London Gold Fix to Be Overhauled
Time is about to be called on the near-century-old tradition of setting gold prices.
The quartet of banks that set the daily London gold fix have begun a search for someone to take over the 95-year-old benchmark, the body that represents the gold-fixing banks said Wednesday.
The move comes amid heightened regulatory scrutiny of financial benchmarks, and follows a recent shake up to the silver fix.
The London gold fix is currently determined twice daily via a conference call between Barclays, HSBC, Bank of Nova Scotia and Société Générale. Improved technology aside, this process hasn't changed since its inception in 1919. The silver fix, which used a similar methodology involving just three banks, will change forever on Aug. 15 with the start of a new, electronic system provided jointly by CME Group Inc. and Thomson Reuters Corp.
The fixes are important because they provide a benchmark for mining companies to settle sales contracts and, more recently, to price such derivatives as exchange-traded funds.
It would make sense for the gold fix to evolve in a similar way to the silver fix, said Rob Doyle, chief financial officer of Vancouver-based Pan American Silver Corp., which produces both metals. "To me, that would be a logical progression."
The London Bullion Market Association--the industry body that led the search for a new silver benchmark--will help coordinate the overhaul to the gold fix, said The London Gold Market Fixing Ltd., an umbrella entity that represents the four fixing banks, in a statement Wednesday. The two bodies have launched a request for proposals for the revamped process, The London Gold Market Fixing Ltd. said.
The prospect of an overhaul was well-received by some market participants.
"The proposed silver fix is certainly a huge improvement in terms of transparency and breadth of market participants that can come on board and if we can get the same thing for gold it can only enhance the market, " said Brian Lucey, finance professor at Trinity College Dublin who has studied the gold market and has written academic papers on the subject.
The planned overhaul comes amid heightened regulatory scrutiny of financial benchmarks globally. In 2008, authorities launched an investigation into rigging of a key interest rate benchmark, the London Interbank Offered Rate, or Libor. So far, seven financial institutions have settled with authorities in the U.S. and U.K. in connection with the Libor investigation.
Regulators are also probing possible manipulation of currencies benchmarks. To date, around 30 traders and bank staff have been fired or suspended in connection with these investigations. On Tuesday, the Basel-based Financial Stability Board published a consultation paper aimed at addressing concerns about benchmark currency rates.
In recent months, authorities in the U.K. and elsewhere have been reviewing the gold and silver fixes. Separately, in May, Barclays was fined GBP26 million ($44.5 million) by the U.K.'sFinancial Conduct Authority after one of its traders manipulated the gold benchmark at the expense of a client.
Prof. Lucey said he was surprised that the new silver fix system wasn't being given time to bed in before changes are made to the gold fix.
"If they're happy with the silver fix then they'll probably be happy with the gold fix, but it's perhaps better to wait than not," he said.
Others were similarly cautious.
"Any alternative will need to pass the test of time. It is easy to say, "This new thing is great," but let's see that great thing in action" first, said Mehdi Barkhordar, a managing director at precious-metals processing and trading company MKS SA.
A spokesman for the LBMA declined to comment on the overhaul. Representatives for Barclays and HSBC also declined to comment. Société Générale and Bank of Nova Scotia didn't respond to requests for comment.
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