The Italian Competition Authority targets a margin squeeze practice in the financial sector


The Italian Competition Authority (ICA) has opened an Article 102 TFEU investigation against Monte Titoli Spa (MT) in the case A506 Monte Titoli-Servizio di post-trading (Monte Titoli). The ICA feared that MT breached competition by carrying out anti-competitive foreclosing and discriminatory pricing policies.

The parties and the relevant regulatory framework
MT was a vertically integrated financial service provider wholly owned by the Italian Stock Exchange (Borsa Italiana). The antitrust investigation, the ICA started following the receipt of complaint filed by MT’s competitors, targets the pricing policies put in place by MT since 2016. MT is the only entity licensed by the Italian financial regulators to provide the services of settlement and centralized administration of securities as Central Security Depositary (CSD).
Moreover, MT joined the Target 2 Securities (T2S) platform developed under the auspices of the European Central Bank. As a result, MT is the only national provider capable to carry out settlement services through the T2S platform and allowed to act as CSD under the EU law.

The decision of the ICA
The ICA said that the market for settlement services is distinct from the market for post-trading activities, including custodian services. The latter is a market open to competition where issuer CSD compete with the investor CSD in the provision of custody services. These markets are vertically linked with the settlement activities being the upstream market and the ancillary services of security custody the downstream market. In these markets the ICA played two roles: on one hand, it acts as market infrastructure (issuer CSD) in the upstream market for settlement services; on the other hand, it acts as a market operator (investor CSD) in the downstream market.
Bearing in mind the above described regulatory framework, the ICA found MT to have a monopoly position in the market for settlement services as it was the only licensed operator to provide settlement and centralized administration services. In practice, the discharge of the obligations arising from contracts having as object national securities can be only via MT.
Then, the ICA focused on the pricing policies applied by MT. The MT’s competitors reported that MT charged a € 0.47/0.48 fee for the provision of settlement services to the Directly Connected Parties (DCP), which are the financial intermediaries acting as custodian that have access to the T2S platform. As the internal costs bore by DCP is about € 0.30, the total costs for them to provide the settlement services is € 0.70/0.75. Instead, the fees charged by MT to the financial intermediaries, Indirectly Connected Parties (ICP), that opt for the settlement of financial transaction via the fully integrated services supplied as investor CSD amounted only to € 0.50. Moreover, the MT’s competitors also reported about the discriminatory pricing of the dominant firm. It charged a € 0,10 fee on transactions concerning national securities made by CSD of other countries that are part of the T2S platform, whereas it charged a € 0.47/0.48 to the transaction made by the national custodians.
The ICA feared that MT could leverage its dominance in the upstream market for the settlement services in the downstream market, reducing the profitability margins of its competitors. The fully integrated offer could not be replicated by the operators that competed with MT in this market. This pricing policy may have foreclosing effects that may be magnified by the rebates granted by MT.

Conclusion
The theory of competition harm relied on by the ICA is that MT might have abused its dominant position by means of foreclosing and discriminatory practices. The objectives underlying the implementation of the T2S platform was to strengthen competition between national CSD and between the former and the custodians for the provision of value added services. MT might frustrate these objectives by driving competitors off the downstream market.

 

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