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London is the centre of the gold world, accounting for about three quarters of the world’s bullion trading.
On Friday the twice-daily process used for almost a century to “fix” the price of precious metal goes digital.
What is the gold fix?
Started in 1919, the daily meeting to decide on a benchmark price was held at NM Rothschild with five bullion dealers and an agent of the Bank of England.
Originally held once a day, companies involved in the early years included Rothschild, Mocatta & Goldsmid, Samuel Montagu, Sharps Pixley and Johnson Matthey Bankers.
How did the old process work?
Every day at 10.30am and 3pm London time, the banks joined a secure conference call. The chairman would suggest an initial price, close to the market quote. Each bank would then confer by phone with clients — other financial institutions and gold producers and consumers — and then declare if it is a buyer, seller or had no interest. If there were only sellers, the price was lowered, and vice versa. This was repeated until the difference between buying and selling requests was less than 50 bars and the price was fixed.
Why does it matter?
The fix remains the global benchmark, used as a reference price by miners, central banks, jewellers and the financial industry to trade gold bars, value stocks and price derivative contracts.
Unlike many other commodities, gold does not trade on an exchange in London but is bought and sold over-the-counter. The main futures contracts are in New York and Shanghai and the gold fix takes its cue from and influences these markets.
Who will participate in the new system?
Initially six banks will take part in the electronic fix, including the four members of the traditional process and Swiss bank UBS and Goldman Sachs.
The Intercontinental Exchange says it is looking for broad participation but fix participants need to be a member of the London Bullion Market Association, which oversees the London gold market. They will also have to meet other requirements such as having clearing arrangements and credit lines before they can join.
ICE is also in discussions with a number of Chinese banks, but they have not got the documentation in place to participate on Day 1.
How will the electronic system change things?
Essentially it follows the same process, but should allow for greater transparency and easier tracking of submissions to identify any problems. It also offers a full audit history, something regulators will find useful. It will still be set twice a day and be based in London.
Anonymous bids and offers will be published onscreen in real-time with the imbalance calculated and the price updated until the buy and sell orders are matched. If the imbalance between buy and sell orders is within 20,000 troy ounces, the price will be fixed. Each round lasts 45 seconds.
The system is designed to segregate orders placed from banks’ trading desks from client orders.
The ICE Benchmark Administration will appoint a panel of internal and external members to chair the daily fix. There will also be an oversight committee made up five members including the LBMA as well as gold miners AngloGold Ashanti and Denver Gold Corp. It will be regulated by the UK’s Financial Conduct Authority.
Why is it changing?
Critics have long charged that the fix process was opaque and vulnerable to market abuse.
In 2014 the FCA found that a Barclays trader had manipulated the London gold fix, and the British bank was fined £26m. That spurred calls for greater transparency at a time when banks globally were being fined for manipulating the London Interbank Offered Rate, another key benchmark, used to set the worldwide lending rate.
Since the fine, regulatory scrutiny has not gone away. US regulators are investigating at least 10 banks over precious metals trading and have subpoenaed HSBC, the bank said last month.
This article has been updated to add UBS and Goldman Sachs as participants in the new fix.
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