Bullion market eyes e-platform to revamp London gold benchmark

Mon Mar 31, 2014 11:40am EDT

Related Topics

* Regulatory requirements may lead to electronic solution

* Tech providers work on price discovery transparency

* Miners, refiners fear higher costs if gold fix disappears

By Clara Denina and Jan Harvey

LONDON, March 31 (Reuters) - As regulators investigate the transparency of global financial benchmarks, bullion banks are contemplating a move to electronic platforms that would shed more light on the London gold fix, a widely used reference price, sources said.

A growing number of technology providers are competing to offer a more transparent way of disseminating information that shows how the price of the $20 billion a day trade is settled.

The move was prompted by growing regulatory scrutiny after the Libor (London Interbank Offered Rate) rigging scandal exposed widespread interest-rate manipulation in 2013.

"Could the regulators say 'we'll let this (the daily gold settlement) carry on but only with massive transparency brought to it?' The answer is yes, because we know the technology is being developed to do that," a senior banking source said.

The source added that the technology would be similar to processes being developed in foreign exchange markets.

Regulators including Germany's Bafin, Britain's Financial Conduct Authority and the U.S. Commodity Futures Trading Commission have stepped up scrutiny of commodity indices.

The volume-matched gold benchmark is set twice a day by five banks via a teleconference, and is used widely by miners, refiners and jewellers to set their contracts.

Most gold-backed U.S. exchange-traded funds use the London afternoon gold fix to calculate their net asset value, which in turn is used by ETF custodians to calculate their fees. The U.S. Mint and Royal Canadian Mint also price their products based on daily London p.m. gold fixes, or average weekly fixes.

"Even though the gold market has undergone significant shifts in its trading mechanisms and demand behavior in the last 10 years alone, the fix is still accepted as a reference point for traders globally," David Mazza, head of research of SPDR ETFs at State Street Global Advisors, said.

As new requirements for transparency on pre- and post-trade price discovery and trading emerge, providers say an electronic solution could improve the visibility of, for example, trading volumes during the process.

"The process itself doesn't need changing, but a platform that broadcasts it to a wider audience could be developed," one technology provider said.

"There is also a matter of speed on how much information can flow on stream before the price changes again or it fixes and that could also be addressed."

Fixing members Barclays Bank, HSBC Bank USA, Societe Generale and Bank of Nova Scotia declined to comment on the matter. Deutsche Bank announced in January it was putting its seat at the fix, which it had held for 20 years, up for sale.

The Gold Fixing Company, which represents banks involved in the price settlement, is undertaking a review to ensure the gold fix is compliant with benchmark principles set by the International Organisation of Securities Commissions - a global umbrella group for markets regulators - by the July deadline, the London Bullion Market Association said in its latest Alchemist magazine issue.

Impending European EMIR (European Markets Infrastructure Regulation) and MiFID (Markets in Financial Instruments Directive) regulations will increasingly require electronically traded, centrally cleared and daily monitored transactions.

COST CONCERN

Gold miners and manufacturers are concerned they could face higher costs, should the London gold fix be abandoned under the weight of regulatory requirements and replaced with a different price mechanism, sources said.

"The fear that regulators will come out with completely exaggerated requests is so big, that people from the gold trade are afraid the other banks may even step out, like Deutsche Bank did," a European manufacturer said.

"Then we would end up with something that is an artificial contract, very expensive."

Many miners are active listeners to the fixing process as sellers, but they do not have to pay a commission. If they have to sell metal outside the fix, their costs may rise, they said.

"We use the fix as a benchmark when we set our contracts," Peter Hambro, founder of Russian gold miner Petropavlovsk, said.

"(If banks withdraw from the fix) you would have to go to some sort of volume-weighted average price which is less satisfactory," he added.

While those who use the fix say they are confident that it cannot be manipulated, the five banks involved in setting the London benchmark gold price have been accused in two recent lawsuits filed with a U.S. federal court in New York of price rigging.

"These banks work on very thin commissions and they are stuck between a rock and a hard place," said Tony Dobra, director of trading at bullion merchant Baird & Co. (Additional reporting by Frank Tang in New York; Editing by Veronica Brown and Dale Hudson)

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