This month’s editors: Maxime Vanhollebeke, Julienne Chang, Zhao Jingjing, Christina Jeong, Steven Qin, Lydia Fung, Hamada Shino and Tonosaki Akiko.
Below is an excerpt from our monthly Competition Report. More detailed commentary on these issues and other recent competition law developments in the Asian region is to be found in this month’s edition of our report available on a free subscription basis (see further below).
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Malaysia competition law enforcement gears up
The adoption this month of the final Guidelines on Chapter 2 prohibition, in which Malaysia’s Competition Commission clarifies its interpretation of the abuse of dominance provisions of the Competition Act, sets the stage for more active competition law enforcement in Malaysia. Aside from the announced guidance on franchise agreements and intellectual property rights which remains outstanding, the Commission has now put in place a comprehensive enforcement framework, with substantive guidelines on market definition and on the two main prohibitions, as well as procedural guidelines on how to file complaints.
Businesses will likely point out that while the guidelines are in many aspects consistent with foreign practice, there remain a number of uncertainties including in respect of common practices such as territorial exclusivity, joint ventures, or joint research and development. The difficult topic of a sanctions policy has also yet to be discussed. Further, the addition of bundling and tying practices in the final version of the Guidelines on Chapter 2 prohibition may be regarded as a step towards a more stringent enforcement approach against dominant companies, contrary to the more pragmatic approach initially embodied in the consultation draft.
The Commission however does not satisfy itself with the publication of formal guidelines. In addition to finalising the guidelines on the abuse of dominance, it has this month presented a Handbook on the Competition Act for use by the general public, and made public the guidance on information exchanges and the dissemination of industry statistics it provided to the Malaysian Automotive Association. It has also announced its first market review and the adoption of a proposed decision against price fixing practices in the cut flower industry.
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JFTC conditionally approves merger between Tokyo and Osaka stock exchanges
On 5 July, the Japan Fair Trade Commission (JFTC) conditionally approved the proposed merger between Tokyo Stock Exchange and Osaka Securities Exchange.
The transaction was notified to the JFTC in January and entered into second-phase review in February. As is now its custom, the JFTC considered that the formal 90-day second-phase review would not start until all of the additional information requested was submitted by the parties. This allowed the authority to suspend its review until 15 June, at which date all outstanding information was submitted. Parties submitted proposed remedies on 26 June, and the transaction was approved on 5 July.
The decision identifies three broad markets: the market for the listing of debt and equity securities, the market for trading-related services, and the market for derivatives trading.
The first market was considered to be limited to the public issuance of debt and equity instruments by Japanese companies, and to be further segmented between traditional “main board”-type exchanges and “emerging investments”-type exchanges. Rejecting the parties’ contention that the geographic scope of these markets extended to the whole of Asia, the JFTC considered that the markets were Japan-wide. As a result, it found that the transaction would lead to very significant levels of concentration as measured by the HHI, with HHI values of up to 9,000 points that far exceed the 1,500 points safe harbour for horizontal mergers set out in the JFTC’s Guidelines on the Application of the Antimonopoly Act to Business Combinations. In terms of market share, the transaction would lead to combined shares of between 70 and 95 per cent on these markets. To address the obvious concern of the combined entity’s pricing power and the risk of an increase of listing fees, the parties proposed to delegate pricing approval decisions to a third-party independent committee set up by the Board of Directors, and to report to the JFTC on pricing decisions for ten years.
The market for trading platforms of commodities and securities was also found to be limited to Japan, with the parties accounting for up to 95 per cent of all trading-related services, and with the transaction leading to an HHI increase of 1,000 points to a total of 9,300 points. The JFTC was particularly concerned that the merged entity would be able to discriminate against proprietary trading systems that rely on their services for the liquidation of trades. To remedy these concerns, the parties offered to ensure equal treatment of all users and to relax usage rules.
The third market on which concerns arose is the market for the trading of index derivatives such as TOPIX- or the Nikkei 225-based derivatives. While the JFTC accepted that the geographic scope of the market is global, the transaction would still lead to a combined market share of 70 per cent and an HHI concentration level of 5,300, with an increase of 2,000 points. Noting that NYSE Euronext had obtained a licence to trade TOPIX-based derivatives since 2010, the parties offered to relax trading terms and offer reduced licence fees to address concerns arising from the marked increase in market concentration following their merger. The transaction would also remove a competitive constraint on the Osaka Securities Exchange’s activities on the related option derivatives trading market. However, this market is already very concentrated with the Osaka exchange accounting for a share of more than 95 per cent. The transaction would only lead to a modest increase of less than 100 points in HHI, which is well within the safe harbour of the JFTC’s Guidelines on the Application of the Antimonopoly Act to Business Combinations (in line with international practice, the Guidelines also provide a safe harbour for transactions leading to a minimal increase in market concentration).
The JFTC found the behavioural remedies offered by the parties to be adequate, and accordingly cleared the transaction despite the very significant increase in concentration it brings about on the relevant markets.
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