Shirley Bassey "Goldfinger" - Live at Royal Albert Hall, 1974.

Rosa Abrantes-Metz
2014 The London gold fix, the benchmark used by miners, jewelers and central banks to value the metal, may have been manipulated for a decade by the banks setting it.

Abrantes-Metz advises the European Union and the International Organization of Securities Commissions on financial benchmarks. Her 2008 paper "Libor Manipulation?" helped uncover the rigging of the London interbank offered rate, which has led financial firms including Barclays Plc and UBS AG to be fined about $6 billion in total. She is a paid expert witness to lawyers, providing economic analysis for litigation. Metz heads credit policy research at ratings company Moody’s.

For background, see this, this, this. Another – perhaps even bigger – gold scandal is the Fed and other central banks don’t really have all of the gold which they claim to hold. Gold manipulation is not only not surprising, but accepted just like every other product has been exposed to be blatantly and maliciously manipulated by the banking estate.

 

2/23/14 Gold price rigging fears put investors on alert

Global gold prices may have been manipulated on 50 per cent of occasions between January 2010 and December 2013, according to analysis by Fideres, a consultancy. The findings come amid a probe by German and UK regulators into alleged manipulation of the gold price, which is set twice a day by Deutsche Bank, HSBC, Barclays,Bank of Nova Scotia,Société Générale in a process known as the "London gold fixing". Fideres’ research found the gold price frequently climbs (or falls) once a twice-daily conference call between the five banks begins, peaks (or troughs) almost exactly as the call ends and then experiences a sharp reversal, a pattern it alleged may be evidence of "collusive behaviour".

"[This]is indicative of panel banks pushing the gold price upwards on the basis of a strategy that was likely predetermined before the start of the call in order to benefit their existing positions or pending orders," Fideres concluded. "The behaviour of the gold price is very suspicious in 50 per cent of cases. This is not something you would expect to see if you take into account normal market factors," said Alberto Thomas, a partner at Fideres.

Alasdair Macleod, head of research at GoldMoney, a dealer in physical gold, added: "When the banks fix the price, the advantage they have is that they know what orders they have in the pocket. There is a possibility that they are gaming the system." Pension funds, hedge funds, commodity trading advisers and futures traders are most likely to have suffered losses as a result, according to Mr Thomas, who said that many of these groups were "definitely ready" to file lawsuits. Daniel Brockett, a partner at law firm Quinn Emanuel, also said he had spoken to several investors concerned about potential losses. "It is fair to say that economic work suggests there are certain days when [the five banks] are not only tipping their clients off, but also colluding with one another," he said. Matt Johnson, head of distribution at ETF Securities, one of the largest providers of exchange traded products, said that if gold price collusion is proven, "investors in products with an expiry price based around the fixing could have been badly impacted". Gregory Asciolla, a partner at LabatonSucharow, a US law firm, added: "There are certainly good reasons for investors to be concerned. They are paying close attention to this and if the investigations go somewhere, it would not surprise me if there were lawsuits filed around the world."

All five banks declined to comment on the findings, which come amid growing regulatory scrutiny of gold and precious metal benchmarks. BaFin, the German regulator, has launched an investigation into gold-price manipulation and demanded documents from Deutsche Bank. The bank last month decided to end its role in gold and silver pricing. The UK’s Financial Conduct Authority is also examining how the price of gold and other precious metals is set as part of a wider probe into benchmark manipulation following findings of wrongdoing with respect to Libor and similar allegations with respect to the foreign exchange market.

The US Commodity Futures Trading Commission has reportedly held private meetings to discuss gold manipulation, but declined to confirm or deny that an investigation was ongoing.

Look at these 2 maps. This is corrupt Britain today #HSBCfraud pic.twitter.com/jzhlTlXsIy

— Mr Ethical (@nw_nicholas) September 6, 2015

HOW CAN YOU TRUST BITCOIN?  BUT WAIT . . . HOW CAN YOU TRUST BANKS?

 

2/27/14 What is Bitcoin

‘Bandits’ Club’

At the center of the inquiries are instant-message groups with names such as "The Cartel," "The Bandits’ Club," "One Team, One Dream" and "The Mafia," in which dealers exchanged information on client orders and agreed how to trade at the fix, according to the people with knowledge of the investigations who asked not to be identified because the matter is pending. Some traders took part in multiple chat rooms, one of them said.

