For gold bugs, a less pithy corollary of Joseph Heller’s dictum "just because you’re paranoid doesn’t mean they aren’t after you," could be: Just because you imagine gold-price suppression in every corner of the gold market, doesn’t mean there isn’t serious manipulation going on at the highest levels.
In the gold market, mid-May was punctuated by megabank Barclays being fined £26 million (US$44 million) by U.K. regulator Financial Conduct Authority (FCA) for failing to implement internal controls from 2004 to 2013 that would have prevented a Barclays gold trader from manipulating the global benchmark of spot gold prices: the daily London Gold Fix.
To make it more outrageous, the Barclays trader rigged the London gold fix in 2012 only a day after Barclays was fined US$450 million for participating in the long-term rigging of the Libor and Euribor interest rates — two much more significant benchmarks for global finance and business.
Barclays is the first bank to be fined for manipulating the 95-year-old London gold fix. It was also the first bank to be fined in the Libor–Euribor scandal, though other banks were later fined greater sums.
As laid out by the FCA, on June 28, 2012, Barclays gold trader Daniel James Plunkett was a director on the firm’s Precious Metals Desk and responsible for pricing and managing Barclays’ risk on a digital exotic options contract (a.k.a. "the Digital") that referenced the gold price during the day’s 3 p.m. gold fixing.
At the time, the FCA says Plunkett "exploited the weaknesses in Barclays’ systems and controls to seek to influence that day’s 3 p.m. gold fixing, and thereby profited at a customer’s expense."
If the gold price fixed above US$1,558.96 per oz. (a.k.a. "the Barrier") during the 3 p.m. fixing, Barclays would have to make a payment to its customer. But if the price fixed below the Barrier, Barclays would not have to make the payment.
The FCA says that in teh minutes leading up to this crucial time, Plunkett "placed certain orders with the intent of increasing the likelihood that the price of gold would fix below the Barrier, which it eventually did. As a result, Barclays was not obligated to make the US$3.9-million payment to its customer, and Plunkett’s book profited by US$1.75 million [excluding hedging], which was in addition to an initial profit that his book had received upon the sale of the Digital."
The FCA notes that "very shortly" after the 3 p.m. fix, the customer became aware the price had fixed just below the Barrier and sought an explanation from Barclays, and "when Barclays relayed the customer’s concerns to Plunkett on June 28 and 29, he failed to disclose that he had placed orders and traded during the gold fixing. Further, Plunkett misled both Barclays and the FCA by providing an account of events that was untruthful."
The FCA fined Plunkett £95,600 (US$161,000) directly and, in its Final Notice, the FCA writes that Plunkett "lacks the honesty and integrity required to perform any function in relation to any regulated activities carried on by any authorised or exempt persons, or exempt professional firm. The authority has concluded that Mr. Plunkett should be prohibited from doing so because he is not a fit and proper person."
Because Barclays and Plunkett agreed to settle with the FCA early on in the investigation, the two fines represented a 30% discount to the full ones. Also, Barclays later compensated the customer in full, as if the fix in question had been above the Barrier.
Tracey McDermott, the FCA’s director of enforcement and financial crime, commented in a release that "a firm’s lack of controls and a trader’s disregard for a customer’s interests have allowed the financial services industry’s reputation to be sullied again . . . Traders who might be tempted to exploit their clients for a quick buck should be in no doubt — such behaviour will cost you your reputation and your livelihood. Barclays’ failure to identify and manage the risks in its business was extremely disappointing."
Meanwhile, Barclays is working to exit the commodities business, and its head of spot-gold trading left the company in early May. At the moment, four banks set the daily London gold fix: Barclays, HSBC, Societe Generale and Bank of Nova Scotia. Deutsche Bank resigned from the group on May 12, without a replacement.
Sensing an opportunity, China’s central bank has authorized the Shanghai Gold Exchange to create an international gold-trading platform in Shanghai, and has sent out invitations to major Western banks, including ANZ, HSBC, Standard Bank and Bank of Nova Scotia. This would be in addition to the gold futures being traded on the Shanghai Futures Exchange since last year — a year highlighted by Hong Kong Exchanges & Clearings Ltd. buying the iconic London Metal Exchange.
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