Treasury concerned after bank admits to manipulating the Rand

National Treasury has expressed its concern after Standard Chartered Bank admitted to manipulating the Rand before the Competition Tribunal but emphasised that the conduct that the banks are accused of would not have influenced the depreciating trend of the currency since 2013, as it 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,” Treasury said in a statement.

In the Competition Tribunal’s settlement agreement, the Tribunal confirmed that: “Between 2007 and 2013, Standard Chartered Bank fixed prices of bids, offers and bid-offer spreads in relation to spot trades of ZAR currency pairs through bilateral and multilateral communications using instant messaging platforms and other means of communication.”

In addition, the Tribunal confirmed that Standard Chartered Bank’s “traders assisted each other through allowing a trader with a large open risk position to complete his trades first before trading and through holding and/or pulling their trades to reverse liquidity for each other instead of trading normally in the market”.

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Treasury had this kind of abuse of the Rand in mind in 2011

Treasury says it welcomes the sanction that the bank pays an administrative penalty of R42 715 880 after it admitted liability for manipulating the USD/ZAR currency pair. Other banks denied any wrongdoing and continue to challenge the allegations. If the allegations are proven to be true, they would indicate the prevalence of poor market conduct practices at that time, Treasury says in the statement.

“This is precisely the type of abuse Treasury had in mind in 2011 when proposing and implementing the Financial Sector Regulation Act (FSRA) as part of the Twin Peaks reform. The reform put in place a new market conduct regulator to ensure that all financial institutions treat their customers fairly and operate with the highest ethical standards.”

In addition, Treasury 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 this year, 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 specify that the Financial Sector Conduct Authority (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.

In terms of section 288(1)(b) of the FSRA, which empowers regulations to provide for procedural and administrative matters that are necessary to implement the provisions of this Act, some specific powers and duties are provided to the FSCA in relation to the provision of benchmarks to enable the effective regulation and supervision of the financial service of the “provision of a benchmark”.

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More legislation coming in 2024 to avoid Rand manipulation

Treasury says it will introduce further legislation next year to ensure South African financial markets are fair, transparent and operate with integrity. The Conduct of Financial Institutions (CoFI) Bill will propose that Over the Counter (OTC) Derivative Providers are carried into the CoFI licensing activities and will be subject to the CoFI Act.

This implies that requirements for good governance, transparency and managing conflicts of interest will continue to apply. The spot OTC market reforms will be considered as part of the review of the Financial Market Act Bill (FMAB). The OTC market participants will also be subject to core CoFI conduct requirements as part of the FMAB review.

The draft FMAB, which is under development, proposes that:

• First, foreign currency is included in the definition of “security”.
• Second, providers of OTC securities are to be brought under FSRA as a licence category, subject to the new FMA (this will be integrated into the FSRA) as well as relevant conduct provisions under CoFI.
• Third, the market abuse provisions are extended to ‘applicable security’ which means a security made available for trading on a trading venue or a foreign trading venue and any benchmark or derivative instrument related to, or whose price or value is dependent on, a security.

“The reforms already undertaken since the Standard Chartered misconduct between 2007 and 2013, as well as the additional reforms proposed, demonstrate government’s commitment to fair, transparent and efficient financial markets and rooting out any misconduct and unfair treatment of customers,” Treasury says.