03 Oct Manipulation Behaviors in Financial Markets From the Perspective of Competition Law
İçindekiler
INTRODUCTION
Manipulation acts, which can be carried out in various ways, can also bear the characteristics of competition law violations. In such cases, it should be examined whether the supervision of the said manipulation behaviors is solely under the jurisdiction of the financial authorities. Indeed, the Competition Board and foreign authorities have differing jurisprudence on this issue. The Competition Board; with its decision dated 26.08.2021 and numbered 21-40/576-279[1] (“Financial Markets Decision”, which is published on 09.09.2022), has examined the manipulation acts realized in financial markets and put forth its opinion regarding whether such behaviors fall under the competition law. The interesting aspect of the mentioned decision is that the Competition Board, which refers to the opinions of many foreign authorities, differs from its own jurisprudence.
THE OPINION OF THE COMPETITION BOARD
In its Financial Markets Decision, examining whether banks and financial institutions operating in Turkey and their representatives violated Article 4 of the Law No. 4054 on the Protection of Competition (“Competition Law”) through various communications and agreements in many financial services, the Competition Board has conducted specific evaluations based on executed projects and focused on findings which display exchange of information within the markets of corporate banking, derivatives, fund management, bonds/bills and foreign exchange. In the relevant markets differing from each other due to their technical features, examinations have been conducted over specific cases such as “, Risk-Wieghted Derivative Products”“Yıldız Holding Syndicated Loan”, “İDO Loan” ve “ŞEKERBANK-VAKIFBANK, Risk-Wieghted Derivative Products” .
The case-specific approach of the Competition Board was in line with its jurisprudence and appropriate in our opinion. Indeed, even though it may be perceived as an exchange of information between competitors at first glance; in certain circumstances, conducted communications may not be defined as anti-competitive due to the characteristics of the relevant financial products and projects. In this context, the Competition Board has evaluated that the undertakings subject to the preliminary investigation did not engage in any communication that would violate the Competition Law and decided that it was not necessary to initiate an investigation. However, what makes this decision interesting is that the Competition Board examined the concerned conducts in terms of competition law and did not leave it to the evaluation of financial authorities. The Competition Board’s decision differs from its previous decision dated 24.11.2016 and numbered 16-41/667-300 [2] (“FX Decision”) . In the aforementioned decision; the claim regarding whether competitor bank traders, who carry out information exchange in online chat rooms accessible from Bloomberg and Reuters screens, engage in actions such as frontrunning (coordinated leading), stop-loss hunting (coordinated loss prevention) and information exchange related to customer orders has been examined. However, it was stated by the Competition Board that the actions subject to the FX Decision were mainly related to manipulation rather than the competition law; thus it has been decided that these behaviors are not related to the competition to win customers and are basically in the nature of manipulative cooperation to deceive the customer. The Competition Board changed this view with the Financial Markets Decision. In this article, it will be evaluated whether manipulation behaviors are the subject of financial authorities or competition law in the light of the opinions of the Competition Board.
ARE MANIPULATION ACTIONS ONLY A MATTER OF FINANCIAL AUTHORITIES?
Manipulation is an umbrella concept that covers various acts that are subject to more than one regulation in Turkish and foreign legislation. In the doctrine; manipulation, which consists of acts that can be carried out in different ways thus defined in different ways in the legislation, can be defined as actions designed to (i) interfere with price mechanisms by preventing the free interaction of supply and demand, (ii) deceive people into trading in a security, and (iii) keep the price of the security at an artificial level .
Concept of Manipulation in the Doctrine
The Competition Board provides a general definition of manipulation in its Financial Markets Decision as “an attempt to create a price above or below the price which would occur under free supply and demand conditions and to force the security to be traded at this price, an artificial control of the price”[4] . It is clear that, manipulation, by definition, does not differ much from competition law violations. Indeed, as it is known; competition law aims to prevent the determination of factors such as price, cost and profit, which should be formed in the free market, via artificial interventions outside the market.
