The London gold fix is set to become the next benchmark subject to an overhaul, after facing criticisms over a lack of transparency and the potential for manipulation.
The London-based World Gold Council on Wednesday announced it had invited the big players in the industry – including banks, refiners, exchange traded funds, industry bodies, central banks and mining companies – to attend a meeting, observed by the UK’s Financial Conduct Authority – at the start of July to “explore reform” of the fix.
The reforms would be the first major overhaul of the fix, introduced in 1919. It would aim to bring it up to date to meet market expectations of “enhanced regulation, transparency, and technology,” said the WGC in a statement.
“Modernisation is imperative in order to maintain trust across the industry,” said Natalie Dempster, Managing Director for Central Banks and Public Policy at the WGC.
Benchmarks have come under increasing regulatory scrutiny in the wake of the global Libor manipulation scandal, with others areas such as the forex market and oil benchmarks coming under the spotlight. The silver market is already set for reform, with the existing benchmark, the London Silver Market Fixing set to end operations in August. Proposals for an alternative are currently under consideration.
Following the withdrawal of Deutsche Bank earlier this year, the gold fix is set by four investment banks – Barclays, Scotia Bank, Societe Generale and HSBC, twice a day. During telephone conferences at 10.30 am and 3 pm the fix is set, starting with the chair’s determination of the US dollar spot price with negotiations taking place till a price based on supply and demand is reached and agreed on by all members.
However, the market has come under increased scrutiny. Just last month Barclays was fined £26 million by the UK’s FCA for failings in its systems relating to the gold fix which enabled a trader to influence – and profit from – the 3pm fixing on a day in 2012. At the time the FCA said it was engaging with the administrators of the benchmark over possible reforms.
The WGS has identified five principles which any reform to the process would have to meet, including basing the fix on actual executed trades (rather than submitted quotes), ensuring the price was a tradable one and not one used simply for reference, ensuring the input data was highly transparent, published and subject to audit, physically deliverable, and calculated from a deep liquid market.