The Competition Commission has today referred a collusion case to the Tribunal for prosecution against Bank of America Merrill Lynch International Limited,  BNP Paribas, JP Morgan Chase & Co, JP Morgan Chase Bank N.A, Investec Ltd, Standard New York Securities Inc., HSBC Bank Plc, Standard Chartered Bank, Credit Suisse Group; Standard Bank of South Africa Ltd, Commerzbank AG; Australia and New Zealand Banking Group Limited, Nomura International Plc., Macquarie Bank Limited, ABSA Bank Limited (ABSA), Barclays Capital Inc, Barclays Bank plc (Respondents).

The Commission has been investigating a case of price fixing and market allocation in the trading of foreign currency pairs involving the Rand since April 2015. It has now referred the case to the Tribunal for prosecution.

The Commission found that from at least 2007, the respondents had a general agreement to collude on prices for bids, offers and bid-offer spreads for the spot trades in relation to currency trading involving US Dollar / Rand currency pair. Further, the Commission found that the respondents manipulated the price of bids and offers through agreements to refrain from trading and creating fictitious bids and offers at particular times.

Traders of the respondents primarily used trading platforms such as the Reuters currency trading platform to carry out their collusive activities. They also used Bloomberg instant messaging system (chatroom), telephone conversation and had meetings to coordinate their bilateral and multilateral collusive trading activities. They assisted each other to reach the desired prices by coordinating trading times. They reached agreements to refrain from trading, taking turns in transacting and by either pulling or holding trading activities on the Reuters currency trading platform.  They also created fictitious bids and offers, distorting demand and supply in order to achieve their profit motives.

The Commission is seeking an order from the Tribunal declaring that the respondents have contravene the Competition Act. Further, the Commission is seeking an order declaring that the Bank of America Merrill Lynch International Limited,  BNP Paribas, JP Morgan Chase & Co, JP Morgan Chase Bank N.A, Investec Ltd, Standard New York Securities Inc., HSBC Bank Plc, Standard Chartered Bank, Credit Suisse Group; Standard Bank of South Africa Ltd, Commerzbank AG; Australia and New Zealand Banking Group Limited, Nomura International Plc., Macquarie Bank Limited are liable for the payment of an administrative penalty equal to 10% of their annual turnover.

“The referral of this matter to the Tribunal marks a key milestone in this case as it now affords the banks an opportunity to answer for themselves,” said the Commissioner, Tembinkosi Bonakele. 

BACKROUND TO CURRENCY TRADING

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 = ZAR 13.3402 / 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.