Barclays Fined $44m, Gold Fix Blameless

Friday, 5/23/2014 19:53

UK regulator supports Gold Fix, smacks Barclays for weak controls & conflict of interest...

SO the LONDON GOLD FIX has been fixed, at least once, by one trader wanting a bigger bonus at the expense of a client, writes Adrian Ash at BullionVault.

No doubt you saw the news. We would have updated Goldnews sooner on Friday, but I was speaking at a Bloomberg conference as the story broke.

The facts? As far as the UK regulator, the FCA, said on Friday, it has fined Barclays over control failings. They enabled one senior trader...a director from outside the Fixing itself, who placed false orders that the Fix took to be client requests...to knock the benchmark price lower on 28 June 2012.

Incredibly, this came just one day after Barclays was publicly fined £290 million ($450m) for repeatedly allowing traders to rig the London interbank lending rate (the dreaded Libor).

Shameless behaviour from a bank trader? Whatever next?

Perversely, the Fix worked just fine that day. Because the final price reflected market orders to buy and sell, as the FCA's detailed report shows. It was just that they included sell orders from a Barclays' director...who was actively trading against one of his own clients...seeking to stop the price rising...so the client didn't win a big bet on the Fix coming in above a certain level...so the trader would trigger a fat bonus for himself.

The client smelt a rat, and complained immediately. The trader, named and shamed today as one Daniel James Plunkett, lied from the start. First to the Fix, then both to his managers and then to the regulators. He never did get his bonus, and soon left Barclays. The client was paid its winnings. Plunkett has now been fined £95,600 himself, and banned from every working in UK finance again.

What to say, beyond good riddance? Crooks will try to game any system or process. Banking bosses are supposed to impose checks and controls to make sure the crooks they might have hired don't succeed. Regulators are supposed to make sure those checks are in place. No one involved comes out of this well. Least of all Barclays.

"Barclays breached Principle 3 [of the UK regulator's rules] by failing to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems...

"[The bank] also breached Principle 8...[and needs to] adequately manage certain conflicts of interest between itself and its customers."

Nothing there says the Fix is broken. Individual behaviour or cultural failings don't undermine its value or validity as a process. The Fix has been running for 100 years and longer, and the FCA's full report says Barclays has since established the controls and oversight needed to avoid a repeat of Plunkett's fun.

Nor does Friday's news remove the benefit of this singular point of deep liquidity, run alongside the ongoing buzz of spot trading. Still, as my panel and the other speakers at today's Bloomberg conference agreed, changes are coming to the Fix. Starting with the end of the Silver Fix, unless the market finds new Fixing members, on 14 August.

That risks a rash of "force majeure" in long-standing contracts across the world. Because the Fix...which in gold did its job just fine on 28 June 2012...is used to price many commercial, industrial and investment deals. Some friends and competitors I met today said they're facing a real mess if there's no resolution within 11 weeks.

Brave work then, from the crooked trader who's now added to the misperception of the Fix as broken. But to quote the FCA's decision today:

"The Gold Fixing is an important pricing mechanism which provides market users with the opportunity to buy and sell gold at a single quoted price."

So UK regulators apparently support the Fix. Now the market needs and is working to meet wider concerns about how the process runs. Oh, and the banks need to make sure their traders put clients before their own bonuses. That applies to all markets in all assets. Neither gold, nor the Gold Fix, is the cause of Barclays' fine. Nor of Plunkett's ban from working in finance.