A look at what will happen next in the world economies
Sunday, March 1, 2015
Big Banks Face Scrutiny Over Pricing of Metals
If you are an investor in precious metals you should be outraged, unless you read This Time It's Different Not. Aivars Lode
By Jean Eaglesham and Christopher M. Matthews
U.S. officials are investigating at least 10 major banks for possible rigging of precious-metals markets, even though European regulators dropped a similar probe after finding no evidence of wrongdoing, according to people close to the inquiries.
Prosecutors in the Justice Department’s antitrust division are scrutinizing the price-setting process for gold, silver, platinum and palladium in London, while the Commodity Futures Trading Commission has opened a civil investigation, these people said. The agencies have made initial requests for information, including a subpoena from the CFTC to HSBC Holdings PLC related to precious-metals trading, the bank said in its annual report Monday.
HSBC also said the Justice Department sought documents related to the antitrust investigation in November. The two probes “are at an early stage,” the bank added, saying it is cooperating with U.S. regulators.
Also under scrutiny are Bank of Nova Scotia , Barclays PLC, Credit Suisse Group AG , Deutsche Bank AG , Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Société Générale SA, Standard Bank Group Ltd. and UBS AG , according to one of the people close to the investigation.
Bank representatives declined to comment or couldn’t be immediately reached. A CFTC spokesman declined to comment, as did a spokeswoman for the Justice Department.
The precious-metals probes are the latest example of regulatory scrutiny into how the world’s biggest financial institutions influence widely used benchmarks. Until last year, prices for gold, silver, platinum and palladium were set using a decades-old practice of once- or twice-a-day conference calls between a small group of banks. The process for setting each of the price “fixes” has since been overhauled.
Benchmarks for the four precious metals affect jewelry prices and financial products such as exchange-traded funds. U.S. commercial banks regulated by the Office of the Comptroller of the Currency had $115.1 billion of precious metals-related contracts outstanding as of Sept. 30.
Previously launched investigations of the interest-rate and foreign-currency markets have led to billions of dollars in settlements from major financial firms. Related probes are continuing in the U.S. and Europe, with additional cases against firms and individuals by the Justice Department expected in the coming months, according to people familiar with the matter.
In the interest-rate investigations, banks often reached settlements with U.S. and U.K. regulators, which made similar allegations of collusion in the rate-setting process. In contrast, the U.K. Financial Conduct Authority and German financial watchdog BaFin reviewed the precious-metals benchmarks but closed their inquiries without finding evidence of wrongdoing, according to people familiar with those probes.
Robert Hockett, a law professor at Cornell University, said it is “not particularly surprising” that the Justice Department is plowing ahead despite the decision by European regulators. Recent scrutiny of big banks’ operations in the physical commodities markets and criticism of the Justice Department’s financial-crisis track record make it “quite understandable” that the agency would investigate allegations of precious metals price-rigging.
Last year, the FCA fined Barclays £26 million ($40.2 million) for lax controls after one of its traders allegedly manipulated the gold fix at the expense of a client.
The bank said at the time that it regretted the situation that led to the settlement and has enhanced its controls. A Barclays spokesman declined further comment.
Swiss regulator Finma settled last year allegations of foreign-currency manipulation with UBS. The regulator said it found “serious misconduct” among precious-metals traders at UBS, including “front running,” or trading ahead of, the silver-fix orders of one client. A spokeswoman for UBS, which said at the time that it “instituted significant cultural and compliance changes,” declined further comment.
Some of the banks under scrutiny by the regulators are also fighting potential class-action lawsuits filed by investors, traders and other plaintiffs in a federal court in Manhattan.
More than 25 lawsuits have been filed against Barclays, Deutsche, HSBC, Bank of Nova Scotia and Société Générale over their alleged role in setting the gold fix. The plaintiffs are seeking damages for losses suffered due to the alleged manipulation of the price of the metal and gold derivatives. Law firm Berger & Montague, the court-appointed co-lead counsel for the proposed class-action suits, said the gold fix affected trillions of dollars worth of gold and related financial contracts.
Jewelry company Modern Settings LLC last year sued the firms that used to set the platinum and palladium fixes. The proposed class-action suit seeks unspecified damages from Goldman, HSBC, Standard Bank and BASF Metals Ltd, a unit of chemical giant BASFSE, for losses suffered from their alleged “nearly eight-year unlawful conspiracy to manipulate and rig” the metals benchmarks.
The banks and BASF are fighting the lawsuits.
Meanwhile, the CFTC and Justice Department are pushing ahead with an investigation into another interest-rate benchmark, according to people familiar with the probe. Investigators are scrutinizing whether bank traders or brokers were involved in the potential manipulation of the ISDAfix, a measure used widely in areas such as setting payout rates on pension funds and determining the cost of real-estate loans.
Representatives of the agencies declined to comment.