LONDON--The gold market marched into the 21st century Friday
with the launch of a new electronic platform designed to make the
daily market price benchmark less vulnerable to manipulation.
But efforts to fix the fix have been partly hobbled by the
complex rules that made it difficult for some banks to join up in
time for the launch, according to a senior executive at the firm
that will run the gold pricing process, which is called the LBMA
Gold Price.
Nervousness about the new rules, as well as a law in the U.K.
that makes manipulating benchmarks a criminal offense, has made
some banks reluctant to participate right away, said Finbarr
Hutcheson, president of ICE Benchmark Administration Limited, the
unit of Intercontinental Exchange Inc., which will manage the new
pricing mechanism.
At some banks, "it's very hard to satisfy senior management that
the rules are very well understood," he said.
Still, the four banks that previously participated in the
gold-price setting process-- Bank of Nova Scotia, Barclays Bank
PLC, HSBC Holdings PLC and Société Générale SA--have all agreed to
stay in the new gold fix, which is based on an electronic auction.
UBS AG and Goldman Sachs Group Inc. joined on Friday.
"That shows a real commitment on their part to making this
market," said Adrian Ash, head of research at BullionVault, a
U.K.-based online marketplace for gold and silver investors. "Six
is great, more would be better."
Mr. Hutcheson, of ICE, said he wants more firms to join and he
is confident more will sign up in coming weeks once people have had
a chance to see how the new system works.
More participants means a larger number of trades, making the
benchmark more accurate and reliable. But the electronic silver
fix, which was launched in August last year, has so far struggled
to sign up many more banks and currently has six. CME Group Inc.,
which runs the silver price together with Thomson Reuters Corp.,
didn't respond to a request for comment.
Gold is a far larger market, with daily turnover of around $150
billion, which should make it easier to bring in fresh
participants, according to Robin Bhar, head of metals research at
Société Générale.
"I think it has to [work] because the old methodology was open
to allegations that it was rigged, or manipulated, or gave the
opportunity to fleece customers--it was so riddled with problems
that it just wasn't able to survive," said Mr. Bhar.
The daily gold fixes are used by mining companies, investors and
jewelry makers, among others, to price billions of dollars in gold
assets every day. The U.S. Mint has said it would use the LBMA Gold
Price for its gold bullion orders.
The previous process, more or less unchanged for a century,
involved four banks that would meet twice daily over a conference
call to determine the price based on their customers' orders. It
came under scrutiny after investigations discovered that a number
of global benchmarks were being manipulated, most notably the
London interbank offered rate, or Libor.
Benchmarks are now becoming much more closely controlled. From
April 1, the U.K.'s Financial Conduct Authority will take over
direct oversight of a number of benchmarks including gold and
silver. To make sure the price meets the regulatory requirements,
IBA has drawn up a complex list of rules that participants must
meet. At the same time, there is new legislation in the U.K. that
makes manipulation of a benchmark a criminal offense, meaning
prison sentences for anyone found guilty.
Mr. Hutcheson said the new system is more transparent. For the
first time, market players will be able to see the amount of gold
that is traded during each auction, and there will be historical
records of all trading that can be scrutinized by market
participants and regulators. Additionally, he said, the IBA, as the
manager of the benchmark has no vested interest in gold prices. At
some point, IBA will start to charge firms for access to the
auction data, he said.
On Friday morning, after five 45-second rounds were held in just
under five minutes, the settlement was price was $1,171.75. At that
level, a total of 29,239 ounces of gold were bought and 43,934
ounces were sold. Under IBA rules, the six banks would buy the
difference of 14,695 ounces in equal shares.
"I think the questions that have been raised about the fix were
inevitable in the context of other benchmarks coming under
scrutiny. Anything that improves the process...can only give a
greater sense of trustworthiness to market participants," said
Brian Lucey, finance professor at Trinity College Dublin. "I've
never bought into the idea that the fix was fixed."
Ese Erheriene contributed to this article
Write to Matthew Cowley at matthew.cowley@wsj.com
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