A Moment of Clarity in the IBOR Transition: DOJ Antitrust Division Issues Business Review Letter Approving ISDA's Proposed Protocol for Derivatives

For the thousands of financial institutions anxiously watching the discontinuation and transition from certain interbank offered rates ("IBORs"),¹ 2020 just got a little less chaotic.

On Thursday, October 1, 2020, the United States Department of Justice Antitrust Division issued its highly anticipated Business Review Letter² blessing ISDA's proposed protocol for derivatives contracts that reference the soon-to-be-discontinued IBORs. The DOJ concluded that "ISDA's proposal is unlikely to produce anticompetitive effects," that "ISDA's proposal has the potential to offer substantial benefits to the financial services industry," and that "the Department does not presently intend to challenge ISDA's proposed amendments to its standardized documentation." A copy of the Antitrust Division's letter is available here.

This favorable Business Review Letter is great news for the financial services industry. For decades, IBORs have been essential tools for everything from mortgages to multibillion dollar financings. According to the Alternative Reference Rates Committee ("ARRC"), a group of private-market participants convened by the Federal Reserve Board and the New York Federal Reserve Bank, US dollar LIBOR alone is referenced in more than $200 trillion worth of financial contracts.³ That's why the transition away from IBORs has the potential not only to affect millions of contracts but also to create uncertainty that could inspire "a DEFCON 1 litigation event," as New York Federal Reserve General Counsel Michael Held put it.⁴

ISDA Proposal

In 2016, the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, asked the International Swaps and Derivatives Association ("ISDA") to develop fallback arrangements to ease the transition for parties to derivatives contracts referencing IBORs—to ensure that those contracts continue to reference clear, transparent, and consistent rates if the IBOR they currently reference is discontinued. After more than four years of work and six public consultations, ISDA proposed (1) a supplement to its standard contract definitions and (2) a transition protocol. The proposed supplement adds new fallback rates and the contract terms necessary to implement them. Each of these fallback risk-free rates ("RFRs")⁵ would be adjusted to reflect the terms and risk premium of the defunct benchmark it replaces. ISDA's transition protocol would assist parties in amending legacy contracts whose fallback provisions do not account for a permanent end to the referenced IBOR.

A great virtue of the ISDA proposal is its wide reach across market participants in the derivatives market; the proposed supplement and protocol can remove significant uncertainty by helping parties across the industry efficiently amend their contracts. But ISDA was aware that certainty and efficiency to some can mean unprincipled opportunity to others—particularly antitrust plaintiffs' lawyers looking to file treble damages antitrust claims, however meritless. Indeed, the competition authorities and private plaintiffs' bar are no strangers to IBORs,⁶ and plaintiffs' lawyers already have begun publishing articles proposing lawsuits related to the IBOR transition.

Therefore, ISDA sought to preempt any antitrust concerns by seeking advance approval of its fallback protocol. Specifically, as ISDA described in a September 21, 2020, letter to the Bank of England and Federal Reserve Bank of New York, ISDA planned to launch its fallback supplement and protocol only after requesting and obtaining a favorable business review letter from the DOJ—hopefully indicating that the DOJ Antitrust Division did not plan to challenge ISDA's proposal on antitrust grounds.⁷ And if the DOJ issued such an approving letter, then ISDA would share the letter with other competition authorities around the world and seek their positive feedback before implementing its proposal.

DOJ Business Review Letter and the Non-Mandatory Nature of the ISDA Protocol

Last Thursday, October 1, 2020, the good news from the DOJ arrived. The DOJ Antitrust Division issued a Business Review Letter indicating that, after scrutinizing ISDA's proposal, the DOJ did not intend to challenge the proposal on antitrust grounds. The DOJ concluded that "ISDA's proposal is unlikely to produce anticompetitive effects" and "has the potential to offer substantial benefits to the financial services industry."⁸

While the Antitrust Division's letter follows the usual antitrust Rule of Reason⁹ format—weighing anticompetitive effects against procompetitive benefits—the DOJ's favorable conclusion is based primarily on one assumption.

While the DOJ cautioned that "IBOR's fallback rate could have the potential for anticompetitive effects" if it "prevent[ed] other rates from being used instead," the DOJ found no evidence to suggest that would happen. Specifically, "nothing in the Proposed Supplement or Proposed Protocol prevents the user from entering into a derivatives contract (or amending one currently in place) that uses an alternative rate, including rates not included in the 2006 ISDA Definitions." While one of the procompetitive benefits of ISDA's protocol is that the fallback rates will be "standard and widely available," the "Proposed Protocol is voluntary; if holders of derivatives contracts wish to use different fallback procedures than those in the Proposed Protocol, they can decide not to sign the Proposed Protocol and to individually amend their contracts instead."¹⁰

Accordingly, the DOJ concluded that "ISDA's proposal is likely to have substantial procompetitive benefits and that these benefits outweigh the possible anticompetitive effects."

