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STANDARD & POOR’S: DATA LICENSING UNDER THE SPOTLIGHT (…AGAIN)
January 2009

On 12 January, the European Commission announced that it has opened an investigation into possible breaches of the EC Treaty’s rules on abuse of a dominant market position (Article 82) by Standard & Poor’s (“S&P”).

S&P is the ratings, equity research, index, data, risk and investment advisory services business of The McGraw-Hill Companies, Inc.. It is accused of breaching its monopoly position as the US National Numbering Agency (“NNA”) in how it licenses the use of numbers that identify US securities to financial institutions (such as banks and investment funds), in order to facilitate clearing and settlement of trading in those securities.

The investigation was prompted by complaints filed jointly in July 2008 by the European Fund and Asset Management Association, French and German asset management associations, and associations of financial market data users in the UK and Switzerland.

This case is the latest in a series of competition challenges in recent years, which have tested the ability of rights holders to refuse access to “essential” data, and the terms (especially price) on which data should be licensed.

Background to the case

The International Securities Identification Number code (“ISIN”) is a standard developed by the ISO, which provides unique cross-border identification for securities (shares, bonds, etc.) issued throughout the world[1]. This ensures that there is no confusion when it comes to clearing and settling a trade in that security.

Typically, each ISIN is issued by the NNA[2] of the country in which the security is issued, as a unique nine digit NSIN, or National Securities Identifying Number. So, Euroclear France, Finland and the Netherlands operate the NNAs for those countries and S&P runs the NNA for North America (the CUSIP[3] Service Bureau) on behalf of the American Bankers’ Association.

As such, S&P is the only issuer of identifiers for US securities. It is also the only operator to receive first-hand information gathered from all securities issuers, which it includes in a descriptive database that is licensed to data vendors.

The allegations made against S&P

The complainants allege that S&P has abused its dominant position within the meaning of Article 82 by demanding a licence fee, not only from financial data vendors, but also directly from financial institutions (such as the complainants), which use ISINs when accessing third party data services.

Financial institutions do not obtain US ISINs from S&P but from multiple sources. In fact, they do not receive any service directly from S&P. The concern is that financial institutions are obliged to pay for a service (S&P’s ISIN database) that they are not interested in and do not actually use.

The Commission’s initial inquiries suggest that ISINs are the only universal or common identifier for US securities and are essential for the day-to-day business of financial institutions, including those located in the EU. Without the ISINs, securities cannot be exchanged because of international agreements that seek to prevent duplication and the potential loss of assets.
In addition, S&P is accused of abusing its dominant position by forcing the data vendors it deals with to cut off data feeds of US securities to any financial institutions which refuse to sign a licensing agreement directly with S&P for the use of its ISINs.

Legal basis of the complaint

Having a position of dominance is not, in itself, something to worry about. Article 82 does not prohibit the holding of a dominant position. It only regulates the way in which companies with a strong market position use their market power, to ensure that they do not conduct themselves in a manner that is exploitative of / unfair towards customers, or excludes competitors.

Assuming S&P does have a dominant position on a relevant market, the reported allegations suggest that S&P’s conduct potentially infringes two particular categories of abusive conduct:

(i) refusals to supply existing customers without objective justification, or denying access to an “essential facility” - ‘refusal’ in this context includes outright refusals, as well as constructive refusals, for example by charging unreasonable prices, imposing unfair trading conditions, or by treating a particular customer in a discriminatory way; and/or

(ii) making the purchase of one product that the buyer wants conditional on the purchase of another unconnected product (tying or bundling).

Comment

The debate still rages about the extent to which the owner of an intellectual property right can be compelled to grant a licence of it to third parties under Article 82. It is not the holding of the right that is at issue. The key question is at what point the exercise of an IP right is so harmful to consumer welfare that competition law should override it.

The ISIN system, as a universal, standard method for classifying and identifying tradable securities, has provided essential underpinning for the recent growth, in numbers and types, of tradable financial instruments and other assets. The case shows up the tensions at the commercial level between the needs, on the one hand, for universal standards and to ensure, on the other, a return on the increasingly significant investment required to maintain and operate these kinds of systems.

At the legal level, it will be interesting to see whether the case sheds any light on the types of intellectual property rights that arise in relation to CUSIPs as well as what happens when the unstoppable force of competition law meets the immovable object of IP rights.