BROKEN BENCHMARKS: The Libor Scandal Sets Off a Wave of Probes

The allegations of collusion undermine one of society’s fundamental principles -- how money is valued. The possibility that a handful of traders clustered in a closed electronic network could skew the worth of global currencies for their own gain without detection points to a lack of oversight by employers and regulators. Since funds buy and sell billions of dollars of currency each month at the 4 p.m. http://www.wmcompany.com/wmr/index.htm WM/Reuters rates, which are determined by calculating the median of trades during a 60-second period, that means less money in the pension and savings accounts of investors around the world.

‘Collusive Practices’

At stake is the integrity of a market that affects the daily valuations of private and public money alike, from the $261 billion Sacramento-based California Public Employees’ Retirement System to the $237 billion Scottish Widows Investment Partnership in Edinburgh, from the $4.1 trillion BlackRock Inc. (BLK)in Manhattan, the world’s largest asset manager, to the $1.2 trillion Tokyo-based Government Pension Investment Fund, the biggest pension.

"This is a market that is far more amenable to collusive practices than it is to competitive practices," said Andre Spicer, a professor at the Cass Business School in London, who is researching the behavior of traders.

 

‘Big Profits’

Unlike sales of stocks and bonds, which are regulated by government agencies, spot foreign exchange -- the buying and selling for immediate delivery as opposed to some future date -- isn’t considered an investment product and isn’t subject to specific rules.

While firms are required by the Dodd-Frank Act in the U.S. to report trading in foreign-exchange swaps and forwards, spot dealing is exempt. The U.S. Treasury exempted foreign-exchange swaps and forwards from Dodd-Frank’s requirement to back up trades with a clearinghouse. In the European Union, banks will have to report foreign-exchange derivatives transactions under the European Market Infrastructure Regulation.

A lack of regulation has left the foreign-exchange market vulnerable to abuse, said Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business in Manhattan.

"If nobody is monitoring these benchmarks, and since the gains from moving the benchmark are possibly very large, it is very tempting to engage in such a behavior," said Abrantes-Metz, whose 2008 paper "Libor Manipulation" helped spark a global probe of interbank borrowing rates. "Even a little bit of difference in price can add up to big profits."

 

Culture ‘Wrong’

The currency investigations are taking place as authorities grapple with a widening list of scandals involving the manipulation by banks of benchmark financial rates, including the London interbank offered rate, or Libor, and ISDAfix, used to determine the value of interest-rate derivatives. The U.K. regulator also is reviewing how prices are set in the $20 trillion gold market, according to a person with knowledge of the matter.

"Some of these problems developed over many years without anybody speaking up," said Andrew Tyrie, chairman of Britain’s Commission on Banking Standards and Parliament’s Treasury Select Committee. "This is remarkable. It suggests something very wrong with the culture at these institutions."

The story published by Bloomberg News in June, based on interviews with current and former traders, triggered internal probes as banks began reviewing millions of instant messages, e-mails and transcripts of phone calls to see whether employees attempted to rig rates. The U.K.’s Financial Conduct Authority, the European Union, the Swiss Competition Commission and the U.S. Department of Justice are all now investigating.

Deutsche Bank

In addition to seeking evidence of collusion, the FCA is looking into whether traders cut deals for personal profit before completing customers’ orders, according to a person with knowledge of the probe. Bloomberg News reported in November, based on the accounts of two people who witnessed the transactions, that some dealers placed side bets for personal accounts or through friends in exchange for cash payments.

At least 12 currency traders have been suspended or put on leave by banks as a result of internal probes, and 11 firms have said they were contacted by authorities. Government-controlled Royal Bank of Scotland Group Plc (RBS) turned over transcripts of instant messages. Deutsche Bank AG (DBK), Germany’s largest lender, said it’s cooperating with regulators and Zurich-based UBS, the world’s fourth-biggest currency dealer, said it’s taking unspecified disciplinary measures against employees.

