CNMC fines four banks for derivatives price-fixing

Following a complaint by a wind farm owner in June 2015, which considered that it had been charged abnormally high fees for its derivatives close-out, the CNMC opened a formal investigation, in which it analysed 43 project finance deals with 22 sponsors, mainly related to renewable energy projects but also to some private hospital deals. The CNMC looked into different financial products commonly applied to hedge interest rate changes in project finance deals, including interest rate swaps to set a fixed interest rate or cap-and-floor collars to set minimum and maximum rates. 

The banks alleged that they needed to agree on the same pricing in a deal, for example for derivatives prices, in order for the syndicated loans market to function properly. However, the CNMC did not expressly consider the issue of whether syndicated loans and their ancillary derivative products are legitimate joint selling practices under Spanish and EU competition law. 

Rather, the CNMC punished banks for the way they carried out their joint selling practices. In particular the fact that the banks initially made independent offers to their clients described as transparent and without collusion, and subsequently agreed higher prices among them and “behind the back of the client”, often using changes in the market conditions as an excuse, which the CNMC found was corroborated by emails and phone call recordings from the banks.

The CNMC also explained that requesting clients to take an insurance against the risk of fluctuating interest rates when concluding syndicated loan agreements in the context of project finance is a reasonable practice. However, the CNMC found that it was unclear whether it was justified to force customers to sign those derivatives with the same banks as granting the underlying project finance loans. Therefore this practice was not considered as part of the unlawful conduct.

Although the CNMC considered that the coordination between the four banks amounted to a restriction of competition by object, it argued that the conduct also had effects in the market. In this regard, it stated that clients ended up paying higher prices for derivatives and periodic settlements than those they would have paid in the absence of the coordination.

The CNMC's decision comes at a time when the European Commission has highlighted the syndicated lending market as an area for investigation, since it issued a tender in April 2017 to conduct a systematic analysis of the EU loan syndication market and its possible implications for competition policy, in particular in relation to exchange of information and co-operation between banks in the syndicated lending markets. 

With thanks to Pablo Velasco Sanzo of Ashurst for his contribution