Gold traders plan benchmark code of conduct
Like, maybe, don't get caught?
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By Jack Farchy
Financial Times, London
Friday, November 22, 2013
The group of banks and traders that runs the London gold market is planning to tighten procedures to protect against manipulation in the wake of the Libor scandal.
The London Bullion Market Association, whose members include Barclays, Goldman Sachs, and JPMorgan Chase, has hired lawyers to review whether the benchmarks it publishes conform to principles set out by the International Organisation of Securities Commissions (IOSCO).
The banks and traders discussed the results of the review at a meeting this week and are working on a code of conduct for banks contributing to the benchmarks, according to three people familiar with the discussions. They are also working on plans to keep more detailed historical records of trading in the market.
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London is the centre of the gold market, with some 175 million ounces, worth $220 billion at today's prices, changing hands daily on the over-the-counter trade, according to a 2011 survey by the LBMA. Benchmarks set in London are used across the gold industry.
A large range of benchmarks has come under regulatory scrutiny after the discovery of widespread manipulation of Libor, the benchmark for borrowing in interbank lending. Iosco in July published a set of principles on methodology and governance of benchmarks.
The Libor scandal has cost banks and brokers $3.5 billion in regulatory fines, and some experts believe the brewing controversy around alleged foreign exchange manipulation could be even costlier, with regulators on three continents now investigating.
"After what's been happening with foreign exchange and Libor, it's only prudent to review your processes and governance around those benchmarks," said one person with knowledge of the gold industry's discussions.
The UK's Financial Conduct Authority is looking at gold fixings as part of a wider review of how well benchmark rates work in conjunction with securities regulators around the world, according to people familiar with the matter. But executives at major gold traders said that they had so far had minimal contact on the subject with the regulator.
"At some point the authorities are going to be turning their attention to some of our benchmarks under the umbrella of looking at all benchmarks," said one person close to the LBMA. "We want to make sure we’re prepared when they do that."
There are several gold price benchmarks set in London. The main benchmark is set twice a day by a small group of banks, in a process known as the "London gold fixing." Unlike Libor, however, the fixing is based on trading activity, rather than theoretical quotes.
A second set of benchmarks is produced by the LBMA for gold forward rates, known as "GOFO." Like Libor, GOFO is based on the average of a set of price quotes by members; however, unlike Libor, banks can be obliged to trade at the prices they quote.
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