Chat-room activity cited in forex inquiry
The Competition Commission on Wednesday described how the use of instant messaging chat rooms was central to the manipulation of the $51bn daily market in the US dollar-South African rand currency pair.
Twenty-three banks have been accused of acting in a cartel-like fashion contrary to competition law over a six-year period from 2007 to 2013.
The hearing under way at the Competition Tribunal was a precursor to the main event that is due to begin later in 2018.
Advocate Tembeka Ngcukaitobi, representing the commission, described how an administrator of the chat room grants access to participants — in this case, the 32 traders accused of the currency manipulation.
“The instant messages are visible to all in the chat room, whether you engage in the conversation or not, and each trader can communicate bilaterally or multilaterally. So just by joining the ‘smoke-filled chat room’ they were party to what was going on – the conspiracy.”
Ngcukaitobi said posts in the chat rooms included information on past and future trades, speculation regarding the direction of the market, the bids or offers that were made and the successful trades.
They also included trading strategies, identities and positions of clients including whether they had spread their trades across institutions.
The activity in these chat rooms, similar to those provided on Reuters and Bloomberg terminals, was “a type of international cartel”, he said.
Picking apart what happened in these chat rooms, who knew what and when, and who acted in concert or failed to act, will be central to determining whether this behaviour affected the efficient functioning of the currency market to the detriment of the broader economy.
Reading through Investec’s response to the Competition Commission in its currency manipulation case is an eye-opener. Investec has asked the Competition Tribunal, in a punchy legal move, to dismiss the referral of the case from the commission on the basis that it’s — that wonderful legal term — “vague and embarrassing”. To rub in the salt, it asks for a declaration that the commission’s conduct in prosecuting the appeal has been “vexatious and unreasonable”. In the alternative, it asks for the commission to be more specific about what it is claiming.
Although the claim seems impetuous, when you read what has transpired, Investec’s frustration becomes apparent.
To summarise, a number of banks and the commission have been arguing for the best part of a year over two procedural issues. The banks claim that the commission has not provided sufficient information about the case it intends to bring, making it impossible to respond adequately. The commission is required to set out the “material facts” of the case, which would allow the banks to formulate their rebuttal. Second, there has been a big argument about whether the cases should proceed individually or collectively, which has more or less been won by the latter proposition.
This is an enormous case. In total, 17 banks have been referred to the tribunal for prosecution, including all the big American and European banks, and three South African banks, Absa, Standard and Investec. The commission should be playing its best possible game.
Yet, the Investec response tracks in fine detail the commission’s decision to provide more details to the bank, then its decision to not provide more details, then its decision to reverse that decision and then its decision to provide more details, then its decision to withdraw the details, and then its decision to provide more details. It’s been a mess.
The commission has one source of primary evidence: a record of chatroom conversations on Bloomberg. In some international cases, the chats have been open and shut, and the result has been expensive for some of the international banks. Three traders, in particular, are in deep trouble. They formed a group called, of all things, “The Cartel” and they, among others, have caused fines for some of the biggest banks, totalling so far about $10bn. JPMorgan, Barclays, the Royal Bank of Scotland and a Citigroup subsidiary pleaded guilty in the US in 2015 to conspiring to manipulate currency rates and were fined $2.5bn. Some of the traders are already in the chookie. But the problem for the commission is that all of this stuff took place from 2007 to 2013. In the Investec case, conversations were between Investec representative Clint Fenton and Absa trader Duncan Howes using a Bloomberg chatroom. Their conversations are alleged to have occurred on November 2 2011, June 30 2008 and January 8 2009. These are the only three conversations referred to in the affidavit. They took place more than three years before the commission initiated its complaint, and the Competition Act provides that a complaint may not be initiated more than three years after a prohibited practice has ceased.
The rejoinder provides another glimpse of Investec’s likely defence. The commission, it says, does not distinguish between collusive conversations and conversations in which the parties are buyers and sellers. If they are buyers and sellers, respectively, they can’t be manipulating the currency because they are on the opposite sides of the trade. In two of the three conversations, they were transparently negotiating a price as buyer and seller.
All of this seems pretty devastating, but the court has yet to decide. It is an intriguing battle and I suspect neither the banks nor the competition authorities will emerge unscathed.
Here’s my theory of what has happened.
In the late 2000s, traders were going nuts. Profits were enormous. When that happens, nobody looks this gift horse in the mouth. Traders were untouchable, or felt themselves to be untouchable. But, as they say, it’s only when the tide goes out that you know who is wearing a swimming costume. And the tide went out with a vengeance in 2008.
As the ugly truth started to emerge, the US department of justice got its act together and the mask of invulnerability was exposed. In SA, the Competition Commission must have felt it was missing out on a big payday, particularly as some of the conversations included traders from South African banks.
Under pressure from an administration keen to forward the “business is inherently evil” philosophical outlook under the banner of “white monopoly capital”, it decided to throw the book at all the banks it could name, partly in the hope they would quickly fold and try to put the problem behind them, which is the policy of some banks. Easy win, they were thinking at the time. And it was also a great diversion from the corruption allegations mounting against the administration.
The commission scored one win when Citigroup decided to pay a fine of R70m. You can imagine the discussion in the boardroom in New York: “We can make this go away for $5m? Let’s pay it and move on.”
However, the other banks decided to force the issue. Whether that was a good idea is still to be seen, but I have to say their case is stronger than I first thought. The commission’s response to the “vague and embarrassing” allegation is simply to say it’s not. These exceptions are a way of blocking the case being heard on its merits, says its divisional manager of cartels division, Makgale Mohlala.
So the court will decide. But there are unresolved problems: the case illustrates what is likely to happen to the commission if it is seen as an income generator and antibusiness activist. That’s significant given the changes to the Competition Act. All of the co-operation between business and the authority that has been a feature of much of the commission’s work so far will disintegrate into myriad fractious legal disputes. And the banks have a problem too: as long as the case continues, their reputations will be hammered.
This is a no-win situation.