2016 Deutsche Bank will pay $38m to settle US silver price-fixing suit 

Deutsche Bank AG has agreed to pay $38 million to settle U.S. litigation over allegations it illegally conspired with other banks to fix silver prices at the expense of investors, according to court papers filed on Monday.  The settlement, disclosed in papers filed in Manhattan federal court, came in one of many recent lawsuits in which investors have accused banks of conspiring to rig rates and prices in financial and commodities markets.   In court papers, lawyers for the investors say the deal will likely be an "ice breaker" that will serve as a catalyst for other banks to settle.  Vincent Briganti, a lawyer for the investors, said the deal provides "substantial monetary compensation plus cooperation from Deutsche Bank in the continued prosecution of this important case against the non-settling defendants."  The settlement is subject to court approval.

In the litigation, investors claimed Deutsche Bank, HSBC Holdings Plc and Bank of Nova Scotia (ScotiaBank) rigged silver prices through a secret daily meeting called the Silver Fix, and accused UBS AG of exploiting that fix.  The alleged conspiracy started by 1999, suppressed prices on roughly $30 billion of silver and silver financial instruments traded each year, and enabled the banks to pocket returns that could top 100 percent annualized, the investors said.  Earlier this month, U.S. District Judge Valerie Caproni ruled the investors had sufficiently, "albeit barely," alleged that Deutsche Bank, HSBC and ScotiaBank violated U.S. antitrust law by conspiring to depress the Silver Fix from 2007 to 2013.  But the judge dismissed UBS from the case, saying there was nothing showing it manipulated prices, even if it benefited from distortions.

Justice Department

Britain’s FCA, which has about 60 people working on benchmark investigations, has asked foreign-exchange traders to come in for voluntary interviews, according to the people with knowledge of the probe. The individuals are among at least 40 traders whose communications are being reviewed, one of them said. The conversations being examined date back to 2004, another said. Chris Hamilton, a spokesman for the FCA, declined to comment.

The Justice Department has issued subpoenas to banks, according to three people with knowledge of the probe who asked not to be identified because the investigation is confidential.

"The criminal and antitrust divisions have an active, ongoing investigation into possible manipulation of foreign-exchange rates," Peter Carr, a department spokesman, said in an e-mail. He declined to name any specific institutions.

EU competition commissioner Joaquin Almunia said in October the Brussels regulator’s probe into currency markets was at a "very preliminary" stage. Several banks have come forward with information on possible rigging in the hope of winning leniency, Almunia’s spokesman Antoine Colombani said in November.

‘The Cartel’

None of the traders or the banks they work for has been accused of wrongdoing.

 

The investigations have had repercussions across the industry. UBS, RBS, Citigroup, Deutsche Bank, JPMorgan and Lloyds Banking Group Plc (LLOY) are banning traders from using multibank chat rooms, people at the firms said. Investors are breaking their orders into smaller units and using more banks to reduce the opportunity for front-running, one of Europe’s largest money managers said.

One focus of the investigation is the relationship of three senior dealers who participated in "The Cartel" -- JPMorgan’s Richard Usher, Citigroup’s Rohan Ramchandani and Matt Gardiner, who worked at Barclays and UBS -- according to the people with knowledge of the probe. Their banks controlled more than 40 percent of the world’s currency trading last year, according to a May survey by Euromoney Institutional Investor Plc.

Entry into the chat room was coveted by nonmembers interviewed by Bloomberg News, who said they saw it as a golden ticket because of the influence it exerted.

Minimizing Losses

Regulators are examining whether discussions among the traders amounted to collusion -- if, with a few keystrokes, they were able to push around rates to boost bank profits and their own bonuses. Traders on the chat deny that, saying they were merely matching buyers and sellers ahead of the fix. That way they could minimize losses by avoiding trades at a time of day when prices typically fluctuate the most, they said.

The men communicated via Instant Bloomberg, a messaging system available on terminals that Bloomberg LP, the parent of Bloomberg News, leases to financial firms, people with knowledge of the conversations said.

The traders used jargon, cracked jokes and exchanged information in the chat rooms as if they didn’t imagine anyone outside their circle would read what they wrote, according to two people who have seen transcripts of the discussions.

Usher, Ramchandani and Gardiner, along with at least two other dealers over the years, would discuss their customers’ trades and agree on exactly when they planned to execute them to maximize their chances of moving the 4 p.m. fix, two of the people said. When exchange rates moved their way, they would send written slaps on the back for a job well done.

