank, N.A., Morgan Stanley & Co., Morgan Stanley Capital Services LLC, Morgan Stanley Derivative Products Inc., and Morgan Stanley Bank International Limited ("Morgan Stanley"); Royal Bank of Scotland plc, The Royal Bank of Scotland Group plc, and RBS Securities Inc. ("RBS"); UBS Securities LLC ("UBS") and UBS AG.

Antitrust claims go forward in part. First, the court held, Tera had not engaged in impermissible claim splitting when it filed multiple lawsuits. This case and another case filed by Tera (In re Interest Rate Swaps Antitrust Litigation) arise from substantially the same events and involve many of the same defendants, but the product characteristics and markets for the two products (interest rate swaps and credit default swaps) differ and the two cases will require different proofs to establish a conspiracy. The court also concluded that the alleged conspiracy was not facially implausible. Although Tera failed to allege that the defendants boycotted other CDS platforms, it had alleged sufficient facts to show that its platform brought certain capabilities to the market that might warrant a boycott of only Tera Exchange.

As to the defendants’ argument that Tera engaged in impermissible group pleading, the court agreed Tera failed to provide sufficient details to link some defendants to the alleged conspiracy. Claims against HSBC, Deutsche Bank, Goldman Sachs, Morgan Stanley, and Bank of America were dismissed. HSBC was alleged only to have first refused to give an answer on whether HSBC would clear customers’ trades on Tera’s platform and then stated that it would not clear the trades without the approval of the HSBC trading desk. Tera did not allege any facts showing the HSBC’s actions were anything other than a unilateral business decision. The only allegations against Deutsche Bank and Goldman Sachs involved ordinary business activities (e.g., that each bank has a dominant stake in the largest CDS clearinghouse) and did not tie the banks to an anticompetitive scheme. The only allegation against Morgan Stanley was its ownership stake in a clearinghouse. Claims against Bank of America failed for similar reasons—the only allegations related to ordinary business dealings and a unilateral decision not to clear trades for TeraExchange. However, the allegations against Barclays, Credit Suisse, JP Morgan, BNP Paribus, UBS, and Citi were sufficient. The complaint alleged that Barclays officials made statements that directly linked them to the conspiracy and that Credit Suisse took active steps to block anonymous trading through platforms such as TeraExchange and participated in other obstructionist conduct. JP Morgan, BNP Paribus, UBS, and Citi allegedly took active steps to threaten parties who used Tera’s platform with loss of clearing services and engaged in pretextual audits of Tera’s system.

The court then concluded that Tera sufficiently alleged parallel conduct and plus factors. The parallel conduct included a refusal to trade on TeraExchange, threatening parties after TeraExchange’s first swap trade, conducting pretextual audits of Tera Exchange, refusing to clear trades or charging prohibitively high fees for buy-side customers who wanted to use TeraExchange, parallel adherence to requiring post-trade name disclosure, and the use of common excuses and language in taking those actions. For example, the day after Tera’s first swap trade, four different defendants called Tera and made near-identical statements that they would not clear trades from Tera’s platform until they completed an audit. Although the platform’s first trade was an interest rate swap, not a CDS trade, the allegations are still relevant to proving parallel conduct because the trade showed Tera’s viability in the CDS market. Tera also sufficiently alleged the plus factors of a common motive to conspire (to preserve the profits from non-anonymous RFQ trading) and a high degree of interfirm communications. There was less support in the complaint for the plus factor of actions against a defendant’s self-interest, but that factor did provide marginal support for the claim because the defendants gave up the fees they would have earned if they had cleared trades from the Tera platform.

The case is No. 1:17-cv-04302-RJS.

Attorneys: Christian Levis (Lowey Dannenberg P.C.) for Tera Group, Inc. Brad Scott Karp (Paul, Weiss, Rifkind, Wharton & Garrison LLP) for Citigroup, Inc.

Companies: Tera Group, Inc.; Citigroup, Inc.

MainStory: TopStory Antitrust NewYorkNews

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