On June 28, 2012, the day after Barclays was fined £290 million by Britain’s market regulator for manipulating the benchmark lending rate, Libor, a Barclays customer raised concerns with the bank about the afternoon gold fix. This was set during one of the twice daily telephone gold auctions held by five London-based investment banks — Barclays included, which also acts as a benchmark for gold prices.
The ‘fix’ was declared at $1,558.50, and under an options contract the bank had entered into with the customer, the bank would not have to pay that customer the $3.9 million it would have owed him had the fix been above $1,588.96, boosting its own trading book by $1.75 million.
Subsequently, it emerged that Daniel Plunkett, a 36-year-old director on Barclays’ Precious Metals Desk, had placed certain orders during the period in which the fix call was taking place “with the intention of increasing the likelihood that the price of gold would fix below a certain level,” Britain’s Financial Conduct Authority (FCA) wrote in a notice published last month as it imposed a £96,000 penalty on Plunkett.
Barclays did not get away completely either: while the FCA noted that Plunkett had provided untruthful accounts to both Barclays and regulatory authorities, Barclays had failed “to identify and manage risks in its business,” wrote the FCA’s director of enforcement and crime, Tracey McDermott, calling on all firms to pay special attention to any operations relating to benchmarks.
The case came just months after it emerged that German regulator BaFin had extended its examination of benchmarks beyond those already under scrutiny such as Libor to precious metals silver and gold. Deutsche Bank, which exited the gold fixing process back in May, is carrying out an internal investigation into trading around the settlement process, Reuters reported earlier this week.
The FCA is also looking into trading around the fix, while some reports from the US suggest that the fix may have come under the eye of the Commodity and Futures Trading Commission too.
There were warningsRegulators are far from the first to raise alarm bells: while concerns about the fix — set up in 1919 — have apparently been circulating for years, a research piece made public this year seems to have made a tangible case. According to a draft paper seen by Bloomberg and several other media outlets, New York University professor Rosa Abrantes-Metz and Albert Metz, a managing director at Moody’s Investor Service, identified a decade long unusual trading pattern around the afternoon fix (there is one at 10.30 am and one at 3 pm) arguing that “cooperation between participants may be occurring.”
While some within the industry have sought to explain the anomalies, including the fact that the 3 pm fix takes place while trading happens in both London and New York, they have failed to dislodge the feel of disquiet.
In the US, a number of lawsuits have begun to spring up against the banks involved in the fixing process, largely based on the argument that they get an unfair advantage when it comes to the trading of derivatives linked to the fix.
Responding to the need to restore trust earlier this month the World Gold Council, the London-based market development organisation for the gold industry, said it would hold a meeting in early July to explore opportunities for reform.
Many across the industry, including miners, the banks involved in the fix, industry bodies and central banks will be invited to the meeting on July 7 observed by the FCA. Modernisation — a more transparent system that abides by the principles of the International Organisation of Security Commissions —would be crucial to “maintain trust”, the Council’s Natalie Dempster said.
The need for changeA sense of what a new system could look like might be gleaned from the options being considered for a revamped silver fix. (The process for setting the silver fix closely resembles that for gold, taking place as a teleconference between the banks where the chair begins with the spot price in the market, as other banks declare themselves buyers or sellers at that price. The price continues to adjust until the gap between buyers and sellers is minimal.)
The London Silver Market Fixing is set to be scrapped in August after Deutsche Bank failed to find a buyer for its seat, leaving just two banks in the process, and discussions are already under way for a replacement.
Seven options — including several that would replace the teleconference system with an online trail of information and accountability — are in the running, says Adrian Ash of BullionVault, a London-based maker. Ash attended the most recent London Bullion Market Association meeting to consider the seven proposals.
The significance of finding a replacement soon is clear. There is already much disquiet within the silver industry in India over the disappearance of the fixing – used in the industry to value inventories, audits and so on.
There are fears that a buoyant industry could be damaged without a clear and internationally recognised marker such as the London fix. A period of uncertainty over the gold fix could also prove harmful to that market. “The 3 pm fix is taken for historical pricing of deals, the pricing of inventories, it is used by central banks, large investment holdings,” says Ash. “They need to be able to take it as a creditable benchmark.”
The overhaul could also provide an opportunity to improve the benchmark in other ways, argues Brian Lucey, Professor of Finance at Trinity College, Dublin.
“Any new benchmark needs to get information out, which gives a better perspective on the temperature of the market — not just the large traders, not just the big buyers and sellers but a spread across the market,” he says.
If it hopes to maintain the place it has in the precious metals market, London would do well to act speedily: impatient with the fix’s problems and the lack of influence over prices, there have been calls from across Asia for a new fix, including some calls for India to establish one in Mumbai.
According to Reuters , China and Singapore have already announced plans for new pricing benchmarks. What happens with the London fix remains to be seen, but its recent problems could well provide a catalyst for major change in the industry.