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13 January, 2017
What you need to know
On 14 December 2016 the Australian Federal Court imposed multi-million dollar penalties on two Australian banks for attempted cartel conduct in respect of a benchmark rate for the Malaysian ringgit.
Although the conduct in question occurred outside Australia and was in respect of an offshore currency benchmark, the Australian Competition and Consumer Commission (ACCC) nonetheless took action due to the potential impact of the conduct on the market for Malaysian ringgit non-deliverable forwards (MYR NDFs) in Australia.
Similar offshore activities would also likely be a contravention of Hong Kong's Competition Ordinance, provided that there is also a market in Hong Kong for the financial product in question.
What you should do
Ensure that your staff in Hong Kong and elsewhere are aware of the general principles of competition law and the risks that can arise from their discussions with competitors.
Consider the competition law risks in addition to other forms of market misconduct when monitoring staff communications.
Regularly review your business lines to identify which are likely to be most susceptible to anti-competitive conduct and consider which jurisdictions and markets are relevant to those financial products.
If your business is being investigated or is considering the potential for competition law breaches in another jurisdiction, consider the potential risks under Hong Kong law and whether there is a relevant market for the product or service in Hong Kong that could have been affected.
Background to the Australian Federal Court's decision
Proceedings were commenced against both banks following a lengthy investigation by the ACCC into a number of financial institutions. The proceedings were resolved on a consent basis, with the ACCC and the banks filing joint statements of facts and submissions as to the appropriate penalties to be imposed. The penalties imposed against the banks were A$9 million and A$6 million, respectively. The attempted cartel conduct that was the subject of the proceedings involved attempts by traders at each bank to influence the daily submissions to the Association of Banks in Singapore's benchmark rate for the Malaysian ringgit (ABS MYR Fixing Rate). The ACCC's investigations found that in 2011 trading staff at the banks, all of whom were based in Singapore, communicated via private online chatrooms about the daily submissions for the ABS MYR Fixing Rate and attempted to make arrangements for other submitting banks to make high or low submissions in relation to the ABS MYR Fixing Rate to benefit their trading positions in MYR NDFs.
Although the conduct took place outside Australia, such attempts were in breach of the cartel conduct prohibitions in Australia's Competition and Consumer Act because the relevant banks were incorporated in or carrying on business within Australia. As matter of enforcement priority for the ACCC, it was relevant that there was an active market for MYR NDFs in Australia, with the ACCC estimating that the turnover for them in Australia was worth A$9 to 10 billion.
The ACCC's enforcement action is consistent with that of other competition authorities in Europe, North America and Asia. In recent years the competition authorities in those jurisdictions have imposed significant fines on a number of financial institutions for engaging in anti-competitive cartel conduct by seeking to manipulate financial benchmarks such as LIBOR, EURIBOR and the WM/Reuters fix.
Relevance to financial institutions in Hong Kong
The Australian Federal Court's decision, which coincided with the first anniversary of Hong Kong's Competition Ordinance coming into full force, is a timely reminder for financial institutions operating in Hong Kong of the potential risks of collusive or cartel conduct in relation to financial benchmarks and other financial products, even if the conduct occurs offshore.
In a rates or benchmark manipulation scenario, competitively sensitive information is ordinarily exchanged between traders employed by two or more financial institutions as part of their colluding to manipulate the rate or benchmark in order to benefit their trading positions. The conduct has the potential to distort the "true" or "real" level of the benchmark or rate, and can impact on other participants in the market.
Such conduct would likely be considered by the Hong Kong Competition Commission to be a horizontal cartel agreement in breach of the "First Conduct Rule" of the Competition Ordinance, which prohibits agreements, decisions and concerted practices that have the object or effect of harming competition in Hong Kong. The Competition Commission has confirmed in its Guideline on the First Conduct Rule that cartel conduct would be considered "Serious Anti-competitive Conduct" that may result in proceedings being commenced before the Competition Tribunal rather than the Commission following its warning notice process.
Would it also be possible for the Competition Commission to take action against financial institutions in Hong Kong even if the misconduct occurred offshore? As long as there is a market in Hong Kong for financial products linked to the benchmark or rate being manipulated, the answer is "yes". Under the Competition Ordinance it is not relevant whether the agreements, decisions or concerted practices occur inside or outside of Hong Kong, provided that they have the object or effect of preventing, restricting or distorting competition in Hong Kong.
The penalties that can be imposed under the Competition Ordinance are significantly greater than those that financial institutions will be familiar with under the Securities and Futures Ordinance and Banking Ordinance. The Competition Tribunal has the ability to impose substantial penalties for cartel conduct of up to 10 per cent of an undertaking's annual local turnover for a maximum period of three years. The Competition Commission can also issue warning notices, infringement notices, disqualification orders against officers and seek commitments from financial institutions involved in the misconduct.
How real is the risk?
As the Competition Ordinance has only been in full force for one year, the Competition Commission does not yet have the enforcement profile of other competition regulators such as the ACCC and the European Commission. As a relatively young regulator that faces significant resource constraints, its enforcement priorities to date have been focused on anti‐competitive conduct that is clearly harmful to competition and consumers in Hong Kong. Enforcement actions for collusion between financial institutions to manipulate offshore rates and benchmarks may therefore not be an immediate priority for the Competition Commission.
It is also unclear to what extent the Competition Commission will be able to leverage off the work of other regulators in Hong Kong investigating misconduct in the financial sector. Both the Securities and Futures Commission and Hong Kong Monetary Authority are subject to stringent secrecy obligations under their respective statutes, and it remains to be seen whether they consider that they have the ability to share information with the Competition Commission obtained during the course of their own investigations.
Despite these operational constraints on the Competition Commission, the potential impact of its leniency policy should not be underestimated. Under the leniency policy, only the first cartel member who informs the Competition Commission of the misconduct will be eligible for leniency. This may result in financial institutions that identify their staff as having engaged in misconduct seeking to be the first to blow the whistle on the cartel in order to be able to qualify for leniency. As with other jurisdictions, the race for leniency could become a powerful investigation and enforcement tool for the Competition Commission.
Managing the risk
There are a number of practical steps financial institutions can take to mitigate the potential risks related to benchmark and rates manipulation under the Competition Ordinance:
- Ensure that your trading staff in Hong Kong and elsewhere are aware of the general principles of competition law and the risks that can arise from their discussions with competitors, no matter how informal those discussions might seem.
- Take reasonable steps to monitor communications by your trading staff and, in addition to looking for red flags for other types of market misconduct, consider the potential risks of anti-competitive behavior.
- Ensure that your compliance policies and strategies address potential anti-competitive behaviors by staff.
- Regularly review your business lines to identify which are likely to be most susceptible to anti-competitive conduct and consider which jurisdictions and markets are relevant to those financial products.
If your business is being investigated or is considering the potential for competition law breaches in another jurisdiction, consider the potential risks under Hong Kong law and whether there is a relevant market for the product or service in Hong Kong that could have been affected.
For further information, please contact:
James Comber, Partner, Ashurst
james.comber@ashurst.com
