The trading standard aims to reduce the risk of gold benchmark volatility


LONDON, December 8th (Reuters) – A group of banks, finance companies and blue chip firms have developed trading guidelines to increase auction activity that set the gold and silver reference prices used around the world and make them more reliable.

The benchmarks are intended to represent a fair and precise snapshot of the fast-moving spot market. However, they sometimes deviate from the spot price, causing buyers and sellers to experience unexpected gains or losses.

For example, on October 29th, the afternoon gold benchmark was set at $ 1,769.15, $ 1.95 below its lowest level on the spot market that day, data from Refinitiv Eikon shows – what sellers money costs and makes the buyers a bargain.

Jewelers, miners, traders, and manufacturers around the world buy and sell hundreds of millions of dollars of gold in benchmark auctions every day. The benchmark prices are also embedded in supply contracts across the industry.

Large discrepancies have become rare, but are caused in part by the recent refusal of banks to put customer orders in the auctions, add or remove buy or sell orders to ensure that the auctions stay close to prices in the cash market.

After scandals about the setting of benchmarks like LIBOR, many feared regulators could see price manipulation in it.

The Fixed Income, Currencies and Commodities Markets Standards Board (FMSB) – a group of large banks, asset managers and other companies dedicated to making markets more transparent, fairer and more effective – has drafted a “standard” that explains when it is appropriate for banks to change orders during auctions.

It says: “This standard should create clarity … in order to increase the volume of bids and offers submitted at LBMA (benchmark) auctions and to improve the resulting quality of pricing.”

The FMSB, which has no regulatory authority, has announced that it will publish the final standard in December.

The gold and silver benchmarks suffered numerous major divergences around 2016 and 2017 when only ten companies – nine of them banks – participated in the gold auctions and seven – all banks – participated in the silver auctions.

Eighteen participants are now submitting orders to the gold auctions, eight of which are not banks but other trading companies. 15 companies take part in the silver auctions, 8 of which are not banks.

“I don’t think it’s a big problem anymore,” said a senior executive at a large bank involved in the benchmarks. But he said his bank could be more flexible in starting trading the auctions and others could do the same to improve liquidity.

The gold and silver benchmarks are operated by the ICE Benchmark Administration (IBA), a unit of the Intercontinental Exchange (ICE) (ICE.N), on behalf of the London Bullion Market Association (LBMA), a trade association.

“LBMA, IBA and market participants are pleased that there is currently sufficient liquidity to ensure that all precious metals auctions continue to function well,” they said.

The participants in the gold benchmark are Bank of China (601988.SS), Bank of Communications (601328.SS), Citibank (CN), Coins’ N Things, DRW Investments, ED&F Man, Goldman Sachs (GS.N), HSBC (HSBA.L), Industrial and Commercial Bank of China (ICBC) (601398.SS), Jane Street, JPMorgan (JPM.N), Koch Supply and Trading, Koch Commodities Europe, Marex Spectron, Morgan Stanley (MS.N) , Standard Chartered (STAN.L), StoneX (SNEX.O) and TD Bank (TD.TO).

Marex said they were happy with the liquidity but would welcome any increase. The others declined to comment or did not respond to requests for comment.

The FMSB guidelines also apply to the price benchmarks for platinum and palladium set in daily auctions held by the London Metal Exchange. The LME was “completely satisfied” with the benchmarks, but welcomed the FMSB standard.

Reporting by Peter Hobson; Editing by Kirsten Donovan

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