Spotlight on tricks of the (currency) trade
Some say banks’ incentive structures are such that collusion becomes the only way for currency traders to meet targets
The competition commission’s case against bank currency traders accused of colluding is heating up. It’s far from a done deal, but the authority will take heart from the guilty plea by BNP Paribas USA just last week to currency rigging, and its payment of a US$90m penalty to the US department of justice.
Its French parent is named in the SA commission’s case, which is gaining momentum amid a global clean-up of the $5.1 trillion-a-day foreign exchange market that has netted regulators more than $10bn in fines since 2013, according to Bloomberg.
Shortly before Christmas, as if in response to talk that the case was dead in the water, the commission filed a supplementary affidavit in which it provided details of how currency traders conspired to fix prices on rand-dollar currency trades — a $40bn-a-day currency pair at the end of 2016.
Fingering 35 individuals and 23 financial institutions — up from 18 previously, after it added related-party entities that were incorrectly excluded — the commission describes, over 32 pages, conversations between competing traders via the Bloomberg chat room.
In one example, JPMorgan’s Akshay Aiyer is said to have asked Barclays Capital’s Nicholas Williams to stop buying US dollars, as Aiyer was trying to move the price down. Other examples reveal how traders allegedly set the bid-offer spread, shared information about customer orders and held trades to reserve liquidity for each other.
The affidavit will go some way towards addressing banks’ exception applications, many of which decried the commission’s February 2017 referral to the competition tribunal as “vague and embarrassing” — legal parlance for it Freddy Mavunda being so defective as to prejudice the responding banks. The tribunal will hear exception applications on July 30. Then the commission’s evidence will be tested — provided banks don’t settle first, which is generally the commission’s preferred option.
Collusion cases often succeed on the basis of a whistleblower coming forward and guilty parties then caving, as happened in the construction sector.
Already, Citibank settled in March, paying a R69.5m fine. Barclays Capital, Barclays Bank Plc and Absa have applied for leniency.
These entities must all co-operate with the investigation, meaning the commission has a number of insiders spilling the beans and freely admitting guilt.
Meanwhile, a criminal investigation into the foreign exchange market by the US government and court rulings in other countries are offering more juicy material.
Investigations into the notoriously opaque foreign exchange market are long overdue. And they may lead to some uncomfortable questions for banks, which have been accused of perversely giving incentives to their currency traders in such a way that collusion becomes the only way to meet targets.
A far more nuanced discussion needs to take place about whether the current trading environment is serving the bestGeorge Glynos
interests of either the corporates or the banks
One foreign exchange derivatives broker says: “There’s a direct incentive for traders to [collude] because they’ve got skin in the game.”
Mfundo Ngobese, an inspector in the commission’s cartels division, says banks encourage their traders to communicate frequently with competitors by allowing multilateral chat rooms.
Says George Glynos, MD at ETM Analytics: “Traders find themselves under immense pressure in a market where corporate clients can be mercenary in their search for the best price, leaving traders in the unenviable position of having to sometimes limit losses as the best-case scenario should the market run against them.
“I’m not condoning collusive behaviour, but a far more nuanced discussion needs to take place about whether the current trading environment is serving the best interests of either the corporates or the banks.” Some of this may be explained by sweeping post-crisis regulatory reforms, which have forced banks to manage balance sheets more prudently and hold more high-quality and expensive liquid assets, such as government bonds.
In the pre-crisis boom years, banks warehoused risk more readily, leveraging off their balance sheets to hold open trading positions through their proprietary trading desks (where they traded for their own account), helping to facilitate market making and price discovery.
In this environment, traders might have felt more empowered to give clients keener pricing on forex transactions, trading the positions inherited from their clients for a longer period until they could exit them profitability.
With regulations now limiting this, and transactions being offset immediately into the market, traders risk being dealt a position that might run against the profitability of their trading book, potentially enticing them to look for ways to mitigate their losses or, in the case of greed, to maximise profits.
“We did a big corporate trade where a number of banks knew we were going to execute the trade and the currency started moving in the morning,” says the foreign exchange derivatives broker.
It is largely sizeable institutional and corporate clients, buying and selling large amounts of foreign exchange, that stand to be most prejudiced by collusion practices, says Glynos. “A small negative skew in the price can still translate into significant opportunity cost in nominal rand terms for the client.
“With respect to the value of the rand, there is unlikely to be any material impact.”