New LBMA Gold Price starts 10.30am Friday with same 4 banks plus 2 more...

 

LONDON'S final PM Gold Fix was set today at $1166 per ounce, ending a process running formally twice each day since 1919 with a 15-year break during and after WWII.

 

The market's new benchmark, the LBMA Gold Price, will begin Friday morning, repeating the core process – and providing continuation for commercial contracts and valuations around the world – but using an online platform with fully auditable order entries and strict regulatory oversight by independent administrator, ICE Benchmarks Administration (IBA).

 

Owned by the London Bullion Market Association (LBMA), the new price point will be freely distributed until the third quarter of 2015, when IBA expects to publish its fee schedule.

 

The last PM Gold Fix saw 2 sellers and 2 buyers amongst the four member banks, with their client and house orders netting out to supply of 145 bars against demand for 110 bars at that price of $1166 per ounce.

 

The imbalance came within the Gold Fix's tolerance of 50 large bars (20,000 ounces), with the difference met between the 4 members, who undertook to deal any size at that single price.

 

Friday's new process – again run at 10.30 and 3pm London time – will also seek the one, single price which clears the most business across the wholesale gold bullion market at that moment. Like the 100-year old Fix, it will effectively pool the market's buy and sell orders, trying prices higher or lower – and accepting new orders in response in rounds lasting 45 seconds each – until supply and demand are balanced.

 

As before, the price is set (formerly "fixed") when any imbalance is smaller than 20,000 ounces. Again, the new LBMA Gold Price also requires the major bullion dealers involved (formerly the Fixing members, now "participants") to meet any residual demand or supply which results. Instead of a minimum order size of one 400-ounce Good Delivery bar however, the new minimum size for orders – entered directly to the WebICE app by participant bank sales desks separately from their traders, with the traders now unable to see client flows – will be just 1 ounce.

 

The web application replaces the old Gold Fix's twice-daily telephone call (a face-to-face meeting at the chairing bank's offices from 1919 to 2004). The opening price suggested by the WebICE platform to participants and their clients will be based on prevailing spot market and global exchange prices, and decided by a specialist team at IBA. 

 

An independent human chair – rather than an algorithm – will then suggest higher or lower prices to find the balancing price as needed. Rotated from amongst a pool of external experts, the chair will attend IBA's offices in person.

 

Six bullion dealers will participate in Friday's auctions, ICE said, confirming the involvement of the London Gold Fixing Limited's current four members (HSBC, Scotia Mocatta, Barclays and Societe Generale) plus two more as yet un-named – but neither are Chinese, said Finbarr Hutcheson, president of IBA, explaining the new price's methodology and answering journalist questions this morning in London.

 

"A number are very interested, but aren't yet in a position to start," Hutcheson said, adding that a blog he'd read claiming Chinese banks were somehow being excluded was "totally wrong."

 

CEO of the LBMA Ruth Crowell stressed the amount of work needed from the existing Fixing member banks to prepare for Friday's new process, with strong commitment at the highest levels ensuring "lots of internal sign-offs."

 

It's a significant step, she said, for a CEO – answerable to shareholders – to back joining a new benchmark "in the face of negative headlines" about the current process and with benchmark abuse "subject to billions in fines."

 

From 1 April, a government Order amending the Financial Services & Markets Act (2000) will make the new LBMA Gold Price – along with the LBMA Silver Price and five other key data points for interest rates, foreign exchange and crude oil – a formally regulated benchmark under UK law, with individuals facing criminal sanctions for attempted wrong-doing.

 

Having made interbank interest rates subject to criminal law in 2013, UK regulator the Financial Conduct Authority (FCA) was "very Libor-centric" in how it approached the new gold benchmarking requirements, said Hutcheson.

 

"There's no rule book for these new benchmarks," he explained, but clarity on what the law and regulators will require is now "considerably better than in January and February," when the issue was still under consultation by the UK government.

 

"Clearly," Hutcheson said, the guidance now given is "satisfactory to the six firms starting Friday," and IBA has worked closely with the FCA in developing the new LBMA Gold Price methodology and procedure. It is also "IOSCO ready", because the auditable trail tracks order-entry down to client-level – a key requirement of the International Organization of Securities Commissions' benchmark principles.

 

IBA last November beat four other proposals to provide a Gold Fix replacement, including from the CME/Thomson Reuters team already administering the LBMA Silver Price since August, and from the Hong Kong-owned London Metals Exchange (LME), which went on to become administrator for LBMA Platinum and Palladium benchmarks in December.

 

The new Gold Price's Oversight Committee includes two representatives from the mining industry (AngloGold Ashanti's group treasurer Rob Hayes, and the not-for-profit Denver Gold Group's executive director Tim Wood), plus metals refiner Johnson Matthey's general manager Grant Angwin (also current chair of the LBMA), bullion-bank director Simon Weeks from Scotia Mocatta, compliance specialist Emma Vick from IBA, and LBMA CEO Crowell.