(Minews) - The gold market marched into the 21st century Friday with the launch of a new electronic platform designed to make the daily market price benchmark less vulnerable to manipulation.
But nervousness about new trading rules, as well as a law in the U.K. that makes manipulating benchmarks a criminal offense, has made some banks reluctant to participate right away, said Finbarr Hutcheson, president of ICE Benchmark Administration Ltd., the unit of Intercontinental Exchange Inc., which will manage the new pricing mechanism.
At some banks, “it’s very hard to satisfy senior management that the rules are very well understood,” he said.
UBS AG and Goldman Sachs Group Inc. joined the new gold fix on Friday. The four banks that previously participated in price setting—Bank of Nova Scotia, Barclays Bank PLC, HSBC Holdings PLC and Société Générale SA—agreed to stay in the new process, which is based on an electronic auction.
“That shows a real commitment on their part to making this market,” said Adrian Ash, head of research at BullionVault, a U.K.-based online marketplace for gold and silver investors.
Mr. Hutcheson said he wants more firms to join and he is confident more will sign up in coming weeks once people have had a chance to see how the new system works.
More participants means a larger number of trades, making the benchmark more accurate and reliable.
Even so, the electronic silver fix, which was launched in August, has so far struggled to sign up more banks and currently has six. CME Group Inc., which runs the silver price together with Thomson Reuters Corp., didn’t respond to a request for comment.
Gold is a far larger market, with daily turnover of around $150 billion.
“I think it has to [work] because the old methodology was open to allegations that it was rigged, or manipulated, or gave the opportunity to fleece customers,” said Robin Bhar, head of metals research at Société Générale.
The previous process, more or less unchanged for a century, involved four banks that would meet twice daily over a conference call to determine the price based on their customers’ orders, called the fix. It came under scrutiny after investigations discovered that a number of global benchmarks were being manipulated, most notably the London interbank offered rate, or Libor.
The daily gold fixes are used by mining companies, investors and jewelry makers, among others, to price billions of dollars in gold assets every day. The U.S. Mint has said it would use the LBMA Gold Price for its gold bullion orders.
Benchmarks are now becoming much more closely controlled. From April 1, the U.K.’s Financial Conduct Authority will take over direct oversight of a number of benchmarks including gold and silver. To make sure the price meets the regulatory requirements, IBA has drawn up a complex list of rules that participants must meet. At the same time, there is new legislation in the U.K. that makes manipulation of a benchmark a criminal offense, meaning prison sentences for anyone found guilty.
For the first time, market players can see the amount of gold that is traded during each auction, and there will be historical records of all trading.
On Friday, after five 45-second rounds were held, the settlement was priced at $1,171.75. At that level, a total of 29,239 ounces of gold were bought and 43,934 ounces were sold. Under IBA rules, the six banks would buy the difference of 14,695 ounces in equal shares.
“I think the questions that have been raised about the fix were inevitable in the context of other benchmarks coming under scrutiny. Anything that improves the process…can only give a greater sense of trustworthiness to market participants,” said Brian Lucey, finance professor at Trinity College Dublin.
