Gold benchmark set for closer scrutiny

The London Bullion Market Association (LBMA) has announced a review will be conducted of its benchmarking procedures to ensure it complies with international regulations. The group of traders which runs the global gold hub in London are set to tighten up procedures so the commodities market can never be rocked by the type of problems such as the recent LIBOR scandal.

Centre of gold market

Despite gold being traded all over the world, London is the undisputed centre of the market with around 175 million ounces changing hands over the counter every day. In monetary terms, this is currently worth in the region of $220 billion daily. The benchmarks used for pricing gold in London are used right across the industry, a situation which has sparked the desire to tighten up procedures and review those already in place. There is currently not just one, but several gold benchmarks used in London but the primary one is set twice every day by a tight group of banks. This is known as 'London gold fixing'. This benchmarking process follows a very different protocol than LIBOR, being based instead on trading activity and not a set of hypothetical prices. There is a second set of benchmarking used for pricing gold forwards, known as colloquially as Gofo, and this bears a closer resemblance to the ill-conceived LIBOR process. However, unlike LIBOR, although Gofo is indeed based on theoretical prices quoted, the banks are obliged to follow through and trade at the prices they quote.

LIBOR rocked trading world

The desire to tighten up any holes in procedures comes hot on the heels of the LIBOR scandal, with the news that the interbank lending rate had been manipulated resulting in around $3.5 billion in regulatory fines. And it appears that LIBOR may not have been the only guilty party; the foreign exchange market is attracting increasing attention over fears that this too may have been artificially manipulated. Regulators on three separate continents are currently investigating. As a result of LIBOR, the International Organisation of Securities Commission (IOSCO) published a report in the summer which included guidelines over the use of benchmarking and the methodology involved. The LBMA is keen to avoid being tainted with any hint of improper protocol and has hired a team of top lawyers to review the current benchmarking procedures in place to check whether everything complies with the IASCO recommendations. According to insiders, the LBMA met earlier this week and are planning on releasing a code of conduct for any bank who contributes to the benchmarking process. There are also plans for more detailed records to be held regarding historical trading transactions in the market. One source said that there were no particular concerns which triggered the review but said following the LIBOR and Forex problems, it was 'prudent' to review processes and governance in place.

Regulator reviewing wider market

And it's not just LBMA who are taking a closer look at the gold benchmarking procedures; the Financial Conduct Authority is also looking at benchmarking processes and how they can be regulated internationally, an investigation which includes gold fixing. The study is not believed to be specifically aimed at the gold market but will incorporate it as part of an overall benchmarking review. Sources have suggested that so far the FCA have had little contact with any of the major gold traders but many believe that it is only a matter of time before the market comes under scrutiny too. And according to insiders, ensuring the gold market is tightly controlled, monitored and operating to the highest possible standard before the regulator turns their attention to them is a high priority for traders and banks alike.