Besides general definitions, types of manipulation can be defined in different ways based on the acts and markets. As stated in the FX Decision of the Competition Board; manipulation can be divided into two groups as information-based and transaction-based :[5]:
- Financial transaction manipulation can be defined as the acts which “result in abuse of public confidence in the price within the natural functioning of the market via transactions that do not have an economic basis and aim to mislead others are made to create a price[6] and
- Financial information manipulation can also be defined as the acts which “lead to the deterioration of trust in the public disclosure system and prevent the reflection of the information on the price through the flow of false, incorrect or incomplete information to the public, or the failure to disclose the information when it should be disclosed.[7]” .
In the light of this information, the general concept of manipulation can be categorized under two groups and all manipulative behaviors can be gathered under these two categories.
Manipulation in the Legislation
Besides special laws, acts of manipulation can also be evaluated within the framework of the provisions of the Turkish Penal Code No. 5237 (“TPC”), based on the acts constituting the manipulation. As a matter of fact, an act carried out within the framework of the abovementioned financial transaction manipulation behaviors; can also be evaluated as disclosure of information or confidential documents or information relating to commerce, banking or private customers, pursuant to paragraph 1 of Article 239 of the TPC. The relevant provision is as follows:
“Any person who discloses confidential information, or documents, relating to commerce, banking or private customers, which he holds by virtue of his title, duty, profession or trade, to an unauthorized person shall be subject to a penalty of imprisonment for a term of one to three years and a judicial fine up to five thousand days, upon complaint…”
Likewise, behaviors of financial transaction manipulation can also be examined under the crime of theft by deception pursuant to Article 157 of the TPC. The relevant provision is as follows:
“Any person who deceives another, through fraudulent behaviour, and secures a gain for himself, or others, and causes loss to the victim, or another person, shall be sentenced to penalty of imprisonment for a term of one to five years and a judicial fine up to five thousand days.”
Therefore, it can be argued that manipulative behaviors firstly constitute a crime in the context of criminal law.
Alongside general regulations, Article 107 of the Capital Market Law No. 6362 provides a definition for manipulation acts:
“(1) Those who make purchases and sales, place orders, cancel orders, change orders or carry out account activities with the purpose of creating a false or misleading impression on the prices of capital market instruments, their price changes, their supplies and demands, shall be sentenced to imprisonment from three years up to five years and be punished with a judicial fine from five thousand days up to ten thousand days. However, the amount of the judicial fine to be imposed due to this crime shall not be less than the benefit obtained by committing the crime.
(2) Those who provide false, wrong or misleading information, start rumours, give notices, make comments or prepare reports or disseminate them in order to affect the prices of capital market instruments, their values or the decisions of investors, thereby obtaining benefits shall be sentenced to imprisonment from three years up to five years and be punished with a judicial fine of up to five thousand days.”
Another parallel legislation is Article 76A of the Banking Law No. 5411:
“Transactions and practices of banks governed by and subject to this Law aiming to ensure artificial price formation, also including artificial supply, demand or exchange rates, in financial markets, through transactions listed in Article 4 hereof, and dissemination of untrue or misleading information by using different means, also including internet media, or direction or guidance of savers or account owners untruly or in a misleading manner, or similar other transactions and practices for the same purposes are considered and treated as manipulations and deceptive transactions in financial markets. Transactions and practices covered by this article are determined by the Board and Published in the Official Gazette.”
In Article 4 of the Regulation on Manipulations And Misleading Transactions In Financial Markets, which is a regulation based on the above-mentioned provision and was published in the Official Gazette dated 07.05.2020 and numbered 31120, a list is provided for the acts considered as manipulation. Some examples are as follows:
“a) To get intentionally involved in, mediate or intercede in, or give orders for, transactions which evoke or may evoke false or misleading impressions as to supply, demand or price of a financial instrument, or ensure or may ensure the maintaining of price of a financial instrument, also including foreign exchange rates or interest rates, at an abnormal or artificial level, or to engage in such and similar other transactions;
(…)
d) To spread or disseminate via any mass media including the internet or otherwise any false or misleading information or rumours that create or may create a false or misleading impression as to supply, demand or price of a financial instrument, or ensure or may ensure the maintaining of price of a financial instrument at an abnormal or artificial level;
(…)
g) To engage in practices with the aim of fixing the buying or selling prices of a financial instrument or deriving other unlawful gains by using influence or dominant role over the supply or demand of a financial instrument;
(…)”
Evaluating the exemplary provisions from the relevant Regulation and all the legislations together; manipulation behaviors can be defined as interfering with the parameters that should be determined in the free market via artificial methods and consequently determining them outside the market.
