Global regulators could hit SA banks as rigging probe hots up
Treasury bigwig warns of more trouble to come in currency saga
THE Competition Commission’s investigation into alleged collusion between currency traders could trigger a series of penalties from international regulators for the local banks implicated.
“If I were a local bank with operations in the US I’d be really scared about what the US authorities are going to do to me because they’re based there,” said Treasury deputy director-general Ismail Momoniat.
Makgale Mohlale, manager of the cartels division at the Competition Commission, said that as the investigation was continuing there was a “likelihood that outside regulators could move against local banks”.
Depending on the severity of any such possible fines, the stability of South Africa’s banking system could be affected, said Momoniat.
Three banks — Investec, Absa and Standard Bank — are implicated, and, due to their systemic importance, could spark a crisis.
There is no way of measuring the full impact as no one knows what the ramifications of the deals are.
“The issue here is you’ve got lots of international banks and they’re all systemically important financial institutions. If the problem is a really big one, we have to determine whether it’s big for South African banks, [or for] international banks or both,” said Momoniat.
Earlier this week, the Competition Commission released an affidavit detailing the activities of several traders from 18 financial institutions across the globe and in South Africa.
The traders are accused of colluding to fix bids and offer prices on trading platforms and co-ordinating efforts to fix prices of bids and offers quoted to customers for rand-dollar purchases.
The structure of the deal room and the incentive schemes — which drive many dealers’ trading strategy — have put remuneration policies at banks in the spotlight.
George Herman, head of South African Portfolios at Citadel, said banks acted as proprietary participators in the market. “These banks that you’re talking about are the licensed traders who are allowed to facilitate the buying and selling of currency. Essentially, everyone has to go through them for a price.”
The banks’ influence was not a matter of determining the exchange rate. “The foreign exchange market is just like any other market in that there’s supply and demand. But flows come to the market at different times. These banks essentially facilitate the flows that come to market at different times,” Hermann said.
Nilan Morar, Purple Group head of trading, said traders would need to have big volumes to be able to move a currency in a particular direction. “The quantum that you’ve got to pass through that market to push a move that size is huge,” he said.
But traders depend on small intraday currency movements and hedge against them to make money.
If a customer called in to a dealer requesting a price for $5-million the trader could quote them R13.06 per dollar, which would be R65 300 000. And if the rand were to move to R13.01, and the trader bought back dollars at that level, the rand equivalent would be R65 050 000, yielding a profit of R250 000 from a single transaction.
As a form of punishment, banks involved in the scandal could face a penalty of up to 10% of annual turnover in the financial year following the cessation of the period in which the collusion took place.
Absa, which approached the Competition Commission with evidence against one of its traders, has been exempted from fines due to its willingness to co-operate and assist with the investigation. Citibank and Barclays have also been exempted.
The organisations mentioned in the document would be fined according to the degree of their involvement, Mohlale said. “You’d look at the involvement of Nomura, for example, and compare it to that of Barclays. Was it the same? If not, you have to distinguish like that. The 10% is the maximum the law allows us.”
The Competition Tribunal’s investigation may reveal that firms such as Nomura, whose traders were accused of agreeing to co-ordinate trading, won’t necessarily be penalised.
While some of the people named in the document may not have been directly involved in the cartel’s dealing, evidence suggests that they may have known about the operation, thus making them complicit.
“We have evidence against everyone mentioned in the court papers. We’ve only mentioned people we have evidence against. And it’s all damning evidence,” said Mohlale.
Momoniat said: “Ultimately, you want the CEO and the board to take full responsibility for everything that happens in an institution because they benefit within that profit centre.”
But he also recommends being reasonable as some cases are a matter of one or two employees engaging in illegal activity and not a reflection of an organisation’s culture.