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CADE’s Superintendence investigates cartel in the manipulation of exchange rates


The parties will be notified to present their defense within 30 days
published: Jul 02, 2015 04:34 PM last modified: Apr 15, 2016 04:37 PM

The General Superintendence of the Administrative Council for Economic Defense – CADE has opened, on this Thursday (02 July), an administrative proceeding to investigate an alleged cartel in the manipulation of foreign exchange rates involving the Brazilian Real and foreign currencies. The General Superintendence will also ascertain the manipulation of reference indexes, such as those of the Brazilian Central Bank (PTAX), the WM/Reuters and the European Central Bank. 

The companies investigated in the proceeding (PA 08700.004633/201504) are Banco Standard de Investimentos, Tokyo-Mitsubishi UFJ Bank, Barclays, Citigroup, Credit Suisse, Deutsche Bank, HSBC, JP Morgan Chase, Merril Lynch, Morgan Stanley, Nomura, Royal Bank of Canada, Royal Bank of Scotland, Standard Chartered and UBS, in addition to 30 individuals.

The alleged anticompetitive conducts involved the Foreign Exchange market (FX market) and the financial institutions that operate on this market. 

The foreign exchange market carries out the operations that refer to the purchase of a currency in exchange for another. These operations are based on exchange rates, which are considered one of the key economic variables, influencing from the domestic rates of consumption in a country, to levels of investment, imports and exports, in addition to all the financial transactions based on them. Although the Brazilian Real is Brazil’s official currency, a considerable number of exchange transactions by Brazilian entities are made through foreign currencies, such as the Euro, US Dollar, British Pound Sterling, Swiss Franc, among others. 

The foreign exchange market has reference indexes (or reference exchange rates), calculated based on the exchange rates in the market and periodically published by public and private entities – such as the Brazilian Central Bank (PTAX), WM/Reuters and the European Central Bank – all over the world for specific pairs of currencies. These reference rates are used as a benchmark by multinational companies, financial institutions and investors which evaluate contracts and assets worldwide, among others. 

The clients of the executing agencies of foreign exchange transactions are, among others, those agents which periodically need to carry out transactions involving purchase and sale of currency, such as banks, investment funds, individuals (e.g., investors and tourists), companies and governmental entities, for example. When these clients wish to make transactions on the foreign exchange market, the financial institutions that offer that service compete with each other to offer a competitive price (the exchange rate for the purchase or sale of a particular currency). The currency exchanges can also be made based on the exchange rate reference indexes. 
Conduct – The opinion of the Superintendent points out that there are strong indications of anticompetitive practices to fix prices and commercial conditions among competing financial institutions. According to the evidence, the parties would have cartelized in order to fix price levels (exchange rate spread); coordinate the purchase and sale of currencies and price proposals to clients; in addition to hindering or impeding the activity of other agents in the exchange market involving the Brazilian currency. 
The institutions are also accused of coordinating among themselves to influence the references rates of the foreign exchange market, through the alignment of their currency purchases and sales. Evidence also pointed to potential anticompetitive practices of exchanging commercially sensitive information about the exchange market, such as information regarding negotiations, contracts and future prices; clients orders; strategies and objectives of negotiations, confidential positions in specific operations and orders; and the amount of operations carried out (incoming and outgoing flows).

All the alleged conduct would have damaged competition in this market, hurting the conditions and prices paid by the clients in their foreign exchange operations, raising the profit of the defendants and distorting the reference indexes of the foreign exchange market. 

The anticompetitive practices were made possible through chats on the Bloomberg platform – sometimes named by the parties as “the cartel” or “the mafia”. The conducts would have lasted, at least, from 2007 to 2013. 

With the opening of the administrative proceeding, the defendants will be notified to present their defense within 30 days. At the end of the investigation phase, the General Superintendence will publish an opinion on the condemnation or filing of the proceeding and will submit the case to CADE’s Tribunal, which will issue the final decision. 

Leniency – The investigation was launched following a leniency agreement  signed with CADE’s General Superintendence and the Brazilian Federal Prosecutor’s Office. By way of leniency, as foreseen in Law 12.529/11, a participant in a cartel may report the illicit act it was part of, disclosing information of other parties to the cartel, and committing to cooperate with the authorities in the investigation of the case, in return  for immunity or reduction of applicable sanctions.