In re Interest Rate Swaps Antitrust Litig.

Decision Date28 July 2017
Docket Number16–MC–2704 (PAE),16–MD–2704 (PAE)
Citation261 F.Supp.3d 430
Parties IN RE: INTEREST RATE SWAPS ANTITRUST LITIGATION This Document Relates to All Actions
CourtU.S. District Court — Southern District of New York
OPINION & ORDER

Paul A. Engelmayer, United States District Judge

This multi-district litigation involves claims, brought primarily under the antitrust laws, of unlawful collusion by investment banks who were dealers in the market for interest rate swaps ("IRS" or "IRSs"). There are two groups of plaintiffs. The first consists of a putative class of investors who bought and sold IRSs between January 2008 and December 2016. They claim to have been subject to unfavorable pricing as a result of collusive actions among IRS dealers that impeded the development and later the survival of certain electronic exchange-based platforms for IRS trades. The second consists of a pair of companies, Javelin Capital Markets, LLC ("Javelin") and Tera Group, Inc. ("Tera") (together, "Javelin/Tera"). They claim that such dealers conspired to boycott and otherwise undermine the trading platforms that each developed and put in place by 2013 or 2014, which would have supplied investors with more competitive IRS prices. Plaintiffs sue 13 corporate entities and their affiliates: 11 investment banks that functioned as IRS dealers (the "Dealers" or "Dealer Defendants")1 ; one broker of IRS trades, ICAP Capital Markets, LLC ("ICAP"); and one provider of electronic trading services for IRSs, Tradeweb Markets LLC ("Tradeweb").

Pending are defendants' motions, under Federal Rule of Civil Procedure 12(b)(6), to dismiss plaintiffs' claims. For the reasons that follow, these motions are granted in part and denied in part.

I. Factual Background

The following facts are drawn from the Second Consolidated Amended Class Action Complaint ("SAC"), Dkt. 142 in No. 16–MD–2704, and Javelin/Tera's Second Consolidated Amended Complaint ("JTSAC"), Dkt. 145 in No. 16–MD–2704 (together, the "SACs"). In resolving the motions to dismiss, the Court assumes all well-pleaded facts to be true and draws all reasonable inferences in favor of the plaintiffs. See Koch v. Christie's Int'l PLC , 699 F.3d 141, 145 (2d Cir. 2012).2

An important preface to the long factual allegations that follow is that the IRS market underwent major changes during the period (20072016) covered by the alleged conspiracy. The infrastructure necessary to support the electronic trading platforms which the investor plaintiffs claim were denied them as a result of defendants' collusion—platforms enabling anonymous "all-to-all" exchange trading of IRSs—evolved. There was also a major regulatory development: the Dodd–Frank statute, passed July 21, 2010 in response to the 2008 financial crisis. Dodd–Frank's mandates, as implemented by ensuing regulations, reshaped the IRS market. They facilitated the emergence, in 20132014, of electronic "all to all" platforms for anonymous IRS trading, like those of Javelin and Tera, accessible to investors.

In considering plaintiffs' claims, it is, therefore, important to focus on the distinct goal, at each point, of the alleged conspiracy. Through 2012, plaintiffs allege concerted action among the Dealer Defendants and others to inhibit the emergence of electronic trading platforms accessible to investors that threatened to erode the Dealers' profit margins on IRS trades. From 2013 on, after such platforms emerged, plaintiffs allege a boycott aimed at destroying three such new platforms, including Javelin's and Tera's.

A. Interest Rate Swaps

An IRS is a financial derivative. It permits two parties to trade interest-rate-based cash flows on a specific amount of money over a fixed time period. Typically, one party to an IRS pays cash flows based on a fixed interest rate, while the counterparty pays cash flows based on a floating interest rate, keyed to a benchmark or reference point such as the London Interbank Offered Rate, or "LIBOR." For example, a party might agree to pay a fixed interest rate on a $10 million notional amount for 10 years in exchange for the other party paying a floating rate (such as one tied to LIBOR) for that same 10–year period. The party paying a fixed rate is typically referred to as the "buyer," and the party making payments at the floating rate is known as the "seller." The value of the contract to each side moves (in opposite directions) depending on changes in interest rates. SAC ¶¶ 1–2; JTSAC ¶ 2.

