* LME CEO expects more reference prices will be set by
* LME's open-outcry trading good example of transparent
* CEO believes LME can improve on current silver fix system
By Eric Onstad
LONDON, June 10 The global gold price setting
benchmark or "fix" is open to manipulation, said the head of
the London Metal Exchange (LME), which is competing to offer an
alternative to the silver fix when the system is disbanded in
The gold and silver fixes, along with other commodity
benchmarks, have come under increasing scrutiny by regulators in
Europe and the United States since a London Interbank Offered
Rate (Libor) manipulation case last year.
"When people sit around a table and lift a flag in the gold
market and say this is where the price is, obviously it is open
to manipulation if it's done in this opaque way," LME Chief
Executive Garry Jones told a conference in London on Tuesday,
giving no further details.
The gold fix - a benchmark widely used across the industry -
is set twice a day by banks that get together over the telephone
to work out a standard price for the metal based on transactions
between their clients.
Flags were used when fixing members met in a room in London
- unlike now when the fix is conducted via a conference call. If
a member needed a pause in the fixing process in order to
recalculate their overall selling or buying interest they would
raise a small flag on the desk in front of them and then lower
it when they were ready to continue with the process.
Flags are no longer used, but a fixing member may still call
"flag" if they need a short pause to recalculate their overall
interest which brings the fixing to a temporary halt. During
that time the chairman cannot fix the price.
LME RING TRANSPARENT
Jones said the LME system of open-outcry ring trading was a
good example of transparent price setting.
"I think more of the reference prices will be set by
exchanges... a neutral independent place where transactions
happen," he said.
Deutsche Bank said in January it was pulling out
of the group of banks that set the benchmarks for gold and
silver prices, reducing their number from five to four.
The move to disband the silver fix came after Deutsche Bank
failed to attract a replacement after putting its fixing seats
up for sale.
Barclays Plc, one of the four remaining fixing
member banks, was fined 26 million pounds last month for
failures in internal controls that allowed a trader to
manipulate the setting of gold prices, just a day after the bank
was fined for rigging Libor interest rates in 2012.
Last month, London Silver Market Fixing Limited said it
would stop administering the benchmark on Aug. 14.
The LME and the Chicago Mercantile Exchange (CME) both said
last month they were working with the London Bullion Market
Association (LBMA) and the precious metals industry to find an
electronic-based solution to the silver fix when the century-old
system is disbanded in August.
Jones did not give details of the solution for the silver
fix to be offered by the LME, owned by Hong Kong Exchanges and
Clearing Ltd, but sources have said it is
"We think that going forward can improve the situation there
is at the moment. We have all the resources, the regulatory
overview and obviously we have 137 years of metals experience,"
he told reporters following a panel discussion at the
International Derivatives Expo in London.
(Reporting by Eric Onstad; editing by Susan Thomas)