goldcore.com / By Stephen Flood / 3 July 2014
Yesterday, the UK’s influential Treasury Select Committee met to hear testimony from gold market analysts on the possibility that the London Gold Market Price Fixing mechanism may have been open to widespread abuse by member banks. Addressing the committee analyst Rhona O’Connell, is quoted in The Financial Times today, as saying that there are potential conflicts of interest among the panel banks who control the auction, as they they both act on behalf of clients and trade on their own books. Speaking on behalf of the Financial Conduct Authority (FCA), Mr David Bailey said that it was possible that abuse had taken place but that he has no clear evidence that this had actually happened.
Conceptually, the fix has a very important role to play in the gold market, allowing sizeable flows to be efficiently matched off without causing broader market disruption. The problem is that the banks and their clients in some cases and possibly those working for them, have every opportunity to game the system by acting on information in advance of its release or holding back information until it becomes opportune to release it. There are a number of “fixes” that could be deployed to reduce the scope for abuse. Namely, if the sessions were recorded and randomly checked, and secondly, if the participants were prevented from communicating with proprietary interest during the process the opportunity to trade off confidential market information should be greatly diminished. No system is perfect but the system should be designed to induce confidence and comfort in those parties that require such a service.