While the manipulation of the rand led to significant profits for the banks and companies involved, claims that they profited R1 trillion a day and impacted the long-term value of the currency are exaggerated.
This is the view of TreasuryOne director and currency risk strategist Andre Cilliers, who told Kaya Biz that the banks should not be exonerated of wrongdoing, but South Africans must be realistic about the impact the rand manipulation has had.
His comments come in light of the news that Standard Chartered Bank had been fined R43 million for manipulating the rand against the US dollar.
The UK-based multinational bank pleaded guilty to using illegal tactics to manipulate the rand between 2007 and 2013.
The illegal tactics involved fixing bids, offers, bid-offer spreads, spot exchange rates, and the exchange rate at the FIX.
Standard Chartered is one of 28 banks prosecuted by the Commission for manipulating the USD/ZAR currency pair.
Cilliers said currency manipulation is often associated with significant transactions, such as mergers, acquisitions, large export deals, or capital transactions.
In these cases, collaboration between banks can lead to manipulating bids and offers in the market at a specific time.
However, he said it is crucial to differentiate between short-term transaction flows and the broader economic fundamentals and global situations that influence currency direction over the long term.
He explained that banks manipulated the rand’s value in a bid-offer spread – the difference between the buying and selling prices of a currency.
Manipulating this spread during big-ticket deals can be a strategy employed by banks to enhance their outcomes, whether acquiring or selling currencies.
“When you manage a big-ticket deal, and there’s collaboration between banks, that would mean that they manipulate the bids and the offers going into the market at a specific time,” he explained.
However, he emphasised that this tactic is limited to ‘big ticket deals’ – a big deal going through because of a merger and acquisition, a big export deal or a capital transaction of some nature – and cannot impact the long-term value of the rand.
“We must distinguish between transaction flows that go through daily and where the direction of the currency is heading in terms of economic fundamentals, political situations throughout the world, etc.”
For example, if two banks were to manipulate the spread between a bid and an offer in a big ticket deal today, but on the same day, a war breaks out, skyrocketing the oil price by 20%, the spread manipulation’s influence on the rand would be overshadowed.
“There’s no way that manipulating that bid-offer spread for the day would outweigh the actions of such a big event happening somewhere in the world. It would be a futile exercise to try and do that,” Cilliers said.
This also applies to other political and economic fundamentals in a country, like its unemployment rate, monetary policy and economic growth.
“There’s no way that you can manipulate the currency where fundamentals like economic growth, inflation rates, job creation, unemployment numbers, and all these things come into play. You cannot manipulate all of that,” he said.
In addition, central banks worldwide – including South Africa – have mechanisms in place to counter such long-term actions and keep the currency stable.
He explained that central banks cannot automatically intervene by changing monetary policy in reaction to a very short-term move in the currency because that would have far-reaching implications for the rest of the economy.
“You can imagine what would happen if the central bank in South Africa were to increase interest rates suddenly by 10% just to stop somebody speculating in a currency,” he said.
“Because that would have far-reaching implications in terms of the consumer, what they pay for their credit and so forth because you can’t isolate that to only impacting the banks.”
Cilliers also referred to claims that the entities involved in the manipulation were making R1 trillion a day through this bid-offer spread manipulation.
He said that while substantial volumes are traded daily, the notion that banks profit by R1 trillion per day seems implausible.
Firstly, he said the implicated entities did not collude on a daily basis. Instead, collaboration occurred sporadically, particularly during major transactions.
In addition, none of the 28 entities involved colluded with every entity every day. Rather, one bank would, for example, collude with another bank on one particular big-ticket deal.
“So to say that a bank benefited by R1 trillion per day is absolutely ridiculous. That’s just not possible. You would have to have a very big percentage move on a daily basis for a bank to make that kind of money by manipulating a bid-offer spread,” said Cilliers.
“I think some of the calculations that go around after these discussions and this whole investigation from the Competition Tribunal regarding currency manipulation is getting a little bit out of hand at the moment and is not justifiable.”