Concept of Manipulation Within Competition Law
In light of the definitions and regulations mentioned above, it is clear that manipulation does not fall far from violations of competition law, especially violations such as anti-competitive agreements and information exchanges. Accordingly, some of the violation definitions provided under Article 4 of the Competition Law are as follows: in Subparagraph (a) “Fixing the purchase or sale price of goods or services, elements such as cost and profit which form the price, and any condition of purchase or sale” and in Subparagraph (c) “Controlling the amount of supply or demand for goods or services, or determining them outside the market”.
However, there are two issues which should be evaluated in this context and are underlined by the Competition Board in its Financial Markets Decision: (i) anti-competitive agreements and information exchanges are related to the determination of the elements in all kinds of goods and services markets regardless of the free market, while manipulation behaviors only occur in financial markets and (ii) anti-competitive agreements and information exchanges are realized between at least two competitors, while manipulation behaviors can also be carried out unilaterally. Therefore, it can be deduced that there is an intersection between antitrust violations and manipulation behaviors. Hence, a specific evaluation should be carried out for each case. In this context, it can be concluded that if a manipulation behavior is based on acts carried out between more than one competitor, there is no obstacle for it to be considered as a violation of competition law. As a matter of fact, whether through information exchange between competitors or through manipulative market movements; or artificially affecting a single exchange rate or customer's transactions, or manipulating the financial product range, such behaviors will constitute both manipulation and violation of competition law. As the Competition Board stated in its decision, with these determinations, it differed from the stance it had adopted in its previous FX Decision.
At this point, the overlap of jurisdiction between administrative authorities; related to the manipulation behaviors which are evaluated within the scope of competition law, can be argued. The Competition Board also evaluated this issue in its Financial Markets Decision, and while taking into account domestic and foreign jurisprudence; stated that there is no obstacle for the inspection of an act by two different administrative authorities at the same time in light of different laws. As a matter of fact, it is possible for a manipulation behavior to be supervised by both the Banking Regulation and Supervision Agency (“BRSA“) and the Capital Markets Authority (“CMA“), as it can be seen in the legislation mentioned above. In the decision of the Council of State Plenary Session of Administrative Law Chambers, it is stated that “a market being subject to the regulation of a regulatory and supervisory authority, will not exclude the activities in that market from the scope of Law No. 4054[8].” .
Indeed, considering the fact that the Competition Board has carried out investigations on financial markets before, as in the FX Decision, it is clear that there is no obstacle for the supervision of manipulation behaviors by more than one administrative authority in light of the different legislations.
Another significant issue to consider within the scope of the evaluation of manipulation behaviors in the context of competition law is the nature of information exchanges. Indeed, the evaluation regarding whether information exchanges in financial markets constitute a violation of competition law should be carried out in the light of the characteristics of the concerned markets. In this regard, the Competition Board focuses on the structural features of the market and the nature of the information shared. While the main market characteristics emphasized in this context are (i) the degree of concentration, (ii) the transparency and (iii) whether it is complex and stable; the characteristics of the exchanged information are (i) whether the information is sensitive to competition and (ii) how quickly it loses its currency. Within the framework of these criteria, the Competition Board has determined that financial markets are complex, high-volume, unstable and contain numerous players, and that information is rapidly out of date. However, at this point, it should be underlined that; although these market features reduce the anti-competitive effects of information exchange, these features do not completely eliminate the possibility of exchange of information to be an infringement of competition. As stated by the Competition Board, an evaluation should be made on a case-by-case basis. In the case that such exchanges are continuous, give the impression that they are intended for a planned action, if subsequent transactions are observed between competitor banks in the same direction or if the exchange is followed by coordinated behavior, it will be highly likely that such acts will be considered as a direct violation of competition law.
In the light of all these evaluations, the Competition Board concluded in its decision that; manipulation behaviors and exchange of information in financial markets may fall within the scope of competition law and constitute a violation in this context.
