27 November 2014

67447

Dan Barnes - Information Corporation

47 | posts 62,944 | views 8 | comments

Future Finance News Analysis

Finextra and Oracle have gathered together some of the industry's top thought leaders to assess the key trends and issues within transaction banking, regulations and retail banking. This group will analyse the latest news on upcoming regulations, new service offerings and industry issues shaping the new financial services landscape with regular blog posts, video interviews, webcasts debates and surveys.

Bad as gold

29 May 2014  |  1717 views  |  0

The news that Barclays has been fined for manipulation of the gold benchmark is another nail in the coffin of trader autonomy and of voluntary data-based benchmarks. It also highlights the risks for speculators operating in the unregulated derivatives market when the ‘house’ is in charge of fixing the price.

 

Q: So who got stung this time?

A: Barclays was fined £26 million because one of its traders tried to hold the market down just when the benchmark was going to be fixed.

Q: Why did he want to fix the benchmark?

A: A customer had bought an exotic digital derivative, one which pays a fixed amount on a certain date if the gold price was above a certain level. If the price was below that level the bank would not have to pay the customer US$3.9 million.

Q: So the fix got ‘fixed’? How did one trader do that?

A: The fix is arranged via an auction process in which a chair from one of four banks – Barclays, HSBC, Scotiabank, and Société Générale – takes a price close to that seen on the market at the time and then asks whether the four banks (after consultation with clients) are ‘buyers’ or ‘sellers’ based on that price.

When supply meets demand at a given price, or the prices are close enough that the buying and selling can be balanced out with a little give and take. The trader in question posted several trades with the Barclays rep on the panel, so it became a net seller. This pushed the price down and so the bank did not have to pay out on the derivative contract.

Q: Hmm… another benchmark suspiciously easily rigged?

A: Yes. A lone gunman. It would be complete speculation to ask whether this had ever been done before, but in this instance it certainly didn’t escape the notice of the client, who complained to the bank, which then mounted an investigation.

Deutsche Bank was a fifth member of the panel until the start of 2014 when it gave up its role. BaFin, the German regulator has been investigating Deutsche Bank’s role in the precious metals market since December 2013.

Q: Still, Barclays caught its guy didn’t it?

A: Well, he misled the bank’s investigation according to UK regulator the Financial Conduct Authority (FCA) and he tried to mislead the regulator’s own investigation as well, it reports. It found that “Barclays failed to adequately manage the inherent conflict of interest that existed from Barclays participating in the Gold Fixing and contributing to the price fixed during the Gold Fixing, while at the same time also selling to customers options products that referenced, and were dependent on, the price of gold fixed in the Gold Fixing.”

By failing to tackle these issues an increased risk of “inappropriate conduct by Barclays' traders participating in the Gold Fixing” was created, the FCA said.

TagsRisk & regulationWholesale banking

Comments: (0)

Comment on this story (membership required)
Log in to receive notifications when someone posts a comment

Latest posts from Dan

Google search: What’s my credit score?

01 July 2014  |  1938 views  |  0  |  Recommends 0 TagsRisk & regulationInnovationGroupFuture Finance

Trade finance creates a 10 billion dollar risk

11 June 2014  |  1723 views  |  0  |  Recommends 0 TagsRisk & regulationWholesale bankingGroupFuture Finance News Analysis

Bad as gold

29 May 2014  |  1717 views  |  0  |  Recommends 1 TagsRisk & regulationWholesale bankingGroupFuture Finance News Analysis

Is Bitcoin mo' money or no money?

29 May 2014  |  1393 views  |  0  |  Recommends 1 TagsVirtual currencyRisk & regulationGroupFuture Finance
name

Dan Barnes

job title

Writer

company name

Information Corporation

member since

2013

location

London

Summary profile See full profile »
Award-winning, freelance financial journalist. Specialist in many areas, including; sell-side exe...

Dan's expertise

What Dan reads
Dan writes about

Who is commenting on Dan's posts

Ketharaman Swaminathan
Dave Kershaw
Jorge Yui
Ponnusamy Selvaganapathy