UPDATE 2-Deutsche quits gold price-setting as regulators investigate fix

Fri Jan 17, 2014 8:32am EST

* German regulator has been investigating gold-fixing process

* Deutsche move comes after scaling back commodity business

* Others may follow Deutsche's lead - source

* Deutsche, rivals embroiled in probes of FX, interest rates

By Eric Onstad

LONDON, Jan 17 (Reuters) - Deutsche Bank will withdraw from gold and silver benchmark price setting, it said on Friday, as European regulators investigate suspected manipulation of precious metals prices by banks.

Germany's largest bank and some of its rivals are taking a battering over a series of other scandals and inquiries regarding manipulation of interest rates and foreign exchange.

On Wednesday, global investigations into alleged currency market manipulation intensified as U.S. regulators descended on Citigroup's London offices and Deutsche suspended several traders in New York, sources told Reuters.

Deutsche is one of five banks involved in the twice-daily gold fix for global price setting and said it was quitting the process after withdrawing from the bulk of its commodities business.

"Deutsche Bank is withdrawing its participation in the gold and silver benchmark setting process following the significant scaling back of our commodities business. We remain fully committed to our precious metals business," it said in a statement.

In mid-December, German banking regulator Bafin demanded documents from Deutsche Bank under an inquiry into suspected manipulation of benchmark gold and silver prices by banks, the Financial Times reported, citing sources.

At the time, Deutsche declined to comment on the FT report.

Bafin reiterated in December that besides benchmark interest-rate LIBOR and Euribor rigging by banks, it had been looking at other benchmark-setting processes such as gold and silver price fixings at individual banks.

Bafin declined to comment on Friday, but its President Elke Koenig said the previous day that it was understandable that the topic was attracting widespread concern.

"These allegations (about currencies and precious metals) are particularly serious, because such reference values are based - unlike LIBOR and Euribor - typically on real transactions in liquid markets and not on estimates of the banks," she said in a speech

A source close to Britain's Financial Conduct Authority (FCA) said on Friday the regulator was doing a lot of work on all benchmarks, including commodity benchmarks and gold. "So there is a renewed regulatory focus on that," the source said.

Deutsche has also been named in cases related to the sub-prime crisis, credit default swaps, mortgages, tax evasion and a decade-old lawsuit suit brought by the heirs of late media mogul Leo Kirch, who accuse the bank of undermining the business.

The bank set aside 1.2 billion euros for potential legal charges in the third quarter, wiping out profit and raising the total amount of legal reserves to 4.1 billion euros.

GOLD FIXING CRISIS?

A source close to Deutsche said on Friday it was seeking to sell its gold and silver fixing seats to another member of the London Bullion Market Association.

But Deutsche's decision may foreshadow moves by other fixing banks, a source in the London precious metals market said. "It wouldn't surprise me if the other banks were looking at pulling out as well. Why would they want the aggravation?" said the source, who declined to be named.

"The more worrying point is that, if you don't have the fixing, what do you have? There's a lot of contractual business done on the gold fix, and if you've got no basis for where the price is, someone is going to lose out."

Withdrawal from the fixing was not expected to have an impact on Deutsche's precious metals business, the source close to the bank said. "A very small volume of business is executed on the fix. The majority is outside of it."

Gold fixing happens by teleconference with four other banks: Bank of Nova Scotia-ScotiaMocatta, Barclays Bank Plc , HSBC Bank USA, NA and Société Générale, all of which declined immediate comment on the Deutsche move.

Chairmanship of the gold fixing rotates annually among the member banks. The last time a fixing seat changed hands was in 2004, when N.M. Rothschild and Sons sold their seat to Barclays. Two years earlier, Credit Suisse sold its seat to Société Générale.

At the start of each gold price-fixing, the chairman announces an opening price to the other four members who relay that to their customers, and based on orders received from them, instruct their representatives to declare themselves as buyers or sellers at that price.

The gold price is adjusted up and down until demand and supply is matched at which point the price is declared "Fixed".

The fixings are used to determine spot prices for the billions of dollars of the two precious metals traded each day.