Bollinger Champagne

The conversations echo those uncovered by regulators about Libor, in which bankers promised bottles of Bollinger champagne or cash to counterparts at firms willing to help them rig the benchmark interest rates used to price $300 trillion of contracts from student loans to mortgages. More than six banks have been fined about $6 billion since June 2012, and regulators are investigating traders at half a dozen more firms.

The currency discussions were even more calculating, one of the people who reviewed the transcripts said.

Usher was the moderator of "The Cartel," people with knowledge of the matter said. He worked at RBS and represented the Edinburgh-based bank when he accepted a 2004 award from the publication FX Week. When he quit RBS in 2010, the chat room died, the people said. He revived the group with the same participants when he joined JPMorgan the same year as chief currency dealer in London.

Standard Chartered

Ramchandani is head of European spot trading at New York-based Citigroup. Born in India, and said by people who know him to be studious and polite, he joined the bank’s trading desk after graduating from the University of Pennsylvania with a degree in economics, according to a spokesman for the school and a recruiter who has a copy of his resume. He relocated to London from New York in 2004.

Both Ramchandani and Usher were part of the Bank of England’s 27-member London Foreign Exchange Joint Standing Committee subgroup of chief dealers as of the end of 2012, according to the central bank’s bulletin. The group met three times last year to discuss matters including regulatory developments, the bulletin reported.

Gardiner joined Standard Chartered Plc (STAN) in London in September as assistant chief currency dealer. He previously worked at UBS in Zurich and was co-chief dealer with Chris Ashton at Barclays in London.

FCA Inquiry

Usher, Ramchandani and Gardiner were put on leave by their employers after the FCA opened its inquiry, according to people with knowledge of the matter. Ashton, now global head of spot trading at Barclays, was suspended along with five other spot traders at the bank in London and New York.

Ashton and Ramchandani declined to comment when contacted by telephone. Gardiner didn’t return messages left on his mobile phone. JPMorgan declined to provide contact details for Usher, who couldn’t be located through Internet searches or directory assistance. The bank also declined to comment about the probes, as did spokesmen for RBS, Standard Chartered, Citigroup, Barclays and UBS. Deutsche Bank said in an e-mail that it’s cooperating with investigations and "will take disciplinary action with regards to individuals if merited."

London is the world’s biggest hub for currency trading, accounting for about 41 percent of all transactions, compared with 19 percent for New York and 6 percent for Singapore, according to a Bank for International Settlements survey published in September. About $5.3 trillion changes hands every day, BIS data show, as companies convert earnings into dollars, euros or yen and managers overseeing pensions and savings buy and sell shares around the world.

Essex Countryside

Spot currency trading is conducted in a small and close-knit community. Many of the more than a dozen traders and brokers interviewed for this story live near each other in villages dotting the Essex countryside, a short train ride from London’s financial district, and stay in touch over dinner, on weekend excursions or with regular rounds of golf at local clubs.

Spot traders simply deal with buy and sell orders and don’t need the complex math skills their counterparts on derivatives desks use to extrapolate prices. Developing and maintaining relationships are more important, the traders say.

"The foreign-exchange market has a very strong culture, in which practitioners feel more attached to each other than they do their banks," said Spicer, the Cass School of Business professor. "It is also dominated by an extremely small group of individuals, often with strong social ties formed by working with each other at some point in the past."

Golf Club

On one excursion to a private golf club in the so-called stockbroker belt beyond London’s M25 motorway, a dozen currency dealers from the biggest banks and several day traders, who bet on currency moves for their personal accounts, drained beers in a bar after a warm September day on the fairway. One of the day traders handed a white envelope stuffed with cash to a bank dealer in recognition of the information he had received, according to a person who witnessed the exchange.

 

Such transactions were common and also took place in tavern parking lots in Essex, the person said.

Personal relationships often determine how well currency traders treat their customers, said a hedge-fund manager who asked not to be identified. That’s because there’s no exchange where trades take place and no legal requirement that traders ensure customers receive the best deals available, he said.

