UK to criminalise benchmark rigging for gold, oil, currencies

Britain is toughening the rules after benchmarks set in London were tainted by scandal. Photo / Thinkstock

The British government plans to criminalise the manipulation of seven more benchmarks in markets from foreign exchange to gold and oil as it tries to revive confidence in the integrity of London as a financial centre.

The Treasury on Thursday started a review into whether it should extend legislation regulating the London Interbank Offered Rate to cover other key rates including the WM/Reuters 4pm London currency fix, the Sterling Overnight Index Average, the London gold fixing and the ISDAFix, according to a statement. The government aims to have the rules in place by the year-end - five months before the next general election.

Britain is toughening the rules after benchmarks set in London were tainted by scandal. At least 10 firms have been fined almost $6.5 billion for rigging Libor and related gauges, and regulators are probing whether traders rigged key foreign-exchange rates used by fund managers.

"The strong arm of the law is being applied to areas where previously self-regulation and standard practice were the norm," said Simon Maughan, head of research at financial- analysis firm OTAS Technologies in London.

Last year, the government introduced unlimited fines and jail sentences of as long as seven years for making false or misleading statements about Libor and, in June, Chancellor of the Exchequer George Osborne proposed extending those rules to more gauges in currency, fixed-income and commodity markets.

The Libor rules also require firms that contribute to and oversee rates to have arrangements in place to identify and manage conflicts of interest and notify the Financial Conduct Authority of any potential irregularities.

The rates covered by Thursday's review are: the Sterling Overnight Index Average and Repurchase Overnight Index Average, reference rates for overnight index swaps; the WM/Reuters rates, which determine what many fund managers pay for their foreign exchange; ISDAFix, a benchmark used in the $426 trillion swap market; the London gold fixing, and LBMA Silver Price; and the ICE Brent futures contract, the world's most-traded crude oil future.

"We support regulation that is carefully drafted so it is suitable to the nuances of each benchmark," Finbarr Hutcheson, President of ICE Benchmark Administration said in an emailed statement. "We need to ensure we don't impair their usefulness in the process."

Representatives of the banks that contribute to the London gold fixing declined to comment or didn't immediately return calls and emails seeking comment. A spokesman for the LBMA wasn't immediately available.

"My initial reaction is that they are chasing the wrong fox in singling out Brent futures," Christopher Bellew, a senior oil broker at Jefferies International in London, said by email on Thursday. "A contract that trades around 600,000 contracts daily is not easily manipulated."

The industry consultation, which runs until October 23, comes after regulators opened probes into allegations that a series of benchmarks were manipulated by traders at some of the world's biggest banks.

"The integrity of the City matters to the economy of Britain," Economic Secretary to the Treasury Andrea Leadsom said in the statement. "Ensuring that the key rates that underpin financial markets are robust, and that anyone who seeks to manipulate them is subject to the full force of the law is vital."

Authorities on three continents are scrutinising whether foreign-exchange dealers traded ahead of their clients and colluded to rig the WM/Reuters rate. More than 25 employees have been fired, suspended or put on leave since the investigation began last year. US regulators are examining whether ISDAFix was manipulated at the expense of institutional investors.

The near-century old process by which four banks set the price of gold on a telephone call has come under growing scrutiny over the last nine months as academics and economists have argued knowledge gleaned from those calls could give some traders an unfair advantage.

The London Bullion Market Association and the London Gold Market Fixing have started an overhaul of the benchmark and plan to hire an independent firm to administer the rate later this year.

Last month, the LBMA replaced the 117-year-old ritual in which a group of banks set the price of silver by telephone with an electronic, auction-based mechanism. CME Group and Thomson Reuters run the new procedure each day at midday in London.

- Bloomberg