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The worst-case scenario for South Africa’s colluding banks

The worst-case scenario for South Africa’s colluding banks

South African banks implicated in a currency trading price-fixing and collusion scandal could be in the dock for 10% of their annual turnover.

However, analysts believe that this is unlikely to happen, and that penalties will be much lighter.

Three South African banks were named in an investigation by the Competition Commission that revealed that global banks were colluding to fix the price of the South African rand for their own benefit.

The banks – Absa, Investec and Standard Bank – communicated with other global players using Bloomberg’s chat platform to lay out the strategy.

The case has now been handed to the Competition Tribunal for prosecution, with the Competition Commission seeking an order that those involved be docked for 10% of their annual turnover.

At face value, this would knock a bank like Standard Bank for R51 billion – while Absa would be docked R5 billion.

However, according to Intellidex analyst Stuart Theobald, if the fine is applied to only the turnover of the banks’ currency units, the outcome would be a much lower fine.

Absa has already been exempted from penalties, the Commission said, due to its co-operation in the investigation. This leaves only Standard Bank and Investec to face the music, locally.

National Treasury has called for harsh punishment for the banks if the investigation proves to be true, saying that this type of behaviour needs to be put to an end once and for all.

“We view this matter in a very serious light and welcome any steps taken against wrong-doing by any financial institutions,” the treasury said in a statement.

The share prices of the three locally listed banks, Absa‚ Standard Bank and Investec, showed very little movement following the Competition Commission’s announcement on Wednesday afternoon.

According to Theobald, if there was a serious possibility of the banks facing a massive fine, the share prices would have plummeted.

Currency trading 101

Currency trading is by definition an act of buying and selling one country’s currency for another country’s currency. The participants in currency trading are dealers, customers and brokers.

Dealers are large financial institutions or banks that accept orders from customers to buy and sell currencies from customers. They are commonly known as market makers.

Customers are entities or individuals that are seeking to exchange currencies by placing orders for trades with dealers.

They include corporations and asset managers such as hedge funds, mutual funds, pension funds, and various government financial institutions such as central banks and some individuals who exchange substantial quantities of currency. Brokers are intermediaries that facilitate trade between the dealers.

There are different ways of trading on currency globally. These are spot, forward and futures transactions with spot being the most and common way of currency trading. Spot transaction is currency trading transaction that takes place on the spot which the actual settlement happens within two days of the transaction. If the settlement period goes beyond two days then it is called forward transaction.

A forward transaction is a transaction which is concluded on the spot and the actual settlement will only takes place later, at least after two days. Futures transaction relates to a transaction that gives rise to an obligation to buy or sell an underlying currency at a fixed exchange rate at a specified date in the future.

Simplified example of how currency trading takes place

Suppose a customer which is an importer wants to sell the ZAR and purchase the United State of American Dollar (USD). That customer will approach a dealer for a quotation for a spot transaction.

These quotes are usually requested as a buy and sell price.

The price at which the dealer is prepared to buy is called the bid, and the price at which the dealer is prepared to sell is called the offer. Prices are represented by the following expression: 1 USD = ZAR13.3402 / 1 USD = ZAR 13.3502. The first price is the dealer’s bid and the latter the dealer’s offer.

As the 1 USD = ZAR 13.3502 represents the price at which the dealer is prepared to sell USD (and where the customer or the importer can chose to buy), if the customer chooses to transact, he will pay ZAR 13.3502 and receive 1 USD.

If the dealer is approached by an exporter who wishes to sell the USD and the dealer is willing to buy, the dealer will pay ZAR 13.3402 and receive 1 USD.

The difference between ZAR 13.3402 and ZAR 13.3502 is called the bid offer spread. The bid offer spread in this example is 100 pips.

If the dealer sold its USD (to the customer or the importer) and no longer has USD position, it can decide to keep that position (that is not to go to the market to buy USD) or can go to the market to buy USD.

When the dealer goes to the market to buy USD, the dealer (through its trader) will usually skew its price to the right, (that is showing better bids than offers) and attract sellers of USD.

When the dealer goes to the market to show its price, the trader will either log into the dealer owned trading platform or Reuters trading platform. When the dealer shows its bid price in the trading platform, then the interaction with other traders who will be either buying or selling currency in the market commences.

