Currency affairs: The foreign exchange market has a daily average turnover of more than $5-trillion
The Competition Commission has joined international regulators that have taken aim at banks for manipulating financial markets.
The commission announced its probe into several banks this week, ahead of news that five major international banks have been fined a total of $2.5-billion, following the investigation into the manipulation of foreign exchange markets by the United States justice department.
Added to previous penalties, this brings the total amount in fines paid by the banks – Citicorp, JPMorgan Chase & Co, Barclays Plc, the Royal Bank of Scotland and UBS AG – for their conduct in the foreign exchange spot market to nearly $9-billion, the department said. Investigations into rigging foreign exchange markets followed similar probes into the manipulation of international benchmark interest rates.
The South African Competition Commission hopes its investigation will be dealt with “as quickly as possible” because so much has been covered in similar international inquiries.
The banks include BNP Paribas and its local arm, BNP Paribas South Africa, Barclays Bank Plc and the Barclays Africa Group, JPMorgan Chase & Co and JP Morgan South Africa, Investec, Standard New York Securities (a division of Standard Bank), Standard Chartered Bank, Citigroup and Citigroup Global Markets. Competition commissioner Tembinkosi Bonakele says there is little dispute over many of the facts thanks to the findings of international inquiries and hopes the process will move swiftly either through settlements or expedited prosecutions.
Fixing prices
The commission is probing the banks for allegedly directly or indirectly fixing prices on a range of foreign currency trades and is focusing on trades “in currency pairs involving the South African rand”.
The foreign exchange market is one of the largest and most liquid markets in the world, with a daily average turnover of $5.3‑trillion, 40% of which takes place in London, according to the Britain’s Financial Conduct Authority.
In the case of the US investigation, the justice department revealed in its press statement how self-described members of “the cartel” used an exclusive electronic chat room and coded language to manipulate benchmark exchange rates.
Those rates are set through two major daily “fixes”: the 1.15pm European Central Bank fix and the 4pm WM/Reuters fix. These are then used to calculate and publish a daily benchmark, that is used to price foreign exchange orders for many large customers.
Cartel traders co-ordinated their trading of US dollars and euros to manipulate the benchmark rates set at both fixes in an effort to increase their profits, the US justice department said.
In South Africa, the alleged collusion on the rand was carried out through electronic messaging platforms used for currency trading, enabling the banks to co-ordinate their trading activities when quoting customers who buy or sell currencies, the commission said in a statement.
According to Bonakele, such unlawful trades typically affect big companies looking to buy or sell large amounts of foreign currency. Collusion between traders ultimately raises the price of foreign exchange transactions for customers, who then pass these costs on to their consumers, causing a ripple effect throughout the economy, he said.
Bonakele could not quantify the extent of trades affecting the rand, but points out that the currency is one of the most liquid and heavily traded emerging market currencies in the world. He confirmed that the South African Reserve Bank, the banking sector’s regulator, has been conducting its own review of currency trading involving the rand, and that the commission has been co-operating with the probe.
Following the global financial crisis, such scandals further erode public trust in banking institutions.
Incentives and cultures
Bonakele cautioned banking executives against laying the blame for such practices at the hands of a few “rogue employees”. “That doesn’t fly,” he said. “These things have to do with the incentives and the cultures that organisations create.”
The commission would wait to hear what the banks had to say, he said.
In international cases, fines and settlements have typically equated to between 1% and 2% of a bank’s profits, according to Kokkie Kooyman, global fund manager for Sanlam Investment Management Global.
Foreign exchange trading is the most profitable business for banks, but he expects the effect on local banks will be fairly limited because foreign exchange trading is not a large part of their operations.
Price-fixing behaviour seldom begins as a deliberately fraudulent activity but instead grows over time, Kooyman said. In addition, forex trades are done locally and in offshore markets. Local banks have forex trading operations overseas that operate independently and the two business units do not necessarily talk to each other.
The foreign exchange rigging is unlikely to affect the average retail customer directly, Kooyman argued, because these trades are largely done electronically, without the opportunity for collusion between individual traders, and there are a number of other operators in the market.
Typically, each bank has three main units – retail banking, commercial or corporate banking and investment banking. Many of the problems in banks globally have generally arisen in investment banking units where “the culture has been wrong”, he said.
A Barclays Africa spokesperson said the bank was aware of the probe, and took “such matters extremely seriously and will co-operate fully with the investigation”.
Similarly, Standard Bank and Investec said they would co-operate with the authorities. JP Morgan and BNP Paribas declined to comment.