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European Union

Commission plan to cut systemic risk in payment

Consistent with the aim of promoting finance market stability and the free movement of capital, the Commission has proposed a Directive (based on Article 100A of the EC Treaty) targeting 'systemic risk' in payment systems. The risk of one link in the chain of a payment system failing to meet its liabilities and passing disastrous consequences on to other participants will be reduced by the new rules on settlement finality and collateral security.

One effect of the proposal will be to compel member states to make payment netting legally binding, even in the case of insolvency, and on third parties, as well as principals. A multi-jurisdictional netting system, cutting the credit and liquidity exposure of the participants, depends on being legally enforceable in all the relevant member states.

One clear theme of the proposal is making collateral security more readily available and less subject to conflicts of law. Thus the insolvency of a participant in a payment scheme would be subjected to the insolvency law of the country in which the payment system is based. In addition, immediate and prioritized payment of collateral security would be ensured by isolating it from the implications of local insolvency law, reducing the systemic risk by enhancing the liquidity of the security. The proposed Directive would also exempt payment systems from national rules which impose retroactivity on the insolvency of a participant. Such rules can introduce systemic risk, by undermining the finality of a settlement made by a payment into the system. This change is consistent with the proposal to bar the revocation of payments after the stipulated time.

The Commission has proposed that the Directive be implemented by member states no later than December 31 1998, coinciding with the third stage of Monetary Union, which starts on January 1 1999.

Lower fines for companies disclosing cartels

The Commission has decided, on the initiative of Karel van Miert, the commissioner responsible for competition, to reduce or drop fines for companies which inform the Commission of the existence of cartels.

The amount by which of the fine will be reduced will depend to a large extent on the circumstances surrounding the disclosure. If a company discloses the existence of a cartel before the Commission has undertaken an investigation, it will obviously benefit from more favourable treatment than a company which cooperates after the investigation has begun. Thus, in the first case above, the reduction in the fine which would have been imposed will be at least 75% and possibly 100%. If an investigation is already underway, the reduction would be between 50% and 75%. However, in both cases, the company must fulfil certain conditions:

  • it must be the first to come forward with conclusive evidence proving the existence of the cartel;
  • it must have put an end to its own involvement in the illegal activity no later than the time it discloses the existence of the cartel;
  • it must provide the Commission with all the information it possesses about the cartel, and maintain its cooperation with the Commission throughout the investigation; and
  • it must not have compelled another company to take part in the cartel nor have played a determining role.

For companies that have not fulfilled all the above conditions, the reduction in the fine will be between 10% and 50%. It should be noted that a reduction in the amount of a fine does not cover the individual actions of a member of the company's staff; it is aimed solely at actions emanating from the company itself.

Ciba-Geigy/Sandoz merger cleared with conditions attached

The planned merger between Sandoz AG and Ciba-Geigy AG into the company Novartis AG has been approved by the Commission. However, the approval was granted only after the parties agreed to undertakings in the area of animal health. In the market for products for the treatment of parasites, such as fleas or ticks in small animals, there remained competition concerns. The parties will have a very strong position in one of the crucial products in this market: the growth inhibitors which interrupt the reproductive cycle of parasites. Ciba-Geigy and Sandoz control three out of the five worldwide available active substances. To overcome this potential competition problem, the parties undertook to grant non-exclusive licences for methroprene, one of the active substances, and to supply the licensees with this active substance until the launching of their own products.

The Commission also examined carefully the research and development (R&D) activities of the two companies, noting that the merger would result in a significant combined R&D potential. However, it was considered that there were enough other companies with the necessary 'critical mass' in this field. Novartis will continue to face competition in all areas from a number of major competitors such as Glaxo Wellcome, Upjohn Pharmacia, Bayer, BASF, Rhône-Poulenc and others.

Commission approves Lucas/Varity merger

The Commission has approved a full merger between Lucas Industries, Solihull, in the UK and Varity Corporation, Buffalo, New York. A new UK holding company, under the title LucasVarity, is to be created, with the Lucas and Varity shareholders to hold approximately 62% and 38% of the new company respectively.

The new company will be one of the world's 10 largest automotive component suppliers. However, the companies' operations are mostly complementary, both with respect to the affected product market and the geographical markets. Lucas have a large presence in the integrated brakes market, while Varity have no European market share in this area. Furthermore, it is a competitive market in Europe, with Bosch and ITT being other important players; the addition of LucasVarity in the European market should stimulate competition further.

Bosch and ITT between them also account for a large slice of the anti-lock braking system (ABS) market. While Varity is the world's largest producer of ABS, it only has a 5% share in the European market. Lucas has only minor ABS activities. It is expected that the merger will result in the new entity being able to compete effectively in this market, with a positive effect on the conditions of competition in Europe.

Michael Reynolds
Allen & Overy

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