The European Commission (EC) [official website] on Wednesday fined [press release] eight international financial institutions €1.7 billion for having engaged in illegal cartels. They were all involved in cartels relating to interest rate derivatives. Some participated in a cartel that was denominated in euro currency while some participated in a cartel that was denominated in Japanese yen. Still others, such as Deutsche Bank or RBS, participated in both cartels. The financial derivatives cover the European Economic Area (EEA) and such an agreement between competitors is prohibited under Article 101 of the Treaty on the Functioning of the European Union (TFEU) and Article 53 of the EEA Agreement [texts, PDF]. Barclays and UBS avoided the fines for their participation in exchange for revealing the existence of the cartels. Interest rate derivatives are used to transfer risk. They are used by financial institutions and business entities for managing the risk of interest rate fluctuations. Investigations revealed that the financial institutions have shared trading and pricing strategies.
The investigation started in October 2011 when Commission officials initiated unannounced inspections [press release] of business entities involved in the financial derivative products. The investigation came two days after the head of the EC announced plans [JURIST report] to propose criminal sanctions for wrong-doers in the financial sector. Illegal trading schemes are prevalent outside of the EEA. In April of last year, the US Commodity Futures Trading Commission (CFTC) [official website] filed charges [JURIST report] against the Royal Bank of Canada (RBC) [corporate website] alleging that the bank was involved in an illegal futures trading scheme known as "wash trading" from 2007-2010. Under the scheme, RBC and its subsidiaries would hold equal and offsetting amounts of both "narrow-based stock index futures" and "single stock futures" of the targeted security, essentially ensuring that the transaction was a "wash," and that there was no risk in holding the securities. The CFTC has been tasked with regulating the derivatives market as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act [text, PDF]. The Act was signed into law [JURIST report] by President Barack Obama in July 2010 and created the new regulatory council to monitor financial institutions in order to prevent companies from becoming "too big to fail."