UK hedge fund founder charged with exchange-rate manipulation

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NZINGA QUNTA: Last week saw the arrest of Glen Point Capital co-founder Neil Phillips for alleged foreign-exchange market manipulation. Another firm suspended staffers who had previously worked with him. Let’s get more on the story with Andre Cilliers, who is the director of TreasuryONE.

Andre, a very good evening to you. Can you just summarise what happened back in 2017 that led us to this point and the eventual arrest of Phillips?

ANDRE CILLIERS: Good evening to all the listeners. He sold an option and the strike price with a barrier. Now it’s an interesting product, and I’m not quite sure that I can easily explain it here, but it simply means that the option only became valid if the rand reached a level of R12.50 on a specific day, or at any period during the lifetime of the option.

Now, they got close to the exercise of the option or the expiry of the option, and it was in a period where clearly the option was sort of done with the understanding that if Cyril Ramaphosa came in and was elected as the President of the ANC – in other words the continuous president of South Africa – then that would push the rand to levels of *** strength, and that would then have that barrier kick in.

That we can recall did not happen. The optimism wasn’t that good. But then they collaborated with another foreign bank which then sold large amounts of dollars in the market. Now, the period where they sold was a period of very low liquidity and, because of that low liquidity, it was possible to push it so that the option [would get] triggered, which meant that he would’ve made a lot of money.

NZINGA QUNTA: A lot of money, indeed. I think the figure I saw was over $15 million, and then an unidentified client got around $4 million. So he was allegedly not working alone, but roping in other financial institutions and other people. Just talk to me about that, and how prevalent market manipulation is – whether it comes to foreign exchange or other issues.

ANDRE CILLIERS: Well, it’s difficult to manipulate the foreign-exchange market unless you work in collaboration with quite a lot of other people, because it’s a market where the volumes that go through it are absolutely immense. [They are] very, very large volumes and you need millions and millions and millions of dollars or euros, or whatever the currency might be, to trade to influence it. And you must remember that if you just do that to manipulate it to a certain level, then you need to be able to get that amount of dollars back out of the market so that you can square up your positions, because it is a rather speculative transaction that takes place at that point in time.

So, yes, it’s possible and we know that there’ve been discussions and it’s still ongoing – that of possible collaboration between South African banks, even way, way back in the history of the rand trading, which is still being investigated. But it’s not very easy to do it and not something that happens on a continuous basis.

NZINGA QUNTA: I remember when the former president Thabo Mbeki also had that rand inquiry into the fall of the rand. And there have been, as you’ve said, other issues of banks being accused of market manipulation. Would you say, even though it’s such an irregular occurrence, perhaps emerging-market currencies are more vulnerable to this kind of market manipulation, if someone can pull it off?

ANDRE CILLIERS: Yes. Emerging markets are more vulnerable to that, and the simple reason for that is that emerging markets are in a lot of cases also places where the banking system is not as developed as first-world countries; and secondly, the volumes of trades of currencies are fairly low, and with relatively small amounts you could then manipulate the currency to either weaken or strengthen substantially.

South Africa is a little different in the sense that the South African rand is one of the most-traded currencies in the world. So the volumes going through the markets and also our banking system and the banks, and the products that are available, are very, very developed. So yes, still possible, but less likely because of the size and how developed our market is .

NZINGA QUNTA: So it’s less likely. It’s not a one of the top three or, if any, top 10 risks in terms of what could happen. That being as it may, is there anything that can or should be done to try and safeguard currencies from these types of behaviour or, because it’s happened so infrequently, is it just a danger that may come and pass?

ANDRE CILLIERS: It’s really difficult to stop it completely or to try and regulate it because, if you were to do that, then you would have to sort of go through every transaction in the market. And now, when you do that, and there’s collaboration between a lot of banks, all those trades are being done with various banks. So, even if you think of the transaction that we are speaking of, the amount mentioned that was sold to manipulate the rand to a certain level was in the order of $725 million.

But now that $725 million would not have been sold to one bank. It would’ve been sold – I’m sure that if we go to the trading list of that bank, than you would find that they dealt with Standard Bank, they dealt with Absa, they dealt with Barclays, they dealt with JP Morgan, they dealt with Goldman Sachs, they dealt with Standard Chartered. I can continue with a list of names.

So they would’ve done relatively small amounts with a lot of banks, but the volume would’ve still gone through the market. And then there’s that spinoff of one position cancelling the other, and banks trading out with each other, because there is a lot of liquidity that came into the market. So it’s difficult. You would have to go through every bank and try and trace every deal from every local bank, every foreign bank, every trade that went through, add it up and see who was the counterparty. That’s virtually an impossibility to do.

NZINGA QUNTA: I understand. Andre, the US is prosecuting this matter, and there are other charges against Neil Phillips, who’s a Glen Point Capital co-founder. What do you think may happen in this case?

ANDRE CILLIERS: Well, I think he will be found guilty, and given a very hectic fine, and probably some jail time would be on the cards for him. And he would also be suspended and obviously never be able to trade again.

NZINGA QUNTA: Andre Cilliers, the director of TreasuryONE, has been joining us and unpacking the story of Neil Phillips, who has arrested for alleged foreign-exchange market manipulation. Thanks so much for your time on the SAfm Market Update with Moneyweb.

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