CFTC, DOJ Investigate Banks for Rigging Precious Metals Market

The CFTC and Justice Department are investigating the banking industry for its practice of fixing the prices of gold, silver, platinum and palladium. Until last year, the price of these precious metals were set in conference calls between groups of banks.

HSBC announced in its annual report that it received a subpoena from the CFTC in January for documents related to its precious metals trading. The investigations are at an early stage, according to the HSBC. As of last May, the media reported that the CFTC had not publicly opened an investigation into the manipulation of precious metals.

The DOJ previously requested documents from HSBC in November as part of a criminal antitrust investigation.

The manipulation of the gold fix is also at issue in more than 25 lawsuits filed against the banks. Investors have accused the financial institutions responsible for fixing the price of both and for trading on the information obtained during the call. There is no prohibition on. According to the New York Times, there is an academic study which found spikes in trading volume during the calls. Similar suits have been filed against the silver, platinum and palladium fixes.

Following the lawsuits, the banks took steps to abandon the daily fixing procedure for the metals. The exchanges are now setting two of the three prices electronically, with the third expected to start on March 20, 2015. CME Group and Thomson Reuters administer the silver price fixing. The London Metal Exchange is now responsible for platinum and palladium prices. Intercontinental Exchange’s Ice Benchmark Administration will soon set the gold price.

Several overseas financial regulators have already undertaken investigations. This includes the UK’s Financial Conduct Authority, German financial regulator Binma and the Swiss Financial Market Supervisory Authority (“Finma”). So far, the regulators have yet to hand down penalties of the size seen as a result of the Libor or Forex manipulation investigations.

Last year’s nearly $44 million fine issued by the FCA against Barclays for manipulation of the gold fix was, according to Reuters, the first in the nearly 100 year old process. Although the fine related to internal controls over many years, it focused on misconduct by one trader on a single day. Through manipulation of the market, the bank was able to avoid a loss of a few million dollars in a single transaction.

Finma concluded its investigation into UBS AG with a penalty last November at the same time that it fined the bank for Forex manipulation. Finma alleged that traders were front running the silver orders of clients. The regulator did not publicly break down the amount of the fine for each violation.

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