Legislation will be introduced to tighten the regulation of the country’s financial markets – particularly the over-the-counter (OTC) markets – to prevent unfair market conduct, National Treasury told a parliamentary hearing into the Competition Commission’s allegations that foreign and domestic banks manipulated the value of the rand more than a decade ago.
But the legislative interventions, which include the Conduct of Financial Institutions (COFI) Bill, are part of long-standing reforms.
In a statement on Friday afternoon, Treasury distanced itself from the narrative by some politicians that the weakening of the rand and the country’s low economic growth can be attributed to the banks’ alleged price-fixing.
Treasury was responding to the settlement agreement issued by the Competition Tribunal this month in which Standard Chartered Bank admitted to misconduct relating to trading in the rand/US dollar currency pair.
In terms of the settlement, Standard Chartered agreed to pay a penalty of R42.7 million and co-operate with the Competition Commission and provide evidence to assist with prosecuting the other banks. The Commission rejected the bank’s previous settlement offers of R18m in 2019 and R24m in 2020.
Treasury said the wrongdoing described by the Competition Tribunal harmed individual clients, but it would not have influenced the depreciating trend of rand since 2013, the level of which is driven by broader changes in the global and domestic economy.
“The value of the currency today, which has depreciated against the dollar, and the resulting impact on prices, should not be attributed to these instances of misconduct between 2007 and 2013,” the statement said.
Standard Chartered, a British multinational bank, became the second bank to admit to rigging the rand foreign exchange market. In 2017, Citibank, a prominent bank in the United States, admitted liability, and agreed to pay a penalty of R69.5m and co-operate in the prosecution of the case.
In contrast to the Citibank settlement, Standard Chartered’s settlement does not commit the bank to testify in the case. According to Standard Chartered, the last of the implicated traders left its employ in 2015; therefore, the bank could not compel them to testify. It would, however, provide the Commission with documentary evidence.
Three banks – Barclays Plc, Barclays Capital, and Absa – have been granted leniency from prosecution. They are required to co-operate with the Commission in the prosecution of the other banks implicated in cartel conduct.
National Treasury and the FSCA briefed the National Assembly’s Standing Committee on Finance (Scof) on Friday evening on the measures that have been and will be taken to enhance the integrity of South Africa’s financial markets.
Vukile Davidson, National Treasury’s chief-director of financial sector policy, told Scof that Treasury viewed the unfair market conduct and trading practices by the offending institutions “very seriously”, and they deserved the full force of the sanctions that have been imposed on them by the Competition Commission.
Although some banks have admitted liability, others are still challenging the allegations, and the legal process must be allowed to reach a conclusion without fear, favour, prejudice, or undue influence, Davidson said.
COFI and amendments to the FMA
Davidson said that if the allegations against the banks are proved to be true, they would indicate the prevalence of poor market conduct practices at that time (between 2007 and 2013).
He said it was precisely this type of abuse that Treasury had in mind when it undertook a range of reforms. These reforms were formalised through the introduction of the Financial Sector Regulation Act (FSRA) in 2018 as part of the Twin Peaks architecture, which put in place a new market conduct regulator, the FSCA, to ensure that financial institutions treat their customers fairly and operate with the highest ethical standards.
In its statement, Treasury said it has submitted regulations to ensure that banks do not engage in unfair practices or misconduct when setting reference rates, which are used in the pricing of derivatives and other financial contracts.
In March 2023, Treasury tabled regulations in Parliament to propose to designate the “provision of a benchmark” as a financial service in accordance with section 3(3) of the FSRA, and to specify that the FSCA is the responsible authority for the regulation, supervision, and oversight of the financial service of the “provision of a benchmark” in accordance with section 3(5) of the FSRA.
Davidson said more work needed to be done, and Treasury intends to introduce the COFI Bill “very soon” into Parliament, as well as amendments to the Financial Markets Act (FMA) “soon” thereafter.
The Bill will propose that OTC derivative providers are carried into the COFI licensing activities and will be subject to the COFI Act.
Regulating the OTC market is a priority
Olano Makhubela, the FSCA’s divisional executive for market integrity, told Scof that closing the regulatory gaps relating to the OTC market “requires urgent attention”.
He said the FMA does not cover OTC markets, such as the foreign exchange market.
“Due to the unlisted nature of the OTC market, issues around transparency, fairness, governance, and conduct by market participants have come to light globally and locally, with strong calls from international standard-setting bodies to regulate the OTC market,” Makhubela said.
He outlined the measures that have been and will be taken to regulate the OTC market.