The DOJ's decision is consistent with the prevailing antitrust treatment of trade association behavior. When a trade association publishes a rule governing how its members may compete with one another, and that rule is a condition of membership or otherwise legally binding, then a government enforcer or private antitrust plaintiff may argue that such a mandatory rule represents an unreasonable restraint of trade in violation of the Sherman Act.¹¹ Recently, for example, in late 2019, the U.S. Department of Justice sued and forced the National Association for College Admission Counseling ("NACAC") to remove from its code of ethics certain requirements that member colleges refrain from practices such as paying or offering other incentives to "early decision" applicants.¹² While the NACAC and its members believed that the rules were necessary to maintain fairness in college recruiting, the DOJ Antitrust Division nonetheless successfully argued that the rules unreasonably restricted competition.

But, here, following ISDA's proposed IBOR fallback protocol would not be a condition of ISDA membership, nor would parties be forced to follow the protocol if they decided it was in their interests not to do so. Thus, the DOJ concluded, "anticompetitive effects arising from ISDA's Proposed Supplement and Proposed Protocol do not appear to be likely."

As is typical in Business Review Letters, the DOJ explicitly reserved the right to challenge the ISDA proposal in the future if the facts turn out to be different than as presented to the DOJ. Nonetheless, for ISDA, its members, and any market participants concerned about the transition from IBORs, this outcome is a major milestone in the transition and a hopeful sign of increased certainty to come.

For additional information and resources on the IBOR discontinuation and transition, you can visit White & Case's LIBOR Hub.

_{1 After the 2008 global financial crisis, U.S. and international regulators began evaluating major interest rate benchmarks, and working groups were created to identify alternative or "fallback" rates to be used if existing IBORs were discontinued. In July 2017, the UK's Financial Conduct Authority announced that, by the end of 2021, it no longer would seek to compel or persuade banks to submit quotes for LIBOR, making clear that parties could no longer rely on LIBOR in their contracts after 2021.
2 The DOJ Antitrust Division's business review procedure can offer parties a valuable opportunity to obtain guidance about the likelihood of an antitrust challenge. But business review requests are not for the faint of heart. That is because such requests also may result in a response that the DOJ will sue if the proposed conduct is carried out. See DOJ, "Introduction to Antitrust Division Business Reviews" (citing 28 C.F.R. § 50.6.i). Nonetheless, particularly recently, when many businesses were forced to take bold and creative action to help preserve the U.S. economy during the pandemic, the DOJ responded promptly and positively to several proposed collaborations seeking business reviews. See, e.g., Letter to Martin M. Toto, White & Case LLP, Regarding National Pork Producers Council Business Review Request Pursuant to COVID-19 Expedited Procedure (May 15, 2020).
3 See Alt. Reference Rates Comm., Frequently Asked Questions (July 16, 2020) at 2 
4 Held, Michael, SOFR and the Transition from LIBOR, Remarks at the SIFMA C&L Society February Luncheon, NYC (Feb. 26, 2019)
5 ISDA selected the RFRs that are identified by public-private sector working groups in the respective jurisdictions. For example, in the United States, the fallback rate under ISDA's proposed protocol would be the Secured Overnight Financing Rate ("SOFR"), an RFR recommended by the ARRC.
6 In one case arising out of the LIBOR investigations, the DOJ brought criminal antitrust charges alleging that communications among traders in interbank chat rooms (regarding currency exchange reference rates) constituted an illegal agreement to fix prices, even though the relevant currency market was so enormous and liquid that it would have been impossible for the traders to manipulate any of the FX benchmarks. S. Bishop, "Expert in Forex 'Cartel' Trial Says Trades Seem Legit," Law360 (Oct. 22, 2018). After a three-week trial in the Southern District of New York, the jury quickly acquitted the defendants on all charges. Jury Verdict, United States v. Richard Usher et al., No. 1:17-cr-00019 (S.D.N.Y. Oct. 26, 2018). White & Case represented defendant Richard Usher in that trial.
7 ISDA Letter to the Bank of England, Federal Reserve Bank of New York, and Financial Stability Board Official Sector Steering Group (Sept. 21, 2020)
8 DOJ Letter at 9.
9 The DOJ concluded that the Rule or Reason, and not the per se rule, governed its analysis of ISDA's proposal. DOJ Letter at 6. The per se approach (i.e., if the alleged conduct in fact occurred, it is illegal automatically) is appropriate only if the conduct is of a type "that would always or almost always tend to restrict competition and decrease output." Broadcast Music, Inc. v. Columbia Broadcasting Sys., 441 U.S. 1, 19–20 (1979). Under the Rule of Reason, conduct violates the antitrust laws only if the plaintiff can prove by a preponderance of the evidence that the anticompetitive effects outweigh the procompetitive benefits. See Ohio v. Am. Express Co., 138 S. Ct. 2274, 2284 (2018).
10 DOJ Letter at 7 (emphasis added).
11 15 U.S.C. § 1.
12 DOJ Press Release, "Justice Department Files Antitrust Case and Simultaneous Settlement Requiring Elimination of Anticompetitive College Recruiting Restraints" (Dec. 12, 2019)}

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