Banks scandal explained .
Rogue traders have been implicated in fixing the rand/dollar exchange rate – here’s how they did it and what it means for SA
UNBRIDLED greed. That’s the term being used to describe a price-fixing scandal that’s appalled finance industry players and enraged the public – and left major banks both here and abroad facing penalties that could rocket into billions of rands.
Years of collusion – conducted in internet chatrooms, via telephone calls and in clandestine meetings behind closed doors – among currency traders at 17 banks operating locally, were recently blown wide open after the competition commission of South Africa released its findings of a probe into the illicit operation.
The investigation found that between 2007 and 2013 a group of rogue traders operating in Johannesburg, New York and London broke just about every ethical rule in the book, colluding in a bid to manipulate the value of the rand and send it yo-yoing between highs and lows. And they did this for one purpose only: to score millions in personal bonuses.
But what does all this mean for our currency – and for the average person in the street?
WHAT SPARKED THE INVESTIGATION?
In 2012 overseas investigations lifted the lid on the world’s biggest rogue trading scandal, finding evidence of large-scale currency manipulation, resulting in banks in America, Britain and Europe being fined billions of dollars.
With evidence to suggest there might have been South African involvement, the local competition commission began its investigation in April 2015 and released its findings last month.
HOW DOES PRICE-FIXING WORK?
“Price-fixing is simply two or more parties fixing the price of something independently of what might prevail with demand and supply in a free market,” says Hylton Hollander, an economics lecturer at Stellenbosch University.
In South Africa, as in many other parts of the world, any product or service needs to find a price based on the demand for it, explains Lumkile Mondi, a senior lecturer in the department of economics and business science at the University of the Witwatersrand.
“When parties have already met behind closed doors and used their networks to decide the price of a service or a product, it means there was no price discovery [ when the price is set by supply and demand] and something’s fishy.”
With the exchange of rands for dollars amounting to about R51 billion daily – and about 60 percent of this conducted outside SA’s borders – it seems the potential to score a major payday proved too much of a temptation to resist.
Traders rely on small fluctuations in the currency market to make money. It’s suspected that rogue traders might have
They did this for one purpose only: to score millions in personal bonuses
colluded to drive the rand up and down when they needed to make big purchases on behalf of clients. So if somebody wanted to buy $4 million worth of rands, the trader might, for instance, quote them R13,13 to the dollar – so the transaction would be worth R52,52 million. If the client accepted, they’d transfer the money to the trader.
But if the rand suddenly strengthened to say R13,07 to the dollar before the purchase is made, it would be to the benefit of the trader because the transaction would then cost R52,28 million instead of the higher amount the client had already paid. This would mean a cool R240 000 profit for the trader’s bank, ultimately resulting in a handsome bonus for the trader.
WHICH BANKS WERE INVOLVED?
Absa, Investec, Standard Bank, Bank of America Merrill Lynch International, BNP Paribas, JP Morgan Chase & Co, JP Morgan Chase Bank NA, Standard New York Securities, HSBC Bank, Standard Chartered Bank, Credit Suisse Group, Commerzbank AG, Australia and New Zealand Banking Group, Nomura International, Macquarie Bank, Barclays Capital and Barclays Bank are named in the report.
Three of the rogue traders implicated are South African and the rest are based in Britain and the US. The South Africans are Clive Fenton, a trader who worked at Investec, and Duncan Howes and John Daly, who were both suspended from Absa.
It’s alleged they were part of a shadowy group of rogue bankers known as The Cartel. In January Jason Katz, a trader who worked for various banks including Standard Bank, Barclays and BNP Paribas in many currencies – including rands – entered into a plea bargain with US federal prosecutors that saw him spilling the beans on how he and other traders had conspired to manipulate prices through “non-bona fide trades”.
HOW DID THEY MANIPULATE THE RAND?
The head of the SA competition commission, Tembinkosi Bonakele, revealed that the traders used the Bloomberg instant FAR LEFT: Tembinkosi Bonakele, commissioner of the competition commission, has revealed these banks (ABOVE FROM LEFT) are among the 17 implicated in a scandal that’s rocked the industry. messaging system (a chatroom), telephone conversations and meetings to plan trading activities.
This is completely unethical, not to mention illegal. The law prohibits traders discussing their trades with their peers.
“They assisted one another to reach the desired prices by coordinating trading times and reached agreements to refrain from trading, taking turns in transacting and by either pulling or holding trading activities,” Bonakele says. “They also created fictitious bids and offers, distorting demand and supply to achieve their profit motives.”
WHAT EFFECT DID THESE ACTIVITIES HAVE?
If these allegations are true, the implicated traders and banks have been weakening our currency artificially, Mondi says. “We’ve been importing more food from overseas in the past 18 months because of the drought and that means the poor – who spend most of their income on food – have been robbed [because the food would cost more as a result of the volatile rand].”
It also affects the rich as they buy foreign currency when they travel abroad on holiday, he adds.
But Hollander reckons it will be extremely difficult to estimate how much the banks benefited and doesn’t believe it’s had a significant effect on the price of imported goods.
“Any significant deviations would require collusion with all other currency pair exchange rates. Even a large central bank like the People’s Bank of China finds it difficult to systematically fix the exchange value of its currency.
“To fix the exchange rate between the rand and the dollar would require an extremely large share of currency trades to be fixed.
“Of course, agreeing on prices before the fact and doing this on small margins over a long period could generate significant profits but it’s difficult to pinpoint.”
HOW WILL THE TRADERS AND BANKS BE PUNISHED?
The local traders named in the report won’t have to spend any time behind bars as the law criminalising their activities only came into effect late last year.
It will more than likely be their employers who have to pay the price. The commission has queried how it was possible that banking bosses didn’t know about these rogue activities.
Questions are now being asked about the lucrative bonuses paid to traders, amounting to millions, which makes it tempting for them to cross ethical lines.
The commission’s finding has now been referred to the competition tribunal of South Africa (an independent body with its own structure that holds the same status as a high court), which will conduct a hearing and adjudicate the matter to determine whether the Competition Act has been breached.
The tribunal can impose an administrative fine of up to 10 percent of a company’s annual turnover and reports suggest if the commission’s recommendation were to be implemented, the penalties paid by the banks could amount to almost R140 billion.
But, warns Stuart Theobald, an analyst at Intellidex, in the past the tribunal has focused only on the “affected turnover” – meaning the income generated by illicit transactions – and this is likely to be a much smaller percentage of a bank’s overall revenue.
It might also count in the favour of banks such as Absa and Investec that only three of the traders implicated were local.
“It should be clear that there’s a long way to go before any real amounts are paid,” Theobald adds. “The probability of success is far from 100 percent and the amounts will be small.”
The local traders named in the report won’t have to spend any time behind bars