Gold Fix Manipulation Crackdown: Deutsche Officially Resigns London Fix Seat
Gold Price Manipulation Was "Routine", FT Reports
Two weeks ago when news broke about the first confirmed instance of gold price manipulation (because despite all the "skeptics" claims to the contrary, namely that every other asset class may be routinely manipulated but not gold, never gold, it turned out that - yes - gold too was rigged) we said that this is merely the first of many comparable (as well as vastly different) instances of gold manipulation presented to the public. Today, via the FT, we get just a hint of what is coming down the pipeline with "Trading to influence gold price fix was ‘routine’." We approve of the editorial oversight to pick the word "influence" over "manipulate" - it sound so much more... clinical.
What the FT found:When the UK’s financial regulator slapped a £26m fine on Barclays for lax controls related to the gold fix, the UK financial regulator 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 the practice of nudging a tradeable benchmark in order to protect a “digital” derivatives contract – as a Barclays employee did – was routine in the industry.
Well, then, if gold price manipulation, pardon, "influence" was routine, be it to avoid digital option trips or any other reasons, then it's all good, right?
Apparently not, especially if a "customer" of a bank that was running a prop trade against the customer ended up costing said customer millions in lost profits.The only piece of actionable information from the above sentence is that Barclays actually has customers: we expect that to change. After all, with the exception of Goldman's muppets, there hasn't been a more clear abuse of client privileges than what relatively junior trader Daniel Plunkett did while at Barclays. However, Plunkett is just the first of many. Many, many.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 FCA 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.”
That, naturally, assumes that the FCA wasnt to catch more manipulators, pardon, "influencers" of gold and other OTC derivative prices. Which is hardly the case: after all one never knows which weakest link rats out the people at the very top: the Bank of England itself, and perhaps even higher: going all the way to the BIS and those who equity interests the BIS protects.
So just what is the most manipulated product with either gold or FX as underlying?Ideally, the underlying will be relatively illiquid, with a price fixing set by a small number of individuals, individuals who can be corrupted or simply onboarded to your strategy, thus incetivizing them to keep their mouth shut and assist you in ongoing rigging attempts.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.
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 $3.9m.
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 $3.9m, and was fined. Mr Plunkett was also fined – £95,600 – 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.
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Three months ago, we discussed the increasingly close eye that regulators were keeping on Deutsche Bank (and in fact many other precious metal fix providers) as manipulation concerns shifted from conspiracy theory to conspiracy fact. At the time, Deutsche - among other banks - had suggested it would relinquish its role on the London Fixing committee and was actively marketing its seat to other LBMA members; the WSJ now confirms...
This is hardly surprising given previous comments that possible manipulation of precious metals "is worse than the Libor-rigging scandal." but it does leave us wondering who is left to do the manipulating? It seems no one wants to be part of the fixing process (critical for so many derivatives contracts) unless they are allowed to manipulate it to their own needs.
As a reminder, Deutsche is one of five banks involved in the twice-daily gold fix for global price setting.
As Bloomberg reports, So if everyone exits the London fixing market, what happens then?Well considering that the fixing process over the years was manipulation pure and simple, those who will lose out are the... manipulators? it would seem rather logical. And speaking of manipulation, if indeed Germany is so keen on breaking the manipulators' back, perhaps it can demand that the pace of its gold returns from the NY Fed and Paris accelerates. It may be surprised at what it finds.
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