Association Counsel: New DOJ Business Review Letter Is Instructive for Standards Initiatives

The United States Department of Justice recently released a Business Review Letter approving of a proposal by the International Swaps and Derivatives Association, Inc. (ISDA) to amend its standardized derivatives contracts in a way that might typically invite significant antitrust price-fixing challenges. Instead, the DOJ applied a “rule of reason” analysis and concluded that ISDA’s proposal, on balance, was unlikely to produce anticompetitive effects and could, in fact, offer substantial benefits to its industry and the broader financial markets.

Background

In response to the expected global discontinuation of interbank offered rates (IBORs) due to widespread, fraudulent bank manipulation, ISDA proposed several amendments to its model contracts to implement IBOR alternatives by using (i) “fallback rates” to replace the use of IBORs between parties and (ii) a protocol to apply fallback rates to existing and future contracts. Ordinarily, including such price-setting terms in a standardized contract could create a per se antitrust violation. Here, however, the DOJ found that anticompetitive effects were not likely to arise for a few reasons:

1. Broad Feedback and Support. ISDA sought substantial breadth of support for the proposed amendments through a comprehensive feedback process involving the public, regulators, and numerous market participants.
2. Voluntary and Flexible Character. The proposal did not indicate that for this particular use an agreement would be formed among ISDA’s members to limit their choices for rates or that would prevent users from negotiating alternative fallback rates, protocols, or provisions that would best suit the purposes of the contracting parties.

The DOJ also found several pro-competitive benefits in ISDA’s proposal that would outweigh the possible anticompetitive effects:

1. Increased Efficiency and Certainty. By establishing a standard, widely available fallback rate for an IBOR, parties are able to (i) avoid time and effort in obtaining quotes and calculating rates on a contract-by-contract basis and (ii) easily incorporate fallback rates into existing contracts without having to renegotiate each individual contract.
2. Predictability. As IBORs are phased out of the broader financial markets, the added predictability of the fallback rates and application protocols are expected to substantially reduce potential disputes surrounding rate calculations.
3. Generalized Benefits Across the Financial Markets. The proposal may benefit the financial markets on the whole by encouraging standardization and adoption by other financial service industries (e.g., business and consumer loans), facilitating standardization of contract language across financial products, and fostering a smooth transition away from IBORs to other reference rates.

The Takeaway

Standardized contracts that include price-related terms ordinarily raise per se antitrust risk. The DOJ’s new guidance confirms that for a trade association considering setting standardized terms for use by its industry members, antitrust risks (and anticompetitive effects) may be reduced through 1) early and open stakeholder and, if possible, regulator involvement, 2) emphasizing the benefits of predictability and efficiencies to industry users and non-users alike, and 3) preserving the voluntary and flexible nature of any standardized terms among its users.