South African Probe Finds Currency Traders Shared Details

  • No evidence of widespread misconduct in South Africa FX market
  • Panel recommends legislation be changed to prosecute traders

A South African panel established to investigate the country’s foreign-exchange markets found that some traders inappropriately shared confidential client information, and recommended laws be changed to enable authorities to prosecute traders in future.

While the Foreign Exchange Review Committee found no found evidence of malpractice or “serious misconduct” in domestic rand trading, it proposed on Monday extending insider-trading laws to apply to currency dealers. There is no immediate need for “criminal investigations or punitive measures” as it had not found evidence of “front-running client transactions, collusion or the manipulation of any foreign exchange benchmarks,” the panel said in its report, released in Pretoria.

The South African Reserve Bank and Financial Services Board appointed the panel, headed by former senior deputy Governor James Cross, in October 2014 on concern that trading in the rand may be vulnerable to currency manipulation in overseas markets. Regulators would take action if evidence of wrongdoing were found in a separate Competition Commission investigation into international banks for allegedly fixing spot, futures and forward currency prices, the panel said.

South Africa’s efforts to better regulate foreign-exchange trading follows a price-rigging scandal in which some of the world’s largest banks agreed to pay fines and plead guilty to conspiring to manipulate markets after being accused of using online chat rooms to collude. The country’s antitrust regulator on May 19 announced it was investigating complaints involving Citigroup Inc., JPMorgan Chase & Co., Barclays Africa Group Ltd., Investec Ltd. and a Standard Bank Group Ltd. unit.

About 20 percent of trading in the rand takes place in South Africa, with foreigners accounting for 60 percent of domestic turnover, while almost 43 percent of trades in the currency take place out of London, according to the report. Global turnover in the rand is estimated at about $60 billion a day, 1.2 percent of total trading in the world, according to an April 2013 report by the Bank for International Settlements.

South Africa has 25 Authorized Dealers, with seven of them accounting for 95 percent of local turnover. Trading in the forward and swap market make up about 80
percent of trading in the local market, the panel said in the report.

Issues of client information being shared between dealers was part of what contributed to the formation of the foreign-exchange review panel, Deputy Governor Daniel Mminele
said. The institutions involved had dealt internally with the cases and reported these to the bank regulator, he said, without identifying the institutions.

Same Rules

The review committee, together with market participants and regulators, drafted a code of conduct for over-the-counter markets and recommended a change in legislation that will allow the code to be “subsidiary” law. It also proposed that sections of the Financial Markets Act dealing with insider trading, market manipulation and false reporting be extended to the foreign exchange market, which would give authorities powers to prosecute market players “for instances of wrongdoing.”

The intention was to create a regulatory framework where “the rules are the same, whether you’re trading on an exchange or on an over-the-counter market,” Cross told reporters.

The committee also wants a Financial Markets Standards Group of senior market professionals and compliance officers to be formed, modeled on the U.S. Treasury Markets Practice Group. The group’s immediate task would be to conduct a similar review to the Fair and Efficient Markets Review in the U.K., which will take about 18 months.

“It’s going to place a little bit more strain on banks in terms of compliance, but that’s the world we live in,” Ion de Vleeschauwer, the chief dealer at Johannesburg-based Bidvest Bank Ltd., said by phone. “The regulatory environment has grown massively on a global scale and we’re just falling in line with that, we have to be transparent, we  
need to be compliant.”

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