Banking, Antitrust and Derivatives: Untying the Antitying Restrictions

Abstract:     
This article argues that expressly requiring a borrower to enter into an OTC derivative with a bank as a condition for receiving credit does not violate the antitying restrictions of the Bank Holding Company Act ("BHCA"). Part I of this article discusses the nature of OTC derivatives and demonstrates through examples how OTC derivatives can enable a borrower to minimize various business risks. Part II examines how banks are encouraging their borrowers to utilize various risk management techniques such as OTC derivatives and discusses the impact of BHCA on such efforts. Finally, Part III analyzes the elements of tying a claim under BHCA and argues that a requirement to enter into an OTC derivative with a bank as a condition to obtaining credit will not constitute a violation of the BHCA. Part III first discusses how a loan combined with an OTC derivative such as an interest rate swap is not really two tied products, but is actually in substance a fixed rate loan. The part then argues that these tied products do not satisfy the "anticompetitive in nature" requirement because typically only the lending bank is willing to enter into the OTC derivative with the borrower. Finally, the part concludes that the traditional banking practice exception to the antitying rules would exempt such tying arrangement from the antitying provisions.

Keywords: OTC Derivative, Antitying, Tying, Bank Holding Company Act, BHCA, Anticompetitive in Nature, Risk Management, Business Risks, Interest Rate Swap, Banks, Banking

JEL Classifications: G2, G21, G28, G29

Accepted Paper Series