The issues raised have echoes of earlier cases examining the nature of IP rights in sports data. Access to horserace data, in particular, has been hotly contested. In 2004, the European Court of Justice (“ECJ”) considered whether the British Horseracing Board (“BHB”) had database rights in the pre-race data[4] it maintained and could therefore stop William Hill using information derived from the BHB’s database on its internet betting website. In a landmark ruling, the Court held that the database right protects investment in making the database (i.e. by collecting “existing independent materials”), not the creation of the data itself. BHB created unique information by drawing up official lists of horses in a race – it did not use existing materials. A company that has a monopoly over information it creates itself will not, therefore, have database rights in that information. Furthermore, the ECJ clarified that the indirect extraction of data (via a third party supplier) and use of that data alone (i.e. without also copying the database structure) would be an infringement only if a “substantial” part of the data is used.

The ECJ ruling narrowed the scope of protection afforded to those who collect valuable information under the Database Directive. That said, in the subsequent Attheraces case [5], the Court of Appeal held that it was nonetheless legitimate for the BHB to exploit commercially the information it held that was of commercial value to others, even if it did not have the added protection of IP rights. It was not anti-competitive for the BHB to impose contractual restrictions on third parties who acquired that information, for use in a particular way. Moreover, in setting its prices, the BHB was entitled to take into account the economic benefit that Attheraces derived from the information[6].

The S&P case shows continuing regulatory attention to data and databases, and that it is extending out towards databases in other sectors – in S&P’s case, the data that identities financial securities. Given that S&P maintains that its licensing is “in line with industry practices”, the progress and outcome of the Commission’s investigation will be monitored closely by both suppliers of financial/market data and those wishing to gain access to such data.

Also of interest is the fact that the Commission’s investigation into S&P’s CUSIP licensing practices comes against a backdrop of increased regulatory scrutiny of credit rating agencies, which stemmed from criticisms of their role in the worldwide financial crisis. In November, the Commission proposed strict regulation of credit rating agencies, including that they should register in a central European database, that the Committee of European Securities Regulators should gather historic performance information and make this available to investors, and the introduction of new rules to address perceived conflicts of interest.

Next steps

The initiation of proceedings is a procedural step, which signifies that the Commission will deal with the case as a matter of priority. The Commission will now conduct a full investigation to establish whether S&P does, indeed, have a dominant position on a relevant market and, if so, whether it has behaved in an abusive way. Ultimately, this may lead to the adoption of an infringement decision, although if the Commission does uncover evidence of infringement, it will first issue a statement of objections.

There is no strict deadline for completion of the investigation. The duration of the case will depend on a number of factors, including its complexity, the extent to which the parties involved co-operate with the Commission and the exercise of rights of defence.

Susannah Sheppard and Rachel Iley

Jargon buster

ANNA – the Association of National Numbering Agencies: responsible for the ISIN and other standards for securities and related financial instruments.
ABA – the American Bankers’ Association: owns the CUSIP distribution system.
CSB – the CUSIP Service Bureau: the US NNA, which assigns the unique issuer code (the ISIN) for all North American securities to facilitate the clearing and settlement of trades. The CSB is operated by S&P.
CUSIP – the Committee on Uniform Security Identification Procedures.
EFAMA – the European Fund and Asset Management Association: the representative association for the European investment management industry.
ISIN - International Securities Identification Number code: a standard developed by the ISO, which provides unique cross-border identification for securities (shares, bonds, etc.) issued throughout the world.
NNA – National Numbering Agency: attributes the ISIN shares issued within its own country.

[1]The ISIN structure is set out in ISO 6166. It is a twelve character alpha-numeric code in three parts, a two letter country identifier (itself coded according to the ISO 3166-1 alpha-2 standard); a nine character alpha-numeric NSIN, or National Securities Identifying Number; and a single digit check code.

[2]The 100 or so NNAs around the world operate under the aegis of ANNA, the Association of National Numbering Agencies. ANNA’s main role is to look after the ISIN and other relevant standards.

[3]Committee on Uniform Security Identification Procedures

[4]The BHB’s database contained the UK annual horse racing fixture list, and other horse racing information, such as runners and riders, trainers, owners, dates, conditions and race entrants.

[5]Attheraces Limited v the British Horseracing Board [2007] EWCA Civ 38, judgment of 2 February 2007

[6]For an analysis of the BHB cases and subsequent litigation, see our white papers at: http://www.kemplittle.com/PDFs/Article_Database%20Right_BHBvWmHill.pdf and http://www.kemplittle.com/PDFs/Article_DatabaseRightDevelopmentsAfterBHBvWmHill.pdf