Banks routinely rigged gold fix to defend their positions, Financial Times reports
Trading to Influence Gold Price Fix Was 'Routine'
By Xan Rice
Financial Times, London
Tuesday, June 3, 2014
When the UK's financial regulator slapped a L26 million fine on Barclays for lax controls related to the gold fix, it offered more ammunition to critics of the near-century-old benchmark. But it also gave precious metal traders in the City of London plenty to think about.
While the Financial Conduct Authority says the case appears to be a one-off -- the work of a single trader -- some market professionals have a different view. They claim that the practice of nudging a tradeable benchmark to protect a "digital" derivatives contract -- as a Barclays employee did -- was routine in the industry.
... Dispatch continues below ...
Buy precious metals free of value-added tax throughout Europe
Europe Silver Bullion is a fast-growing dealer sourcing its products from renowned mints, refiners, and distributors. Because of a legal loophole that will close soon, you can acquire the world's most popular bullion coins free of value-added tax throughout the European Union. You can collect your order in person at our headquarters in Tallinn, Estonia, or have it delivered in any of the 28 EU countries.
Europe Silver Bullion is owned and operated by North American and European experts in selling, storing, and transporting precious metals. We have an extensive product inventory of silver, gold, platinum, and palladium, and our network spans the world.
Visit us at www.europesilverbullion.com.
As a result, customers of Barclays and other market-making banks may be looking to see if they too have cause for complaint, according to one hedge fund manager active in the gold market.
"If I was at the Financial Conduct Authority I would be looking at all banks trading digitals. This could be the tip of the iceberg -- there's a massive issue with exotic derivatives and barriers."
In the City, digital options are common in the precious metals sector and, especially, in forex trading. A payout is triggered if a predetermined price -- or "barrier" -- is breached at expiry date. If it is not, the option holder gets nothing.
One former precious metals manager at a big investment bank says there has long been an understanding among market participants that sellers and buyers of digitals would try to protect their positions if the benchmark price and barrier were close together near expiry.
"These are not Ma-and-Pa products. They are for super-professionals," says the former manager. "There's a fundamental belief that both parties can aggress or defend their book, and I would have expected my traders to do so."
In the case of gold, this means trying to move the benchmark price, which is set during the twice daily auction "fixing" process run by four banks, including Barclays.
That is what the Barclays trader, Daniel Plunkett, did on June 28, 2012. Exactly a year earlier, the bank had sold an options contract to an unnamed customer stating that if after 12 months the gold price was above $1,558.96 a troy ounce, the client would receive $3.9 million.
By placing a large sell order on the fix Mr Plunkett pushed the gold price beneath the barrier, thus avoiding the payout. After the counterparty complained, the FCA became involved. Barclays paid the client the $3.9 million and was fined. Mr Plunkett was also fined -- L95,600 -- and banned from working in the City.
In its ruling, the FCA criticised Barclays for its poor controls related to the gold fix and said the bank had failed to "manage conflicts of interests between itself and its customers."
"We expect all firms to look hard at their reference rate and benchmark operations to ensure this type of behaviour isn't being replicated," said Tracey McDermott, the FCA's director of enforcement and financial crime.
The identity of the Barclays client has not been revealed. But a senior gold trader with knowledge of the transaction says it was not another investment bank or hedge fund.
"This was not professionals going head to head," he says.
Philip Klapwijk, managing director of Precious Metals Insights, a consultancy, says digital options were also sold to funds, as well as to private banks, and then repackaged for sale to wealthy individuals, typically as interest rate products. In these cases, the option seller pushing around a benchmark is "not quite cricket," Mr Klapwijk said.
The hedge fund manager who believes that the problem is more widespread agrees, and says his firm would have also complained to the FCA had it been in the same position as the Barclays customer.
"If you have Goldman Sachs on one side and JPMorgan on the other, the gloves are off. But not everybody in the market has the same level of sophistication and vindictiveness."
He adds that tighter regulation has made banks selling derivatives think more about their business models and what is fair.
The gold trader familiar with the Barclays case expresses some sympathy for Mr Plunkett, saying in the pre-financial crisis days the trader may have been censured by his bosses if he had not defended the digital option sold by the bank.
"What's changed now is the market morality," he says. "We can't simply say: It's always been done this way."
* * *
Join GATA here:
New Orleans Investment Conference
Hilton New Orleans Riverside Hotel
New Orleans, Louisiana
Wednesday-Saturday, October 22-25, 2014
* * *
Support GATA by purchasing DVDs of our London conference in August 2011 or our Dawson City conference in August 2006:
Or by purchasing a colorful GATA T-shirt:
Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009:
Help keep GATA going
GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:
To contribute to GATA, please visit:
Safe and Private Allocated Bullion Storage In Singapore
Given the increasing risks in financial markets, it is more important than ever to own physical bullion coins and bars and to store them in the safest vaults in the world in the safest jurisdictions in the world. Gold advocates Jim Sinclair and Marc Faber have recommended Singapore.
Now, with GoldCore, you can own coins and bars in fully insured, segregated, and allocated accounts in Singapore with the ability to take delivery. Learn more by downloading GoldCore's Essential Guide To Storing Gold In Singapore:
And for more information call Daniel or Sharon at +44 203 0869200 in the United Kingdom or at +1-302-635-1160 in the United States. Or email them at firstname.lastname@example.org.