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Banks To Overhaul Gold-Fix Amid Rigging Fears

The banks which set the global price of gold are to open the process to independent scrutiny amid evidence that it has been subject to the same manipulation as other crucial financial benchmarks.

Sky News can exclusively reveal that the 95 year-old gold fixing mechanism is poised to seek an independent chairman and third-party administrator for the first time under plans to be unveiled by its current operators.

A new code of conduct for participants in the fixing process is also being finalised and is expected to be published shortly.

An announcement about the changes is likely to be made as soon as Wednesday, according to people close to the discussions.

The reforms will represent a crucial step towards protecting a globally-recognised mechanism set in London and used across the world’s gold industry to set a reference price for bullion.

They will come during a period of intense scrutiny of financial benchmarks such as Libor amid a string of scandals which have triggered billions of pounds in fines.

A quartet of banks – Barclays, HSBC, Canada’s Scotiabank and Societe Generale of France – set, or ‘fix’, the gold price in twice-daily auctions which establish a level at which the participants will buy and sell the precious metal.

The process is managed by London Gold Market Fixing Ltd, which has been taking advice about the future structure of the gold-fix from Slaughter & May, the law firm, insiders said.

Concerns about manipulation in financial markets led the International Organisation of Securities Commissions (IOSCO), a regulatory body, to set out a series of principles for reform, including a greater emphasis on transaction-based pricing, last July.

Benchmark-setters were given 12 months to demonstrate their compliance with these principles, raising the prospect of announcements from supervisors of other financial indices in the coming days.

LGMFL is expected to say that its proposed reforms will make it broadly aligned to the IOSCO principles.

Approximately $220bn of gold changes hands each day through over-the-counter trades, according to a one-off survey conducted by the LBMA in 2011, with several different gold price benchmarks set in London.

However, the integrity of the gold-fix has, like the Libor interbank borrowing rate and foreign exchange markets, been called into question following allegations that it is susceptible to being rigged.

Critics argue that commodities markets are opaque, do not retain sufficiently detailed historical trading records and are not properly audited, prompting an overhaul of the silver-fix process last week.

The change to the silver-fix will involve CME Group and Thomson Reuters replacing the historical method later this year with an electronic benchmark.

In April, Barclays was fined £26m by the City regulator after one of its traders was found to have sought to manipulate the gold price at the expense of a client, who was reimbursed by the bank.

The sense of outrage over the trader’s behaviour was heightened by the disclosure that his misconduct had taken place the day after Barclays was fined £290m for rigging Libor.

Earlier this month, members of the Treasury Select Committee urged the Financial Conduct Authority (FCA) to conduct a formal probe of gold price-rigging claims after one of the regulator’s executives told MPs that such misbehaviour was “possible”.

Deutsche Bank, which was previously a member of the gold and silver-fixing panels, withdrew earlier this year amid concerns about its potential openness to abuse.

The LBMA, which represents the wholesale over-the-counter market for gold and silver bullion, has been involved in discussions about the overhaul that could be announced this week.

Regulators including the FCA and the Bank of England have also been briefed on the proposals, they added.

Under the existing regime, the chairmanship of The London Gold Market Fixing panel rotates annually, with Simon Weeks, an executive at Scotiabank, the incumbent.

The process of recruiting an independent chairman is expected to get underway shortly alongside moves to appoint a third party administrator, insiders said.

The first gold-fixing took place in September 1919, making it one of the world’s oldest financial benchmarks.

The process was chaired by Rothschild, a former panel member, for the first 85 years of its operation, involving face-to-face meetings of fixing members.

Martin Wheatley, the FCA chief executive, said last summer that the new guidelines offered “clear and robust standards that will improve [benchmarks'] construction and oversight, and form an important step in restoring their credibility”.

In a speech last month, George Osborne, the Chancellor, announced plans to make manipulation of financial benchmarks a criminal offence in a bid to restore the City’s international reputation.

The banks and FCA declined to comment, while the LBMA could not be reached.

Source – Skynews