Reserve Bank investigation unearths forex shenanigans

Despite no evidence of malpractice or widespread misconduct, a South African Reserve Bank investigation into the trade of foreign exchange has uncovered some inappropriate behaviour and resulted in recommendations to allow for individuals to be prosecuted for wrongdoing.

The bank’s yearlong investigation into the trade of foreign exchange in the local market follows a spate of international investigations that have uncovered scandalous dealings, resulting in hefty fines. The probes were carried out by global anti-trust authorities after the rigging of the London Interbank Offered Rate (Libor) was uncovered.

The fixing of Libor, which was exposed by whistle-blowers in 2013, resulted in major international banks being slapped with billions in fines. In August, one trader implicated in rigging the rate was sentenced to 14 years’ imprisonment after being found guilty on eight counts of conspiracy to defraud.

In June last year, the European Commission fined eight global financial institutions a total of €1.7-billion for participating in illegal cartels in markets for financial derivatives covering the European Economic Area.

And in December the United Kingdom’s Financial Conduct Authority imposed fines totalling $1.7-billion on five banks for misconduct uncovered in their spot foreign exchange trading operations.

At home, in May, the Competition Commission launched its own investigation into traders in foreign currencies who have allegedly been directly or indirectly fixing prices on bids, offers and bid-offer spreads in respect of spot, futures and forwards currency trades, in contravention of the Competition Act. The investigation has not yet concluded.

In October last year, the Reserve Bank appointed a foreign exchange review committee to look at authorised dealers in the domestic market. The committee’s report, which was released on Monday, did not extend to offshore operations of local banks.

Although the report notes that no evidence of “widespread misconduct” came to light, “there was some evidence of inappropriate sharing of confidential client information”.

Such activity is cause for concern.

The sharing of confidential client information could point to front-running, said Anthony Smith, associate director at Deloitte Risk Advisory.


“Effectively, it is the same as acting on inside information,” he said. “In the UK, the traders were found to have colluded with other traders to move the price of the currency in a specific direction. The sharing of client information and pending trades would thus be motivated by a desire to move the market in a certain direction to make a profit.”

“In other words, it is the co-ordination of activities to set a predetermined price.”

However, Smith stressed that the review committee report does not specifically state that the evidence of shared confidential client information is what transpired in the context of the investigation into foreign exchange practices.

The report said regulators do not necessarily have the power to prosecute a foreign exchange dealer for insider trading, front-running of client transactions, collusion or manipulation of benchmarks.

It recommended that sections of the Financial Markets Act relating to insider trading, market manipulation and false reporting should apply to the foreign exchange market, thereby enabling the authorities to prosecute individuals for instances of wrongdoing.

The exchange of confidential client information is the only untoward behaviour uncovered by the investigation. But lax monitoring was also identified as a potential risk.

Though authorised dealers have an array of policy and procedures covering market conduct in place, the implementation of these policies and procedures is not always routinely monitored, the report said, adding that no institution in the official sector takes specific responsibility for monitoring market conduct in the domestic foreign exchange market.

Said Smith: “There is, therefore, always a possibility that bad behaviour could go undetected when there is a lack of monitoring.”

The report said there was no indication during the discussions with overseas regulators that either trading in the rand or any of the South African authorised dealers had been singled out in their investigations. However, “subsequently it has emerged that the anti-trust authorities in some of these jurisdictions are investigating certain offshore transactions involving the rand,” it said.

“I think it is clear from what has happened over the past few years in this space that, globally, legislation was found to be lacking,” said Smith.

“It is only recently that there has been a spate of new legislation enacted in the developed work around this … As we all know, a sound regulatory framework with robust legislation is only part of the solution, as legislation without any policing or consequence management is about as effective as having no legislation.”

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