The Reuters currency trading platform is called Reuters Dealing 3000. It is the most commonly used trading platform, especially for ZAR. The other trading platforms include Electronic Broking Services (EBS) and Bloomberg.

Reuters Dealing 3000 is an interbank trading platform used by dealers to enter into currency trading with counterparties. Reuters Dealing 3000 typically runs on a standalone Reuters terminal rather than as a computer application.

It is displayed on the Reuters screen at each trading station. It also has messaging functionality that allows traders to communicate and transact with one another.

EBS is also electronic trading platform which is largely the same with Reuters Dealing 3000 but it is not typically used for USD/ZAR trading. Customers can request spot prices from certain dealer dealers.

Bloomberg is also a currency trading platform. It can also be used for other functions s uch as a source of information and as a tool for communication.

As a source for information, Bloomberg platform provides news headlines to the specific currency markets and movements in exchange rates for particular currency pairs. As a tool for communication, it offers electronic instant messaging platform through which traders may communicate among themselves, with customers, sales personnel, brokers and anyone who has a Bloomberg account.

It is this instant messaging system that the respondents’ traders used to communicate and coordinate their trading activities. This instant messaging system is also called Bloomberg chatrooms.

Read: 3 South African banks face massive fines for price-fixing and collusion

BusinessTech's Staff Writer is directly plugged into the South African Internet backbone, and spits out press releases and other news as they receive it. They are believed to be cl...
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  • Lone Stranger

    I do not know if someone else thought about it, but where does the fine’s money go?

    • OWL

      The “piggy bank”, of course. Hehehehehe.

    • LPCPT

      It goes to the fiscus.

    • lino_lupus

      Off to the fiscus…or fiscus off……

    • Edward

      I did think about that… wherever its intended to go I’m sure many pieces of that pie will be nibbled by corruption.

  • Joe Black

    I’d love to hear from the experts who is most harmed by the collusion. I mean it sounds bad, but its tough for an average Joe to know if it touched him in the wallet.

  • david

    The picture implies that all the banks shown are implicated, I wonder if you can get sued for that?
    Laziness is no defence either.

    • Riaan

      You are right. The implication is certainly that the banks on the logo is involved.

    • Wurnman

      They will only reply and say it’s to show all banks in South Africa as part of the unified banking corporate and does not mean to say they are all implemented. I however agree with you.

  • victory

    I remember years back Rand was trading at R5 against Dollar here crooks come push it to R14 and How many families pushed to poverty by this evils ?

    • Deal_with__it

      If you read and understood the last section, you would realise that this purported type of manipulation could not result in that level of change. Additionally, it would not be advantageous to the banks where trade manipulation still requires you to be able to sell when it is ‘high’. Can’t make a profit if the price only goes down. This was short term manipulation and coordination in a short period (less than a minute) per day. It is unlikely to have had a significant effect on the average prices over the periods that you are talking about. It is still most unethical and illegal.

    • Brian

      That has nothing to do with the banks and everything to do with productivity. If you look at a graph of values over the years you will see short term highs and lows. Those short term trends are as a result of trading. The long term trend which has caused rand devaluation is due to poor productivity and loss of investor confidence due to government policy. When SA produces a product for, say, R100 but they can produce the same product in another country for R75 then the currency has to devalue for SA to be able to compete internationally. If investors lose confidence in SA policies then they pull their money out reducing the demand for ZAR thus causing devaluation as well.

  • SA First

    Handful of rogue traders – question is – who lost money as a result of their actions, and how much ?

  • Vulpes

    This whole idea of fining banks is not such a great idea. The individual traders and board directors should be charged in their personal capacities.
    What is often forgotten is that taxes and bank profits are actually the capital of the private citizens. So GuptaZum and company deflect our tax money and the banks use ours to make disgusting profit for themselves.
    Somebody should force banks to publish their profits based on interest rates (lending vs paid to customers), and transaction fees. The latter is where the crookery really comes into its own. Charges to clients vs cost to banks probably demonstrates a huge gap.

  • Runnin Bare

    If GOVT get away with colluding and corruption with no consequence then why are the banks not exempt. Its a case of follow the leader.

  • lorgat94

    In other words: Gupta’s take revenge on SA banks for having closing their accounts.

    • Blapartheid Zulu

      I don’t know which is worse…

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