Eaton Vance

Hedge-fund managers get the best prices because they trade frequently and are the most sophisticated, according to a former U.S. currency dealer. Next in line are institutional funds -- insurance companies and pension plans that get less-beneficial prices. At the bottom are firms from automakers to smartphone manufacturers that need to swap currencies to purchase materials abroad and repatriate earnings. Traders at banks take advantage of them because they know the least about the market, he said.

Eaton Vance Corp. (EV), a mutual-fund company that manages $281 billion, uses the WM/Reuters rate to value its portfolio, so the credibility of the rate as a result of rigging allegations is potentially worrisome and the firm is continuing to monitor its reliability, said Michael O’Brien, director of global trading.

While the Boston-based company has its own trading desk to make sure investors get the best prices, it uses bank traders for certain currencies, O’Brien said, adding that most customers have little choice.

Market Share

"Banks are market-makers in foreign exchange, and to a large degree you can’t avoid them," O’Brien said. "People have to trust the pricing."

Four banks control more than half the foreign-exchange market, according to Euromoney’s survey. Deutsche Bank, based in Frankfurt, was No. 1, with a 15.2 percent share, followed by Citigroup with 14.9 percent, Barclays with 10.2 percent and UBS, Switzerland’s biggest lender, with 10.1 percent.

The WM/Reuters rates PDF for 160 currencies, used as a benchmark by companies and investors around the world, are determined by trades executed in a minute-long period called "the fix," starting 30 seconds before 4 p.m. in London.

The data is collected and distributed by World Markets Co., a unit of Boston-based State Street Corp. (STT), and Thomson Reuters Corp. Bloomberg LP competes with Thomson Reuters in providing news and information, as well as currency-trading systems and pricing data. Bloomberg LP also distributes the WM/Reuters rates on Bloomberg terminals.

State Street

Thomson Reuters said it "would lend its expertise to support any authorities’ investigation into alleged disruptive behavior on benchmarks." The company doesn’t administer the WM/Reuters rates, it added in an e-mailed statement.

"The WM/Reuters benchmark service is committed to reliability and robust operational standards," State Street said in an e-mail. "WM continually reviews recommended methodology and policies in order to ensure that industry best practices are considered."

Aside from trading after economic events such as interest-rate cuts, 4 p.m. is the busiest time for currency dealers as customers place orders to be transacted at the fix price.

Things are even more hectic on the last working day of the month, when tracker funds buy and sell currencies with their banks. The funds say they have to trade at the fix because the global indexes they track, such as the MSCI World Index, are calculated once a day using the 4 p.m. WM/Reuters rates.

The frenzy begins an hour earlier on trading floors as dealers jockey for advantage. Bids and offers are exchanged. Slang is common. Mio means million. A yard is a billion.

Loss-Leader

Because traders promise clients they’ll get the fix price, it leaves banks open to losses if the market moves against them, one London-based dealer said. He described trading at the fix as a loss-leader that helped his firm win client business.

To make money, traders interviewed by Bloomberg News said they would share information with counterparts at other firms and trade ahead of large client orders. Most tracker funds place their orders as much as an hour before the fix, giving dealers a glimpse of possible future price movements, which they can use to take positions. Traders on instant-message groups increased their chances of predicting market moves by pooling details of their order books and agreeing to align positions at the fix, according to three people with knowledge of the practice.

Dealers can buy or sell the bulk of their client orders during the 60-second window to exert the most pressure on the published rate, a practice known as banging the close. Because the benchmark is based on the median value of transactions during the period, breaking up orders into a number of smaller trades could have a greater impact than executing one big deal.

Market Movements

Some dealers said the tactic is legitimate and necessary for banks to protect themselves from losses. Traders who agree to buy or sell at the close need to push through the bulk of their orders during the window to minimize the risk of losses from market movements, the traders said.

One large transaction can be enough to move the market. A former bank trader said that if he received an order from a customer at 3:30 p.m. to sell 1 billion euros ($1.37 billion) in exchange for Swiss francs at the 4 p.m. fix, he would have two objectives: to sell his bank’s own euros at the highest price and also to move the rate lower so that at 4 p.m. he could buy the currency from his client at a lower price.

While foreign exchange is unregulated, dealers are prohibited by market-abuse laws from trading on inside information and sharing confidential data about client orders with third parties. In recent years, banks have tightened rules on employees’ trading for their own accounts. Many require staff to hold investments for at least 30 days and obtain written clearance from compliance officials for personal dealings.

