UK hedge fund founder charged with currency manipulation

NZINGA QUANTA: Last week saw the arrest of Glen Point Capital co-founder Neil Phillips for alleged manipulation of the foreign exchange market. Another company suspended staff members who had previously worked with it. Let’s dig deeper into the story with André Cilliers, who is the director of TreasuryONE.

André, a very good evening to you. Can you summarize what happened in 2017 that led us to this point and Phillips’ eventual arrest?

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

Now they were approaching the exercise of the option or the expiration of the option, and this was in a period when it was clear that the option was somehow done, with the understanding that if Cyril Ramaphosa would come in and be elected president of the ANC – in other words, the continuing president of South Africa – that would push the rand to *** strength levels, and that would then drive that barrier in place.

This, remember, did not happen. The optimism was not so good. But then they collaborated with another foreign bank which then sold large amounts of dollars in the market. Now the period when they sold was a period of very low liquidity and because of this low liquidity it was possible to push it so that the option [would get] triggered, which meant he would have made a lot of money.

NZINGA QUANTA: A lot of money, indeed. I think the number I saw was over $15 million, and then an unidentified client got about $4 million. So he was not working alone, but was working in other financial institutions and other people. Just tell me about that and the prevalence of market manipulation – whether it’s foreign exchange or other issues.

ANDRE CILLIERS: Well, it’s hard to manipulate the forex market unless you’re working in conjunction with quite a few other people, because it’s a market where the volumes going 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 currency to trade to influence it. And you have to remember that if you’re doing this just to manipulate it to a certain level then you have to be able to take that amount of money out of the market so you can settle your positions because it’s pretty speculative . transaction taking place at that time.

So, yes, it is possible and we know that there have been discussions and are still ongoing – that of a possible collaboration between South African banks, even far back in the history of the trade of the rand, which is still under review. But it’s not very easy to do and it’s not something that happens continuously.

NZINGA QUANTA: I remember when former President Thabo Mbeki also had this rand inquiry into the fall of the rand. And there have been, as you said, other issues of banks being accused of market manipulation. Would you say that even though this is such an irregular event, emerging market currencies are perhaps more vulnerable to this kind of market manipulation, if can someone remove it?

ANDRE CILLIERS: Yes. Emerging markets are more vulnerable to this, and the simple reason is that, in many cases, emerging markets are also places where the banking system is not as developed as first world countries; and second, the volumes of currency trading are quite small, and with relatively small amounts, you can then manipulate the currency to weaken or strengthen it significantly.

South Africa is a bit different in 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 due to the size and development of our market.

NZINGA QUANTA: So it’s less likely. It’s not one of the top three or, if anything, top 10 risks in terms of what might happen. That being the case, is there anything that can or should be done to try to protect currencies from these types of behavior or, because it has happened so rarely, is it simply a danger that can come and pass ?

ANDRE CILLIERS: It’s really hard to completely shut it down or try to regulate it because if you were to do that, you would kind of have to go through every transaction in the market. And now when you do that, and there’s a lot of banks working together, all those transactions are with different banks. So even if you think about the transaction we are talking about, the mentioned amount that was sold to manipulate the rand to a certain level was in the range of $725 million.

But now that $725 million wouldn’t have been sold to just one bank. It would have been sold – I’m sure if we look at that bank’s trading list you’ll find they’ve dealt with Standard Bank, they’ve dealt with Absa, they’ve dealt with Barclays, they’ve 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 have made relatively small amounts with a lot of banks, but the volume would still have crossed the market. And then there’s this fallout of one position canceling out the other, and the banks are trading with each other, because there’s a lot of liquidity that has entered the market. So it’s difficult. You would have to go through every bank and try to trace every transaction from every local bank, every foreign bank, every transaction that was made, add up and see who the counterparty was. It’s practically impossible to do.

NZINGA QUANTA: I understand. Andre, the United States is pursuing this case, and there are other charges against Neil Phillips, co-founder of Glen Point Capital. What do you think could happen in this case?

ANDRE CILLIERS: Well, I think he’ll be convicted and heavily fined, and probably jail time would be on the cards for him. And he would also be suspended and obviously never able to negotiate again.

NZINGA QUANTA: Andre Cilliers, the director of TreasuryONE, joined us and unpacked the story of Neil Phillips, who was arrested for alleged manipulation of the foreign exchange market. Thank you very much for your time on the SAfm Marketplace Update with Moneyweb.

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