Rand collusion

South Africa should restrict rand access for offending foreign banks

By David Whitehouse

Posted on December 19, 2019 05:42

South Africa has better options than extra-territorial powers to prosecute banks in its fight against collusion in currency markets.

After an investigation into alleged collusion by 23 banks, ten of which have no presence in South Africa, to co-ordinate on spot dollar and rand prices, the Competition Commission recommended fines totalling 10% of the banks’ global revenues.

  • The banks involved, which include JPMorgan Chase, Bank of America Merrill Lynch and Credit Suisse, argue that the case should be dropped.

The country’s Competition Tribunal in July ruled that the commission had no jurisdiction to impose the fines.

The Competition Commission, which has been investigating since 2015, this month responded by calling on the tribunal to set a precedent to allow them to prosecute foreign cartels if their actions affect South Africans. The tribunal has reserved judgement on the issue.

“No offshore bank is going to respond to this investigation or pay any penalties,” says Erik Renander, a fund manager at the HI EMIM Africa Opportunities Fund in London.

  • If the competition commission has strong evidence that bank traders in New York, London or Paris were manipulating the rand, they can pass the evidence on to foreign regulators, he says.
  • “It might be frustrating, but that’s how the international legal system works.”

Victim mentality?

Extraterritorial reach of national competition policies is hardly novel. Harry G. Broadman, chair of the emerging markets practice at Berkeley Research Group LLC in Washington, points to the Sherman Act and the Foreign Trade Antitrust Improvements Act in the US which hold foreign firms and their suppliers importing products or services accountable for anticompetitive conduct under US law.

But if South Africa carried out a unilateral move without global coordination, it would “shoot itself in the foot,” argues Paul Hollingworth, managing director at Creative Portfolios in London.

  • Rulings and fines in cases of foreign exchange collusion between traders have taken place within national jurisdictions where the operators have licenses, he says.
  • While foreign banks are “a great populist target, this wouldn’t be an issue if the fiscal and debt position was in better shape,” Hollingworth says.
  • He’s sceptical that the demand will lead to extra-territorial powers, at least in the short term, and argues that the country must work with external authorities to uncover market collusion.

It’s understandable that South Africa is sensitive to its currency being ‘manipulated’ outside its borders and controls, Hollingworth says.  He detects an element of political show in the competition commission’s demand, which “could be a cover for inevitable downgrade consequences.”

  • The country “must break away from a victimisation mindset and just get on with the reform job,” he argues.

Unlike most products, South Africa controls the supply of the product which was allegedly being manipulated.  The country’s banks are the most important providers of rand liquidity.

  • An alternative option, Renander says, is for the South African Reserve Bank to restrict the country’s banks from trading rand with any foreign counterparties which it doesn’t think are fit and proper.

Bottom Line: Restricting rand liquidity for proven repeat offenders would be less spectacular but more effective than seeking extra-territorial powers to prosecute foreign banks.

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