CFTC looking into London gold, silver price setting


By Katy Burne
The Wall Street Journal
Thursday, March 13, 2013

The U.S. Commodity Futures Trading Commission is scrutinizing whether the daily setting of gold and silver prices in London is open to manipulation, according to people familiar with the situation.

No formal investigation has been opened, the people said. The CFTC is examining various aspects of the price settings, including whether they are sufficiently transparent, they said.

Gold prices are set twice daily by five banks via teleconference, while three banks set silver prices. These so-called fixings are then used to determine spot prices worldwide, affecting everything from jewelry to sales from mining companies to refineries. The prices also help determine the value of derivative securities tied to the metals.

Global interest-rate benchmarks also are determined using a bank price-setting process. An investigation by regulators worldwide into one of those benchmarks, the London interbank offered rate, known as Libor, uncovered alleged manipulation and triggered multibillion-dollar fines against three banks.

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The London gold market pricing process dates from 1919, and now has twice-daily conference calls involving units of five banks: Barclays, Deutsche Bank AG, HSBC Holdings, Bank of Nova Scotia, and Societe Generale.

The silver setting, dating from 1897, involves Bank of Nova Scotia, Deutsche Bank, and HSBC.

Spokespeople for Barclays, HSBC, and Deutsche Bank had no immediate comment. Representatives from the other two banks couldn't immediately be reached.

The fixings are "not arbitrary. It's very much done on a demand-supply basis until a price is arrived at," said a spokesman for the London Bullion Market Association, the trade organization that sets the standards for the quality of gold and silver traded in the London market, but doesn't run the fixings. "It's fully transparent; it's nothing like Libor," he said.

The scandal involving Libor, a rate used to price everything from corporate loans to home mortgages, saw traders allegedly provide manipulated data to the industry organization that publishes the benchmark rate in an effort to create profitable trades.

More than a dozen financial firms are under investigation in the rate probe, and three banks, Barclays, Royal Bank of Scotland Group, and UBS AG, have settled for a combined $2.5 billion. Regulators are pushing for greater transparency in how benchmark interest rates are set.

CFTC Chairman Gary Gensler is co-chairman of a task force on financial-market benchmarks within the International Organization of Securities Commissions along with Martin Wheatley, managing director at the U.K. Financial Services Authority. The group plans to issue a new set of guidelines for benchmarks this spring. In January, it published an initial set of comments on financial benchmarks.

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