The market has generally reacted positively to news that the Intercontinental Exchange (ICE) has been chosen to run the administration of the replacement for the London gold price fix.
ICE Benchmark Administration (IBA), an independent specialist benchmark administrator, will provide the price platform, methodology and overall administration and governance for the LBMA gold price, it said in a press release on Friday. The new mechanism will now go into a testing phase with the LBMA before going live in the first quarter of 2015.
“It’s an excellent choice – they’ve got proven technology and they’re a quality organisation. They proposed a very elegant solution, and that won the day,” Ross Norman of Sharps Pixley said. “The solution was clearly excellent and it had a bit of flexibility that people liked – for instance, they had a human being generating the starting price, and people liked that.”
The new price benchmarking system will replace the century-old system, whereby several banks agreed a price, with a more transparent version that displays buying and selling volumes in real-time and meets enhanced regulatory oversight.
“With a digital fix, visibility is far heightened… you have far more ability to dovetail down into trades to see who was buying and whether there was any conflict of interest so from a compliance standpoint it’s a big win. From the client’s standpoint, it doesn’t look like it’ll make a huge difference,” Norman added.
Others were less pleased, particularly because it follows the award of the silver price benchmark earlier this year to partners the Chicago Mercantile Exchange Group and Thomson Reuters.
“This [choice] destroys the potential for a cohesive London precious metals market,” one source told FastMarkets.
ICE was one of few bidders to enter a proposition without a partner – the likes of Autilla/CME and Sapient/Thomson Reuters made joint bids.
“Since the ICE bid is not a joint bid, some would argue that this is better since they can coordinate the auction process and the administration process in house and not have to worry about coordination between two parties,” another trader said. “Whether this is a good thing or a bad thing is debatable.”
Via IBA, ICE has administered LIBOR as of February this year and will handle ISDAFIX in future, which is already IOSCO-compliant. Some market participants stressed how important this will be in the eyes of both the LBMA and the UK’s Financial Conduct Authority (FCA), the UK regulator.
“Since the upcoming ‘London Gold Price’ or ‘LBMA Gold Price’ auction benchmark will most probably become a regulated benchmark given current FCA/Bank of England and HM Treasury consultations and discussions with the market, from a regulatory perspective, ICE makes sense. ICE is already familiar with the FCA’s market conduct sourcebook in the area of benchmark regulations,” the trader added.
Many believed that CME or the LME were favourites, particularly given that the CME/Thomson Reuters bid for the silver fix has generally been well received.
“Many thought it was a two-horse race between CME and LME. On the day, the outsider – ICE – won by putting in a good shift,” Norman added.
The twice-daily gold fix, which has been in operation since September 12, 1919, has come under increased regulatory and media scrutiny. While there have not been any findings of wrongdoing, a third-party operator is seen as a critical step in modernising the image of the benchmark process, while also providing enhanced transparency and compliance with legislation.
(Editing by Mark Shaw)
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