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The announcement has come hot on the heels of a number of international banks in the UK and the USA being fined heavily for manipulating fixes in the foreign exchange markets to their own benefit. To date a total of more than $10 billion has been paid in fines by the banks in question, with the three most heavily fined banking groups, viz. Barclays ($2,32 bn), Citigroup ($2,29 bn) and JP Morgan ($1,9 bn), also featuring in the South African probe.

In fact, the CC’s announcement states that its investigation “follows similar investigations by other competition authorities in other jurisdictions”. Apart from the investigations in other countries being conducted by financial market regulators and not the competition authorities, it appears that the CC’s action has been prompted by international events.

How the CC intends to conduct its probe in view of the fact that according to BIS statistics approximately 50% of the trade in the rand takes place in offshore money centres is not clear.

Some commentators have questioned why the South African probe is not being conducted by the Reserve Bank in view of its responsibility for monitoring the foreign exchange activities of authorised dealers and other market participants. However, there is a more fundamental issue at stake that once again points to a lack of coordination in the conduct of economic policy.

The South African authorities are in the process of implementing a reformed structure of financial regulation, referred to as the “twin peaks model”. As part of this initiative two new regulators will be created, viz. a Prudential Authority (PA) that will be housed in the Reserve Bank and a Financial Sector Conduct Authority (FSCA).

According to the IMF other reasons appear to be of lesser importance. Financial constraints (in particular credit availability) have mostly affected industries that are relatively more dependent on external finance. Much is made of policy uncertainty in particular but the report concludes that this has played a role only in a minority of cases (especially sectors characterised by lumpy, irreversible investments) as the growth in private sector fixed investment in general has not lagged GDP growth.

In a presentation forming part of a series of public workshops earlier this year the National Treasury described the focus area of the latter as follows: “Market conduct regulation aims to prevent, and manage when prevention is not successful, the dangers that arise from a financial institution conducting its business in ways that are unfair to customers or undermine the integrity of financial markets and confidence in the financial system.”

At the centre of monitoring market conduct will be legislation requiring financial institutions to treat their customers fairly. Chapter 8 of the Draft Market Conduct Policy Framework for South Africa furthermore deals specifically with “enhancing the efficiency and integrity of the financial markets”. The reform of South Africa’s financial regulation structure is furthermore aligned with principles agreed on by the G20 that will make it easier to work with our counterparts in other jurisdictions.

Initially this legislation was primarily aimed at how financial institutions treat their retail customers. However, the presentation mentioned above states that the monitoring of financial sector conduct will also extend to the wholesale segment (recognising it will require a different approach), and in particular that “forex rigging” is included under market conduct failures.

This raises the question as to why the CC has decided to embark on its investigation. Judging by the media release announcing the probe, the Commission seems to be totally oblivious to the ongoing process of implementing the “twin peaks” regulatory reforms. If it is a matter of the CC standing in for the FSCA until it is operational, it would have been helpful if this had been spelled out.

The JSE has likewise been buoyant, moving in step with international markets and outperforming the economy. One can only hope that the optimism expressed in rising share prices will eventually spill over into an improvement in business activity. For this to happen the immediate issues to address are bolstering the economy’s potential growth rate and restoring business confidence.

There is another way in which the involvement of the CC in financial market regulation is problematic. Although competition policy and financial regulation share an interest in market structure and conduct at a micro-economic level, and both ultimately influence macro-economic outcomes, it would be unusual for anticompetitve behaviour in product and services markets to pose a systemic risk in the way that financial crises have illustrated financial misconduct to do. In other words, whereas competition policy can (and usually does) stop at the micro (even ad hoc) level, financial regulation always has to reckon with its macro and systemic implications.

If exchange rates are misaligned because of manipulation by forex traders it is not merely a matter of the other party being financially disadvantaged, something that could be corrected by the payment of damages. Misaligned exchange rates will influence the balance of payments and are likely to cause or worsen imbalances. They could also affect measured inflation, depending on their impact on the direction and magnitude of changes in exchange rates. Interest rates could therefore by extension be distorted, with possible negative effects on real economic activity.

Financial sector conduct/misconduct furthermore entails much more than manipulating exchange rates and includes aspects that fall decidedly outside the scope and mandate of the competition authorities and it will be best if all facets of financial sector conduct are dealt with comprehensively to ensure consistency.

In this regard it is worthwhile to take note of the UK’s Fair and Effective Markets Review that will be released on 10 June. ​One of its aims is to promote a uniform approach to the regulation of all financial markets and the Review is widely expected to recommend subjecting the so-called FICC markets (fixed income, currencies and commodities) to scrutiny similar to that for the equity market (inter alia banning practices such as insider trading and front-running from all markets) and to strengthen the powers of financial regulators to impose fines on wayward financial institutions.

In conclusion, it would therefore be advisable for the South African authorities to clarify the relationship between the CC’s forex trading probe and the work of the soon-to-be-established FSCA to avoid further policy confusion.

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