Neil Phillips, the co-founder and chief investment officer of a UK-based hedge fund, has been charged by US prosecutors with conspiring to rig trades involving the US dollar-South African rand currency pair for eventually triggering a payment to his company worth $20. million.

At the request of the US Department of Justice earlier this week, Phillips, 52, was arrested in Spain and charged with conspiracy to manipulate the dollar-rand exchange rate in December 2017, according to a statement released Thursday by the ministry. September 1st.

Phillips’ investment company was not identified in the statement, but Bloomberg said it was called Glen Point Capital, a macro hedge fund firm that pools funds from (usually wealthy) investors to invest across a range of asset classes, including currencies.

Phillips’ only connection to South Africa is that he traded the local rand while in the country on December 26, also known as Boxing Day. But by executing trades on the dollar-rand exchange rate, he “engaged in a scheme to intentionally and artificially manipulate” the currency markets.

Through his UK-based hedge fund company, Phillips purchased what are known as “options” for the dollar-rand exchange rate in late October 2017. Options are investment products, which involve investors betting on currency levels. Investors usually select a level at which the currency would trade on a given date, known as the target price. And through normal, unmanipulated currency movements, traders or investors can make money if the dollar-rand exchange rate hits the target price on a given date.

In the case of Phillips, he purchased options worth $20 million at the end of October 2017, which were due to expire on January 2, 2018. Prior to this expiry date, the dollar-rand exchange rate, through normal market forces, was expected to fall below R12.50. (the target price set by Phillips) for it to recover the initial investment worth $20 million and book profits.

First acts of rand rigging

On December 26, 2017 – seven days before the expiry date of his option contract – Phillips realized that the dollar-rand exchange rate was not going below the target price of 12.50 rand, which that would put his $20 million at risk.

On a normal day, there is a hive of activity in the forex market, with traders executing trades in rand-dollar currency pairs worth around $51 billion every day. But December is usually a quiet month for the financial markets as traders are usually on Christmas vacation and trading volumes in the forex markets are low.

And December 2017 was significant for South Africa because it was the month in which Cyril Ramaphosa was elected – through an internal political party election – as President of the ANC. Currency markets were bullish on a Ramaphosa ANC win, and no amount of bad news could create volatility or weakness in the currency markets, especially the rand-dollar currency pair.

Assuming Phillips panicked, he launched a scheme on December 26, 2017 to “artificially” drive the dollar-rand exchange rate below 12.50 rand.

While doing so, Phillips, who was in South Africa at the time, began making transactions to drive down the exchange rate. He ordered a Singapore-based employee of an unidentified bank – using a Bloomberg chat room – to sell $725 million (US dollars) in return for more than 9 million rand (South African rand), according to US prosecutors. In other words, Phillips sold dollars to receive rands, through his hedge fund.

Financial market instability

Such a large volume of money flowed through the local currency movement at the end of December 2017, at a time when most forex traders removed their working cap and hit the beach. Traders would allow market forces to normally influence the rand and not execute big trades that cause big changes in the local currency market.

Phillps succeeded as through his trades the rand fell below R12.50 (hit Phillps’ target price). This allowed Phillips to raise more than $15.6 million from the deal, the statement said, covering its initial investments of $20 million and some profits. In the words of US prosecutors, Phillips’ “pernicious” actions paved the way for him to “receive a wire transfer of $15,660,000 and… a wire transfer of $4,340,000.”

Authorities around the world, including South Africa’s Competition Commission, are cracking down on the trading of financial institutions’ forex traders and are accused of rigging currency exchanges.

It is difficult for a few traders to cause large changes in the movements of the exchange rate against the US dollar. Currency trading (beyond trading in the dollar-rand exchange rate) is a big market – with over $6 trillion traded daily, making it nearly impossible to cause big changes in an exchange rate, even with a coordinated strategy to rig the currency markets by traders.

The rand-dollar currency pair, in particular, trades around $50 billion every day, and a trader’s actions are unlikely to cause large or long-term swings in the value of the rand. On the contrary, bank-level currency traders would feel the pain of slight movements in the exchange rate – influenced by the likes of Phillips and other rogue traders. Banks help customers to exchange the currencies of various countries. Small movements in the dollar-rand exchange rate would allow banks to increase the “spread”, which is the difference between the “bid” (the price at which banks buy any currency) and the “offer” ( the price at which they sell currency). ). A bank usually sits between people or customers who usually need to convert dollars to rands and vice versa.

For example, mining companies based in South Africa generally have to convert the dollar products they produce into rand during the process of selling those products. Mining companies usually approach banks for this function. A bank currency trader might offer to buy dollars from the mining house at R17,205 to the dollar. But this would usually be done at an inflated price (following currency rigging scenarios) as normal market forces would put the rand at 17,105 rand to the dollar. The difference between the two prices (nearly one cent) could reach thousands or millions of dollars for the mining company. DM/BM