The FSCA has started licensing OTC derivative providers. “For example, if you want to provide financial services in unlisted derivatives, you are required to apply for a licence with the FSCA,” Makhubela said.
The FSCA, the Prudential Authority (PA), and Treasury are amending the FMA to include foreign currency in its definition of “security”. Once this is done, it will give the authorities the power to use the FMA to supervise the conduct of institutions in the foreign currency market.
The amendments to the FMA will also extend the Act’s market abuse provisions to the foreign currency market.
“Fourthly, we are proposing a new broader and all-encompassing definition in line with international standards that will cover both listed and unlisted markets by referring to both as organised markets. This could empower us to look at matters beyond those relating to registered exchange traded ones,” Makhubela said.
He said COFI will, for the first time, provide the FSCA with a dedicated instrument to be able it to discharge its duty as a conduct authority. The Bill is intended to cover both entity-to-entity conduct issues, such those brought to the fore by the rand manipulation matter, and entity-to-retail client issues.
The FSCA is engaging with participants in the capital markets on how best to facilitate the reporting of OTC transactions through a trade repository, which will aid in the transparency and surveillance of “this complex market”, Makhubela said.
Together with the PA, the FSCA finalised and issued margin requirements for non-centrally cleared OTC derivatives, to support financial soundness and stability.
In 2020, the FSCA issued a conduct standard for banks that starts to address critical issues around institutional culture and governance.
Remaining banks contest the allegations
The currency manipulation saga started in 2015, when the Competition Commission launched an investigation into 11 foreign and domestic banks for alleged price-fixing involving the rand. The investigation was subsequently widened, bringing the number of institutions to 28.
The Commission found that, between 2007 and 2013, the banks manipulated by the rand-dollar currency pair by fixing bids, offers, bid-offer spreads, the spot exchange rate, and the exchange rate at the FIX (Financial Information eXchange, an information and price-sharing system between investment banks and broker-dealers).
These activities were purportedly carried out using instant messaging platforms and other modes of communication.
The Commission also found that the banks divided markets by allocating customers in terms of which one trader withheld or pulled his or her existing bid or offer from the market to allow another trader to execute and complete his or her trade.
In 2017, the Commission referred the matter to the Competition Tribunal for prosecution. The banks challenged the referral, but the Tribunal dismissed the challenges in 2019. The banks took their case to the Competition Appeal Court (CAC). In 2020, the CAC dismissed the appeals but ordered the Commission to file a new complaint referral.
The Commission filed a new complaint referral in June 2020. The banks again challenged the referral at the Tribunal. In March 2023, the Tribunal ordered the banks to file their answers to the new complaint referral.
The CAC heard the banks’ challenges to the new complaint referral in November. To date, the 23 banks that not reached agreements with the Commission have yet to answer its referral affidavit.
Banks deny the allegations
Meanwhile, Standard Bank said it has not manipulated the value of the rand or engaged in any anti-competitive or criminal conduct.
Standard Chartered and Standard Bank are separate entities. Standard Chartered sold its stake in Standard Bank in 1987.
“Standard Bank has noted with serious concern false and inaccurate comments in some media and social media related to the Competition Commission investigation into currency manipulation,” the bank said. “These comments incorrectly link various unrelated and unfounded allegations with the Competition Commission inquiry currently under adjudication before the Competition Appeal Court,” the bank said in a statement last week.
“Assertions that Standard Bank is not supportive of the interests of our customers, of South Africa’s economy and society and of the Constitution of South Africa are not consistent with how Standard Bank conducts itself.”
Nedbank, which was added to the case five years after the Commission initiated the case against the original international and local banks, said on Friday that it denies it was involved in anticompetitive behaviour.
“There is no evidence, either from Nedbank’s own investigations or presented by the Competition Commission, of any Nedbank traders participating in any of the so-called chatroom conversations or in any conspiracy in respect of rand trading. Nedbank will continue to defend itself against these claims,” it said.
Business Times reported that Investec said the Commission conceded, in its new referral, that neither Investec nor any other South African bank has been implicated in the reported Bloomberg chatrooms that were set up by traders at the international banks.
“To date, all of the international banks that have settled with the Competition Commission were participants in these Bloomberg chatrooms. Investec did not participate in the recent interlocutory applications and remains ready to present its case when the merits of the new referral are finally heard by the Competition Tribunal,” it said.
FirstRand said yesterday: “We welcome the comments contained in National Treasury’s statement on Friday clarifying the main drivers of rand weakness. The bank denies the allegation that it was involved in a conspiracy to manipulate the rand and continues to defend its position in the courts.”