Currency Futures

The U.S. Commodity Futures Trading Commission, which has no oversight of the spot market, does regulate foreign-exchange futures, contracts that allow companies or investors to speculate on or hedge against the price movements of currencies. Some of those contracts, such as cash-settled forwards traded on the Chicago Mercantile Exchange, use WM/Reuters rates to determine who owes what at settlement. The agency has been reviewing potential violations of the law, according to a person with knowledge of the matter.

Its chairman, Gary Gensler, who declined to comment about any investigation the agency might be conducting, said the CFTC is understaffed, with 670 employees, when more than 1,000 would better fulfill its mission.

"We need to make sure reference rates are not based on a closing price that’s manipulated," Gensler said in an interview. "The CFTC does not have enough people, period."

U.K. Rules

In the U.K., the government is introducing laws designed to curtail market manipulation and punish traders found guilty of wrongdoing. In April, it became a criminal offense for anyone to knowingly make false or misleading statements relating to the setting of benchmarks. Other proposals include deferring bonuses for as long as 10 years and guaranteeing rights for whistle-blowers. They stop short of recommending specific regulations of the spot foreign-exchange market.

Even if regulators were watching the currency market, there would be a question of what they’d see and whether they’d be able to identify wrongdoing, said Felix Shipkevich of Shipkevich PLLC, a derivatives law firm in New York.

"Who has the expertise to determine if there’s any potential unlawful activity going on?" he said. "There are very few people who understand the over-the-counter market."

To contact the reporters on this story: Liam Vaughan in London at lvaughan6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net; Bob Ivry in New York at bivry@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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Officials at London Gold Market Fixing Ltd., the company owned by the banks that administer the rate, referred requests for comment to Societe Generale, which holds the rotating chairmanship of the group. Officials at Barclays, Deutsche Bank, HSBC and Societe Generale declined to comment on the report and the future of the benchmark. Joe Konecny, a spokesman for Bank of Nova Scotia, didn’t respond to requests for comment.

Excerpt from the Economist -- "In a 2011 paper Rosa Abrantes-Metz of New York University’s Stern School of Business and Sofia Villas-Boas and George Judge of the University of California, Berkeley, examined LIBOR data over rolling six-month windows, and found that LIBOR was far likelier than another benchmark interest rate to depart from Benford patterns."

The five banks overseeing the century-old rate —Barclays Plc, Deutsche Bank AG, Bank of Nova Scotia, HSBC Holdings Plc and Societe Generale SA — may have been actively working together to manipulate the benchmark. It also adds to pressure on the firms to overhaul the way the rate is calculated. Authorities around the world, already investigating the manipulation of benchmarks from interest rates to foreign exchange, are examining the $20 trillion gold market for signs of wrongdoing.

LONDON ENGLAND GOLD VAULTS

There are seven smaller vaults inside the M25 (the motorway that encircles Greater London) owned by banks like JP Morgan and HSBC, including three at transport companies around Heathrow Airport. Each owner attempts to keep their vault’s location secret. When CNBC journalists visited JP Morgan in 2011, for example, they had to surrender their mobile phones and travel in a car with blacked-out windows.

Getting your gold fix

It isn’t just vault locations that are kept under wraps. The gold market itself is secretive and steeped in tradition and ritual, particularly around the fixing system used for setting the price. The price setting meetings or “fixes” – in which there are now 12 direct participants hailing from the UK, US, Canada, China and France – take place twice a day. When a price matches supply and demand, the price is fixed.

If a participant wished to pause proceedings, he would raise a small UK flag

Until 2015, this was done verbally: a chairman would try different prices on the participants, each of whom would say if, at that price, they would be buyers or sellers. From 1919 until 2004 fixes were done in person in the City of London. Originally, if a participant wished to pause proceedings – to change between buying and selling, for example – he would raise a small UK flag. In 2004, the fixes were moved to a conference call. Only last year did the system change to a more modern electronic auction platform run by the Intercontinental Exchange, which also owns the New York Stock Exchange. “If everyone knows there are two key points in the day to show up, you get the best liquidity balance between buying and selling,” says Matthew Glenville, chief operating officer of the Intercontinental Exchange Benchmark Administration.