IRSs are used by an array of investors to manage risk and protect themselves against fluctuating interest rates. For example, a municipality that issued a floating rate bond to pay for a clean-water project might later use an IRS to convert floating-rate payments on the bond into fixed payments, so as to hedge against interest-rate increases. Investors in interest-rate swaps include pension funds, asset managers, endowment funds, corporations, insurance companies, municipalities, and hedge funds. The IRS market has grown exponentially over the last three decades, with billions of dollars in notional quantity traded daily. In 2006, the outstanding notional quantity of IRSs was approximately $230 trillion. By 2014, it was approximately $381 trillion. SAC ¶¶ 3, 72; JTSAC ¶ 3.

B. The Evolution of IRS Trading Practices and Platforms
1. Early Years to 2013

In the early years of IRS trading, IRS contracts were not standardized. They typically were negotiated and documented on a trade-by-trade basis, imposing high transaction costs. Over time, IRS trading became more standardized. In 1987, the International Swaps and Derivatives Association ("ISDA") created the ISDA Master Agreement. It set out standardized terms to govern over-the-counter ("OTC") derivatives transactions, and became widely used. By 2000, the material terms of most IRSs were standardized. These included the tenor (the maturity or term of the swap), the fixed rate, the reference index used to calculate floating payment, the payment frequency, and the timing of payments. This resulted in lower trading costs and higher trading volumes. SAC ¶¶ 70–71; JTSAC ¶¶ 67–68.

As demand for IRSs spread, the investment banks who dealt in interest swaps positioned themselves as the exclusive market makers or liquidity providers in the IRS market. As market makers, these banks became the sellers of IRSs (the "sell side"), offering fixed and floating-rate cash flows to their customers (the "buy side"). In this role, these Dealer Defendants profited from the "spread" between the "bid" and the "ask" for IRSs. The "bid" and the "ask" were typically set as follows: Because the floating rate is usually keyed to LIBOR, the key variable that is negotiated when entering into an IRS is generally the fixed rate that will be paid. A buy-side customer that seeks to pay the floating rate and to receive the fixed rate will receive the "bid" price quoted by a dealer for the fixed rate; a buy-side customer that seeks to pay the fixed rate and to receive the floating rate will pay the "ask" or "offer" price quoted by a dealer for the fixed rate. For example, a dealer's "bid" to pay the customer a fixed rate on a five-year IRS might be 2.00% whereas its "ask" as to the fixed rate it would receive from the customer for the same IRS might be 2.05%. The wider the spread between the bid and ask prices quoted by the dealer, the more profit the dealer will make from its IRS line of business. SAC ¶¶ 73–75; JTSAC ¶¶ 70–73.

Historically, dealers and their buy-side customers communicated almost exclusively over the counter ("OTC"), by telephone. This means of IRS trading was advantageous to dealers. In practice, it meant that customers received real-time pricing information from only the dealer, or at most from a small number of dealers, because contacting many dealers for price information was logistically unrealistic and costly. Dealers were also advantaged, because, to obtain a price quote, the customer was required to disclose to the dealer its identity and the direction and notional amount of the trade it sought to make. Dealers could use this "one-way flow of information" about upcoming trades to their trading advantage. Dealers also often required customers to execute trades "on the wire," meaning during the phone call, or else the price quote might lapse; or to disclose whether the customer was putting one dealer "in competition" with other dealers. These practices, too, tended to diminish price competition. SAC ¶¶ 76–78; JTSAC ¶¶ 74–76.

Electronic trading in fixed income securities was introduced in the mid–1990s. It gained momentum in the IRS market in the early 2000s. Such trading had potential to make IRS trading more efficient, transparent and competitive. But, plaintiffs allege, electronic trading developed asymmetrically. With respect to trading between dealers, the dealers utilized electronic platforms operated by entities known as interdealer brokers ("IDBs"). These platforms allowed dealers to access better and transparent pricing for themselves, and speedier execution, while they responded to buy-side requests to trade. A dealer using an IDB submits its bid and ask prices to the IDB, which then publicizes the best quotes (known as the "inside market") anonymously to all other dealers in the platform. A dealer can immediately enter into an IRS contract at a quoted price without negotiations, or it can ask the IDB to attempt to negotiate a better price. As to standardized IRS products that are actively traded, an IDBs uses electronic trading platforms akin to electronic "order books," which automatically match the best bids and offers. In return for facilitating dealer-to-dealer trades, an IDB earns a commission, known as a "brokerage fee," on each trade. But, plaintiffs allege, the IDBs allowed only dealer-to-dealer transactions. Plaintiffs allege, for example, that defendant ICAP, the leading IDB for IRSs, did not open its interdealer platform to buy-side customers. SAC ¶¶ 10–13, 84–86; JTSAC ¶¶ 81–83.

In contrast, plai...

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