Judge Engelmayer
Judge Engelmayer ()

U.S. District Judge Paul Engelmayer of the Southern District of New York will allow to go forward a suit claiming a dozen of the biggest banks colluded against competition in the $230 trillion interest rate swap market.

The order, issued late last week, represented a partial victory for plaintiffs seeking class status in the consolidated suit In re: Interest Rate Swaps Antitrust Litigation, 16-md-02704, against major financial firms such as Bank of America, JPMorgan Chase & Co. and Citibank. The defendants filed a motion to dismiss antitrust claims, arguing among other things that the plaintiffs, which include institutional investors as well as third-party trading companies, failed to meet the antitrust collusion requirements.

Plaintiffs allege that major financial institution “sellers” have systematically worked to corner the interest rate swap market by impeding and, later, actively sabotaging efforts to create trading platforms that allow “buyers” greater access to options.

In his decision, Engelmayer separated the arguments into two timeframes—the period before the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted, and the years since. Engelmayer held that the plaintiffs did fail to meet the Sherman Act antitrust tests established by the U.S. Court of Appeals for the Second Circuit. In the pre-regulated environment, plaintiffs were unable to show the so-called “plus factors”—common motive to conspire, acts against individual economic self-interest and high-level communications—beyond simple parallel conduct among industry actors.

The “shards of parallel conduct” during the pre-Dodd-Frank period of activity alleged by the plaintiffs were overcome by defendants’ arguments that “supply good reason … for any individual dealer independently to have sought to maintain the status quo and to discourage, not facilitate” more competition in the market, Engelmayer said.

The passage of Dodd-Frank in 2010 helped change the underlying dynamic, the judge found, as the law explicitly calls for an expansion of platforms with greater transparency and accountability in the so-called over-the-counter swaps market. A number of new third-party trading platforms emerged, but were allegedly undercut by the major financial institutions. One such effort, allegedly, was a coordinated agreement by the defendants not to participate in the markets from 2013 to 2016, as well as threats to cut off other financial services to other participants if they did.

Pointing to a number of specific examples of actions taken by financial firms after Dodd-Frank, Engelmayer found plaintiffs’ arguments were “buttressed by the allegations of subsidiary parallel acts, practices and locutions” identifiable in concrete ways during the later time period.

“[V]iewing these areas of symmetry in combination, the inference of communication and coordination among dealers with the shared goal of grinding down the new platforms is entirely plausible,” Engelmayer said.

Cohen Milstein Sellers & Toll partner Michael Eisenkraft, part of the team representing plaintiff Public School Teachers’ Pension & Retirement Fund of Chicago, said despite the judge’s decision not to preserve the full complaint against the banks “we have a major case that’s live.”

“What we have now is a judge saying that our theory that the world’s biggest banks conspired to artificially restrict the development of a major financial market for a four-year period going onward—it’s a major victory,” he said, even as plaintiffs say they continue to be harmed by the ongoing actions of the banks.

“It’s not like they stopped conspiring and the market turned into what it should be overnight,” he said.

None of the multiple counsel for any of the defendant banks either provided requested comment or acknowledged receiving request for comment.

As the case moves forward toward discovery, Engelmayer indicated that any class in the suit would likely be limited to “plain vanilla swaps,” rather than any “bespoke” swaps, even as the judge said plain vanilla swaps was “not a defined term” yet. He said he expected the definition to be agreed upon during the next phase of the suit.