British bank Barclays was hit with a $44 million fine on Thursday following revelations that one of the bank's traders rigged the gold markets in his favor two years ago.
The U.K.'s Financial Conduct Authority is fining Barclays over the actions of Daniel Plunkett, a former Director of Precious Metals at the bank. Plunkett was also censured by the FCA for manipulating the price of gold in order to avoid paying out a contract. (Via BBC)
The scandal hinges around Barclay's role in the gold fixing process, which works like this: twice each business day, major banks — including Barclays — meet to determine a benchmark price for buying and selling gold. The lead participant proposes a gold price, and each bank declares how much gold buying and selling they would do at that price. The leader then adjusts the proposed price until the buying and selling demands balance out.
Plunkett, who was privy to the gold fixing process, was also managing a digital options contract about the fixed price of gold. MarketWatch explains, "On June 28, 2012, if the gold fix was above $1,558.96 an ounce, the customer would get a $3.9 million payout. If it didn't, not only would the customer not get the $3.9 million, but Plunkett would get a cut of what Barclays saved."
So, Plunkett had an interest in seeing his client's contract flop, and he had the means to make it happen. CNN reports Plunkett told a colleague "hopefully we fix 1,558, or 1,558.75 ideal" the day the contract would have expired.
But when the day's gold fixing began, it looked like the price might rise above Plunkett's magic number. So the trader quickly submitted a series of large sell orders for gold in order to artificially drive the price down to where he wanted it. As one Bloomberg writer put it, "If you were writing a paranoid fantasy of gold price manipulation you'd be hard pressed to come up with something more on the nose."
The scheme worked and Plunkett avoided paying out the contract. However, the suspicious customer complained about the trade to Barclays. One investigation later, Plunkett was banned from trading, the customer got his lost money back, and the FCA had penalized both Barclays and Plunkett.
The whole incident has prompted financiers to reexamine the gold fixing process. One professor told Businessweek, "I don't think we would invent the gold fix mechanism as it is now, if it was just starting up. ... That leads to the obvious question of do we then need it?"
And in an unfortunate twist of fate for Barclays, Plunkett's manipulation of the gold market came just one day after Barclays was handed a whopping $450 million fine for manipulating a different number: the LIBOR interest rate. (Via The Guardian)
Responding to the gold fixing fine, Barclays executive Antony Jenkins emphasized the bank has been working to improve its corporate culture to avoid future scandals. "While there is much more to do to achieve the deep-rooted cultural change we embarked upon at the start of 2013, Barclays today has significantly changed for the better."
In filing their fine, the FCA did credit Barclays and Plunkett for cooperating promptly with the investigation, which knocked 30 percent off of their final fines.
