SEF Scuttling? Alleged Manipulation of the Interest Rate Swap Market through Torpedoing of All-To-All Platforms and SEF Marketplaces

Interest rate swaps (IRS) are a frequently traded instruments known for their ability to reduce or increase one’s exposure to changes in interest rates. Buy-side funds and firms historically have been reliant on the major sell-side broker-dealer banks like Bank of America to purchase and sell IRS. However according to a number of actions MDL’d to Interest Rate Swaps Antitrust Litigation, No. 1:16-md-02704 (SDNY) (“IRS Antitrust Litigation”), in the late 2000s this was poised to change. New platforms, and swap execution facilities (“SEFs”) supposedly would have opened up “all to all” trading, in which buy-side firms could sell to other buy-side firms, breaking the broker dealers’ monopoly on the sale of swaps. According to the Plaintiffs, Defendants, the major buy-side banks, sabotaged this by preventing the creation of these all-to-all trading platforms, and otherwise conspiring to restrain their creation and growth. Plaintiffs allege that because of Defendants’ actions, the IRS market was less competitive and transparent, artificially preventing the narrowing of bid/ask spreads and thereby damaging the buy-side firms, when they purchased and liquidated their IRS positions at less favorable terms. In this post, we focus on the facts alleged in IRS Antitrust Litigation. In an upcoming posts we will unpack the procedural and factual developments to date.

What are IRS?

IRS essentially are bets that that allow investors to change their exposure to certain changes in interest rates without having to exchange actual underlying instruments. IRS are agreements by two parties to trade the interest cash flows from a particular interest bearing instruments, like bonds, without trading the instruments themselves. Plain vanilla swaps for instance trade fixed interest rate cash flows for those of an instrument with a floating interest rate, for instance one tied to an industry benchmark such as LIBOR.

How are IRS Traded?

Historically IRS were non-standardized instruments sold “over the counter” (“OTC”) in one-off “bespoke,” or specially tailored, transactions with the dealer banks like Bank of America, which would sell swaps to buy-side investors. Buy-side funds and firms would have to call for quotes from the dealer banks. This process was opaque in that it did not provide very much information to the buy-side funds about the actual market price of their purchase. However, in the last few decades, IRS contracts have become more and more standardized in their terms and form. Additionally, technology has made it so that anonymous, real time electronic quoting could become ubiquitous.

Overview of the Alleged Collusion

However, according to the allegations of Plaintiffs, buy-side funds such as pension and retirement funds, and asset management companies, in IRS Antitrust Litigation, while a number of platforms have emerged in the last decade or so, those platforms continue to use a “request for quote” (“RFQ”) protocol whereby buy side investors must give up their identity, and request quotes only from several dealer banks and no one else. Meanwhile the Defendants, large dealer banks including Bank of America, Barclays, BNP Paribas, and Credit Suisse, among others, are able to use their own interdealer bank (“IDB”) platforms that are anonymous, all-to-all (at least for the dealer banks who have access to them), and real time, much like exchanges for stocks.  According to Plaintiffs, Defendants have used their heavy hand to prevent the development of truly all-to-all platforms like the IDB platforms, stifling the growth of these platforms and relegating buy-side firms to the use of RFQ platforms in order to perpetuate an “OTC-like” state where buy-side firms are forced to go through the dealer banks, which could use the opaqueness of the market to artificially widen the bid-ask spread, the spread between the purchase and sale price of a particular position on a particular IRS instrument.

Plaintiffs allege Defendants accomplished this by backing the creation of Tradeweb, which adopted the RFQ system, then putting together investment groups, which collaborated with one another to prevent Tradeweb from implementing “all to all” trading, by installing themselves on Tradeweb’s boards and committees, and otherwise by preventing the IDB platforms like GFI Group by threatening to pull their business from the platforms, and through negotiating with entities like ICAP.

Moreover, while Title VII Dodd–Frank Wall Street Reform and Consumer Protection Act sought to forward centrally cleared and all-to-all purchased/sold IRS through SEFs, according to Plaintiffs, the dealer defendants have prevented central clearing on SEFs so that they could continue to control the clearing infrastructure of IRS, forcing buy-side firms to purchase through them. They did this by taking control of IRS clearinghouses like SwapClear through bankrolling their formation, and barring access to the clearinghouses without the payment of a “king’s ransom” to the clearinghouse’s default fund. Having barred access to the clearinghouses, dealer defendants’ allegedly forced the buy-side firms to trade on the RFQ platforms in order to be able to clear. Moreover, their boycotting and threatening of other SEF’s “smothered these entities in their crib” so to speak, preventing these entities from growing early in their formation, and preventing any means for the buy-side firms to break the Dealer’s monopoly.
According to the plaintiffs, because the buy-side Plaintiffs are forced to purchase on the artificial “OTC-like” RFQ platforms, they cannot break the monopoly and must continue to enter into IRS agreements at artificial and unfavorable terms.


Plaintiffs seek damages, restitution, injunctions and declaratory relief under Section 1 of the Sherman Act, 15 U.S.C. § 1 and their claim for Unjust Enrichment.

This post was written by Lee J. Rubin.

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