EXPLAINER: How traders at big banks may have rigged the rand for years
- The Competition Commission is pursuing a case against 28 South African and foreign banks, which it accuses of rigging the price of the rand for years.
- Traders from different banks shared information - and even posted fake bids or offers, the commission says.
- Two of the traders involved in the investigation have already admitted to currency manipulation.
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Last week, the Competition Commission included two more banks, Nedbank and Rand Merchant Bank (RMB), in its charge sheet against what now numbers 28 international and local banks accused of manipulating the rand.
Standard Bank, Investec, Absa, Investec Bank, and FirstRand are among those accused of rigging the rand-dollar exchange market between 2007 and 2013.
The commission contends the South African banks were participants in a single, overarching conspiracy, which hurt the local economy.
This South African leg is part of global action against implicated banks. One of the banks, Standard Chartered, already paid a $40 million penalty last year to settle US claims that it colluded to rig currencies, including the rand, between 2007 and 2013.
And a US judge ruled last month that almost 1,200 institutional investors can pursue a lawsuit accusing 15 major banks of rigging foreign exchange prices.
In South Africa, the Competition Appeal Court ruled earlier this year that the Competition Commission could fine foreign banks, if they were found guilty.
Who is accused of the rand rigging?
The Competition Commission has named 38 traders at the 28 banks who it says participated in the alleged conspiracy to fix prices and divide markets.
Traders who were employed by the local banks include Duncan Howes and Thulani Kunene (Absa), Clint Fenton (Investec) as well as Bryan Brownrigg and John Wood (Standard Bank).
Two of the international traders named by the Competition Commission – Jason Katz (Barclays and BNP Paribas) and Christopher Cummins (Citigroup) – pleaded guilty to currency manipulation in 2017, in a plea agreement with US authorities. Another trader named by the commission, Akshay Aiyer (JP Morgan), was convicted in November 2019 for participating in an antitrust conspiracy to manipulate prices for emerging market currencies, where traders rigged bids and coordinated their trading to push prices in their favour.
How did the manipulation supposedly work?
The value of the rand is determined by buyers and sellers in the $5 trillion-a-day foreign exchange market. The rand is a very liquid currency and popular with traders and speculators; it represents 16% of the entire market, even though South Africa’s total economy is equal to 0.3% of global gross domestic product (GDP).
The traders from different banks are alleged to have shared information about what they are prepared to bid or offer - and they even posted fake bids or offers, to drive prices lower or higher, the commission says. They would then inform competing traders when these fake bids were posted.
On top of that, the traders are also accused of sharing their strategy, market positions, and even client information with each other. Other allegations include that they withheld trades and agreed to manipulate positions on trading platforms.
The effect was that buyers of the rand paid artificially inflated prices, and sold at artificially reduced prices too, the commission says.
The commission says the overarching conspiracy is inferred from the extensive communication and contact between competing traders, the lengthy period of frequent and regular communication, the existence of numerous chat rooms on the Bloomberg instant messaging platform, as well as the frequent presence of traders in Bloomberg chat rooms. (Traders typically get their live market information via Bloomberg terminals.)
“The traders would participate, actively and passively, in frequent and regular communication with one or more traders employed by or representing competing banks. The participants sought to benefit by receiving assistance from competing traders to profit, reduce risk and to avoid making losses,” the Competition Commission says in an affidavit.
Using phrases like “walk down the price”, “walk it lower” and “whack it first”, two of the traders are accused of discussing their intended trading in a chatroom and then agreeing to meet for drinks.
The commission’s referral affidavit includes a reference to Katz blatantly telling participants he had to purchase rand and intended to manipulate the price. He asked traders to tell him if they needed his assistance.
The commission says the 28 banks knew – or ought to have known – that their traders were engaged in the conspiracy.
What was the impact of the alleged manipulation?
The commission says manipulating South Africa’s currency “has a significant effect on economic activity, especially international trade and international financial transactions”.
“Even a 1% change in the fair value of the dollar/rand rate may result in a $1 billion change of the value of imported and exported goods and services.”
“The manipulations impacted on the exchange rate of the rand which in turn affected the South African economy - including imports and exports, foreign direct investment, public and private debt, companies balance sheets, with the attendant implications for the price of goods and services and financial assets.”
If the rand weakens, everything imported becomes more expensive. South Africa is particularly dependent on the rand because we import most of our oil, and have to buy it in dollars. The rand oil price affects transport costs, and so almost all consumer prices.
The commission says it does not know the date when the conspiracy ceased to operate, or if it has indeed ceased to operate.
What penalties do the banks face?
The Competition Commission wants a fine of 10% of turnover on the colluding banks.
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