Opinions of Foreign Authorities
The view of the Competition Board is in line with the approaches of foreign competition authorities. As examples of which will be presented to your attention below, the prevailing trend in the world is that it is possible for acts of manipulation to be overseen in the framework of competition law. In this context, in the case that the subject is considered to have restrictive effects on competition, investigations carried out by financial authorities are also followed up by competition authorities as well and inquiries are carried out in the same direction.
Within this scope, first of all, United Kingdom’s approach should be mentioned since it differs from the majority. It was stated in the announcement published on 12.11.2014 by the British Financial Conduct Authority (“FCA”), which has the authority to enforce competition law in the financial market in the United Kingdom, that; as a result of the investigation conducted, the actions taken by Citicorp, HSBC, JPMorgan, RBS and UBS manipulated the spot foreign exchange market and the mentioned actions damaged the confidence in the UK financial system. Therefore, fines amounting to 1.1 billion Pound were imposed[9]. During the mentioned investigation, it was determined that (i) the traders of rival banks were in communication and engaged in coordinated manipulative behaviors and (ii) they did not take the necessary precautions in terms of customer confidentiality, conflict of interest and business ethics. The remarkable thing here is; FCA, which also has powers to enforce competition legislation, has handled the issue within the framework of financial legislation rather than competition legislation, unlike other authorities.
In addition, in the decision of US Department of Justice (“DOJ”) dated 28.01.2015 regarding manipulation of the FX indicator, the judge of the case, SCHOFIELD, ruled that the damage suffered by the plaintiffs was due to a breach of competition[10] . Within this context, it was stated that;
- the defendant banks are horizontal competitors,
- they carried out price-fixing and
- thus, the plaintiffs had to pay an excessive price above the market.
It is seen that manipulation behaviors, which are considered solely as a manipulation in the perspective of the UK authorities, pose a violation of competition in the USA. Similarly, within the scope of the settlement between the DOJ and the BNP on 26.01.2018 regarding the exchange of information related to customer transactions, by the BNP; it has been accepted that exchange rate manipulations involving Central and Eastern European, Middle Eastern and African currencies are carried out, and in this context, BNP traders and other enterprises involved in the violation restricts competition by fixing prices in certain currencies[11].
In line with the USA and the dominant trend, the EU approach also considers manipulative behaviors within the jurisdiction of competition authorities as well as financial authorities. In this context; the European Commission (“Commission”) has fined three banks (Credit Agricole, HSBC, JPMorgan) 485 million Euros within the scope of the EIRDs (derivatives linked to EURIBOR) Cartel decision dated 07.12.2016. The decision states that from September 2005 to May 2008, seven banks (Credit Agricole, HSBC, JPMorgan Chase, Barclays, Deutsche Bank, RBS and Societe Generale) entered into anti-competitive agreements in the Euro derivatives market. Since Credit Agricole, HSBC and JPMorgan did not agree to enter into a settlement agreement with the Commission, they were faced with an administrative fine on December 2013 .The Commission, who has many similar decisions; has decided that a cartel has been formed regarding the activities related to 11 different exchange rates traded in the spot market (Euro, Pound, Japanese Yen, Swiss Franc, USA, Canada, New Zealand and Australian Dollars and Danish, Swedish and Norwegian Krone); thus ruled on imposition of a fine amounting to EUR 1.07 billion to five banks (Barclays, RBS, Citigroup, JPMorgan and BTMU)[13]. As a significant point in the aforementioned decision; it was determined that the traders who carry out foreign exchange transactions on behalf of banks exchanged sensitive information and trading plans and coordinated their trading strategies in various chat rooms.
In various countries besides the USA and the EU, competition authorities have enforced their supervisory powers regarding manipulation behaviors and have ruled to impose fines when deemed necessary. For example, conducting an investigation regarding the banks who manipulated WM/Reuters benchmark exchange rates via exchange of information, the Swiss Competition Authority (“WEKO”); ruled that a cartel structure was being carried out among the concerned banks and imposed a fine of 90 million Swiss Francs in total[14] . Similarly, in April 2014 the New Zealand Competition Authority[15] , in May 2015 the South African Competition Authority, in June 2015 the South Korean Competition Authority[16] and, on the same date, the Brazilian Competition Authority[17] launched investigations on a number of undertakings, including the aforementioned banks, with respect to the allegations that banks manipulated exchange rates via acting together in foreign exchange markets. The investigations conducted by the Brazilian and South Korean Competition Authorities have been concluded. Competition authorities in many other countries have also adopted this approach: competition authorities of many countries such as South Africa[18] , Mexico[19] , Portugal[20] and Hong Kong[21] have carried out inspections of manipulation behavior and ruled on imposition of fines.
