Regulators are stepping up their scrutiny of how gold prices are set, with officials from Britain’s Financial Conduct Authority visiting all five member banks including the Bank of Nova Scotia to observe the so-called London fixing process, two people with knowledge of the matter said.
Investigators visited the Societe Generale SA’s U.K. offices in recent weeks for the morning and afternoon conference calls, during which the reference price used by miners, jewellers and central banks is set, the people said. The watchdog is visiting all five member banks involved in the London fixing as part of its review of gold benchmarks, according to one of the people, who asked not to be identified because the matter is private.
The century-old London fixing is led by representatives of Barclays Plc, Deutsche Bank AG, Bank of Nova Scotia, HSBC Holdings Plc and current chairman Societe Generale. They hold conference calls at 10:30 a.m. and 3 p.m. where they discuss buying and selling the metal, starting from the dollar spot price, until a rate is agreed upon.
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The FCA’s visits are the first indication the regulator is looking at the London gold fixing in particular. In November, a person with knowledge of the matter said the agency was reviewing gold benchmarks as part of a wider look at how financial rates are set in the wake of the London interbank offered rate-manipulation scandal. The watchdog hasn’t levelled any accusations that the process is being manipulated.
Educating Itself
“The FCA is clearly trying to educate itself on the mechanics of benchmark-setting in the gold market,” said Simon Hart, a London-based lawyer at RPC LLP. “It demonstrates that the FCA is looking into the suggestion that there has been benchmark rate manipulation, although that is very different from a formal investigation.”
While the FCA doesn’t regulate the physical gold market, it is responsible for derivatives based on the spot price such as exchange-traded products. Other benchmarks include the Gold Forward Offered Rates, or GOFO, overseen and published every morning by the London Bullion Market Association.
Chris Hamilton, an FCA spokesman, Ila Kotecha, a spokeswoman for Societe Generale, Nick Bone at Deutsche Bank, Aurelie Leonard of Barclays, and Shani Halstead at London-based HSBC declined to comment. A representative of Nova Scotia didn’t respond to questions about the FCA’s visit.
On the twice-daily calls the banks declare how much gold they want to buy or sell for clients as well as their own accounts. The price is increased or reduced until the buy and sell amounts are within 50 bars, or about 620 kilograms, of each other, at which point the fixing is agreed on. Traders relay shifts in supply and demand to clients and take fresh orders as the price changes, according to the website of London Gold Market Fixing Ltd., where the results are published. It was $1,294.25 after this morning’s call.
Douglas Beadle, a consultant to the company, referred questions about the fixing to Societe Generale.
‘Little Understood’
Economists and academics have said the process is outdated, susceptible to manipulation and lacking in direct regulatory oversight.
“Historically these sorts of esoteric markets like gold have been little understood by the public and regulators,” said Ben Knowles, a London lawyer who advises commodities traders. “It seems the FCA is now taking steps to better understand these markets in an effort to ensure pricing in commodities is scrutinized in the same way as other benchmarks.”
Unusual trading patterns around the afternoon fixing in London are a sign of collusive behavior and should be investigated, Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business, wrote in a draft research paper, which was reported by Bloomberg News in February.
Steering Committee
The price fluctuations are a consequence of supply and demand — not manipulation, Ross Norman, the chief executive officer of London physical gold broker Sharps Pixley Ltd., said in March. The volatility also reflects differing views on the value of metal rather than attempts to rig the price, said Norman, who has traded gold for 30 years and worked at Johnson Matthey Plc, N.M. Rothschild & Sons Ltd. and Credit Suisse Group AG.
The five member banks formed a steering committee last year to review the fixing. In Germany, financial markets regulator Bafin interviewed Deutsche Bank employees as part of a probe into potential manipulation of gold and silver prices, a person with knowledge of the matter said in December.
Deutsche Bank plans to withdraw from the panels for setting gold and silver fixings as it scales back its commodities business, the Frankfurt-based lender said in January. The silver fixing is conducted daily at noon in London by Deutsche Bank, Bank of Nova Scotia and HSBC. Similar fixings also take place twice a day for platinum and palladium.
Bafin is “looking at other bench-marking processes such as gold and silver price fixing at individual banks,” Ben Fischer, a spokesman for the Bonn-based regulator, said on April 22. “These examinations were launched in the middle of the last year and are still ongoing.”
Fading Relevance?
The Commodity Futures Trading Commission, which regulates derivatives in the U.S., also discussed reviewing how gold prices are set in private meetings in 2013, a person with knowledge of the matter said in November. Steve Adamske, a spokesman for the agency, declined to comment on the status of the matter.
Regardless of what regulators find, the London fixing’s relevance is already fading, according to Brian Lucey, a finance professor at Trinity College Dublin who has studied the gold market.
“If it wasn’t there, you wouldn’t necessarily miss it,” Lucey said. “Its importance is really only in so far as it provides a snapshot of what large institutions are seeing from their customers so that there is a publishable number for the market every day.”
Bloomberg.com