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LONDON (Reuters) - Switzerland's financial watchdog said on Wednesday it had found a "clear attempt" to manipulate precious metals price benchmarks during a cross-market investigation into trading at UBS bank.
The FINMA regulator revealed its findings just days after the precious metals industry decided to automate the setting of reference prices for gold, ending the twice-daily "fix" by a panel of banks which has been used for almost a century.
Along with other precious metal benchmarks, the gold fix has come under increased regulatory scrutiny since a scandal broke in 2012 over manipulation of the Libor interest rate, followed by revelations of similar behavior on the global currency market.
Regulators fined six major banks on Wednesday a total of $4.3 billion over the foreign exchange manipulation, including a 134 million Swiss franc ($139 million) penalty that FINMA slapped on UBS, Switzerland's biggest bank.
FINMA's director Mark Branson said investigations had shown the problems at UBS went beyond currency trading. "The behavior patterns in precious metals were somewhat similar to the behavior patterns in foreign exchange," he said in a conference call with journalists.
As UBS has precious metals and foreign exchange desks under combined leadership, it was not surprising to find similar behavior, he said. "But we have also seen a clear attempt to manipulate fixes in the precious metal market," added Branson, himself a former UBS banker.
FINMA said in its report that it had seen repeated "front running" - trading on advance information not available to clients - on the now defunct once-daily silver fix.
CME Group and Thomson Reuters were named in July as the operators of a new electronic silver benchmark which replaced the fix.
Regulators have also imposed penalties over gold trading practices this year. Barclays Plc was fined 26 million pounds ($43.8 million) in May for failures in internal controls that allowed a trader to manipulate the setting of gold prices.
Until this year, the gold fix was set by five banks via a twice-daily conference call but UBS was not one of them.
Despite the UBS charges, participants in the gold market said they were confident of its integrity. "It is hard to make out quite what impact on the fix price itself would have been," one said. "(This was) not a problem with the fixing, but with culture/oversight of traders placing orders."
Deutsche Bank said in January it was putting its seat at the fix up for sale, but failed to find a buyer, leaving the process with only four members.
Sources close to the matter later said in June that Deutsche was conducting its own investigation into trading around the setting of London's daily gold price benchmark, in addition to one being carried out by Germany's financial watchdog Bafin.
Both Bafin and Deutsche Bank declined comment on Wednesday.
The gold fix panel members have announced they will disband the process, which will be replaced by an electronic platform operated by U.S. bourse Intercontinental Exchange (ICE).
The abandonment of the gold fix could mark the beginning of an even wider industry overhaul that may ultimately dilute the dominance of highly profitable bilateral over-the-counter trading. More than $5 trillion in gold transactions are made over the counter in London every year.
Banks are becoming increasingly risk-averse in their precious metals operations. The London Bullion Market Association (LBMA) will stop producing its gold lending rates data, GOFO, from Jan. 30 as banks shy away from the risks of providing financial benchmarks, a source said this week.
"The changes that we see at the moment, whether it's GOFO no longer being published, or the move towards exchanges running the precious metals benchmarks, are indicative of the market preparing for greater regulation, particularly on gold and silver," Jonathan Butler, an analyst at Mitsubishi, said.
Reporting by Jan Harvey; Additional reporting by Thomas Atkins in Frankfurt; Editing by Veronica Brown, Dale Hudson and David Stamp