CONCLUSION
With all this information, evaluated within the scope of legislative provisions and case-law examples, it is clear that the majority opinion of the competition authorities; considers financial behaviors under the scrutiny of competition authorities as well, in the case that they bear the characteristics of competition law violations. Likewise, the Competition Board changed its view with its recent Financial Markets Decision. The mentioned decision which is given by the Competition Authority in parallel with other authorities; displays that financial markets can be supervised not only by the CMB or BRSA, but also by the Competition Authority, thus ones operating in these markets have a higher responsibility to take care and take precautions.
[1] https://www.rekabet.gov.tr/Karar?kararId=9028acb0-1b55-42d9-9d72-ba4b05d9889c
[2] https://www.rekabet.gov.tr/Karar?kararId=9ee162ca-baa3-447e-9fd9-998d6f965ea8
[3] https://www.erdem-erdem.av.tr/bilgi-bankasi/sermaye-piyasasi-hukukunda-manipulasyon-sucu, Erişim Tarihi: 13.09.2022.
[4] ŞENSOY D. (2013), Manipülasyon; Piyasa Dolandırıcılığı Suçu, Uygulanacak Tedbirler ve Yaptırımlar, Ankara Barosu Dergisi, 2013/3, s. 371-399.
[5] Rekabet Kurulu’nun 24.11.2016 tarih ve 16-41/667-300 sayılı FX Kararı, para. 24.
[6] Yüce, A. A., Sermaye Piyasasında Manipülasyon, 2012, TBB Dergisi sayı 98 syf.367.
[7] Yüce, A. A., Sermaye Piyasasında Manipülasyon, 2012, TBB Dergisi sayı 98 syf.367.
[8] Danıştay İdari Dava Daireleri Kurulu’nun 18.01.2016 tarih ve E. 2013/72, K. 2016/11 sayılı kararı.
[9] https://www.fca.org.uk/news/press-releases/fca-fines-five-banks-%C2%A311-billion-fx-failings-and-announces-industry-wide-remediation-programme, Erişim Tarihi: 16.09.2022.
[10] SDNY, “In re: Foreign Exchange Benchmark Rates Antitrust Litigation”, 28.01.2015, No: 1-13- CV-07789.
[11] DOJ, “U.S. v BNP Paribas USA, Inc.”, 26.01.2018, No: 1-18-cr-00061-JSR.
[12] Case AT.39914, 07.12.2016.
[13] https://ec.europa.eu/commission/presscorner/detail/hu/IP_19_2568
[14] https://globalcompetitionreview.com/switzerland-starts-full-forex-cartel-investigation, Erişim Tarihi: 16.09.2022.
[15] https://www.reuters.com/article/newzealand-forex-investigation-idUSL3N0MZ0MN20140407, Erişim Tarihi: 16.09.2022.
[16] https://globalcompetitionreview.com/article/korea-latest-join-global-forex-probe, Erişim Tarihi 16.09.2022.
[17]https://latinlawyer.com/lacca/article/cade-joins-global-forex-probe, Erişim Tarihi: 16.09.2022.
[18] http://www.compcom.co.za/wp-content/uploads/2020/06/Competition-commission-refers-its-case-against-banks-for-rand-manipulation-to-the-tribunal-for-prosecution.pdf, Erişim Tarihi: 16.09.2022.
[19] https://globalcompetitionreview.com/price-fixing/mexico-issues-reduced-fines-bonds-cartel, Erişim Tarihi: 16.09.2022.
[20] https://www.dlapiper.com/~/media/files/insights/publications/2020/09/global_cartel_enforcement_guide_brochure_.pdf?la=en&hash=C9ACB62781BEB3EDB4CB091152B5C934240D5237, Erişim Tarihi: 16.09.2022.
[21] https://www.lexology.com/library/detail.aspx?g=e84e4c25-2470-4664-b16e-d0b38a9b56f5, Erişim Tarihi: 16.09.2022.
