Fixing a leaky Fixing
UWA research uncovered a price bias and an exploitable trade advantage in the 100 year old mechanism used to set the daily benchmark price of precious metals globally. The London Fixing, which had been run by a handful of “member” banks, formed an integral part of a US$30 trillion dollar annual market, impacting metal prices, financial instruments and contracts. Following publication of the research, multiple civil and criminal trials were launched against the banks. Regulatory investigations began and fines were issued. Benchmarking regulations were overhauled and manipulation was criminalised. The research has led to the London Fixings being replaced with modern electronic auctions that provide fairer and more transparent systems of commodity price benchmarking.
Impact Case Study
In 2013, Professor Caminschi researched the interaction between the London Fixing, a financial benchmark, and public markets for gold, silver, platinum and palladium. This involved an analysis of hundreds of millions of transitions, quotes and orders in markets trading over US$30 trillion annually. Empirical evidence from the study revealed that the fixing produced a biased benchmark price where information could be exploited, impacting global financial markets. The trade advantage available to fixing members was significant and economic, and it increased with the transition of electronic derivatives trading. The findings cast strong doubt on the integrity of the most critical price within this market. The research findings were published in the Journal of Market Futures in 2014, a series of working papers (2014, 2017) and formed the basis of Professor Caminschi’s doctoral thesis (2016).
Extensive media coverage of Caminschi’s research increased awareness about the vulnerability within this critical benchmark. In September 2013, Sprott, global metals investment fund manager published the story. Bloomberg ran the story in November 2013 and within hours, it headlined across media outlets world-wide. Between 2013 and 2015, 220 newspapers and media broadcasters in Europe, Asia and America covered the story including Forbes (US), BBC News (UK), The Washington Post (US), Die Welt (Germany) and the Economic Times (India). Professor Caminschi has been an active and available interviewee in this process, providing interviews to Bloomberg (US), The Financial Times (UK), ABC Radio (AU), 2GB (Sydney), KitcoTV (Canada) and public speaking engagements to help increase awareness of the London fixings.
Subsequent to the publicity, several regulatory investigations were launched into the conduct of the London Fixing and associated market participants. In December 2013, Germany’s financial regulator, The Federal Financial Supervisory Authority announced an investigation of Deutsche Bank. In the same month, the Director General for Competition of the European Commission requested the research for its investigations. In May 2014, the Financial Conduct Authority fined Barclays US$43.8 million for manipulating the gold fix. In November 2014, Switzerland’s financial regulator FINMA found “serious misconduct” by UBS in precious metals trading, with their chief executive officer stating that the regulator has “seen clear attempts to manipulate fixes in the precious metals markets.” UBS was disgorged US$150 million. Professor Caminschi provided briefings to the US Department of Justice and the US Commodity Futures Trading Commission to assist in their investigations, some of which are currently on trial.
In August 2014, in the wake of publicity and regulatory sanctions, the London fixings were scrapped and replaced with a London Bullion Market Association (LBMA) Silver Price: an independently administered auction open to a wider range of market participants. The London Platinum and Palladium Fixes were replaced with new auction systems in December 2014. In March 2015, the ICE Benchmark Administration replaced the London Gold Fixing practice with the LBMA Gold Price. Professor Caminschi’s research led to reform of benchmark pricing from a tightly held private ‘club’, to auditable, electronic systems with real-time data, accessible by market participants; resulting in a fairer pricing mechanism. “His research on the London gold fixing has literally changed the way that price is determined.” Professor Robert Webb, University of Virginia, Oct 2016. The International Swaps and Derivatives Association Master Agreement used to settle international financial transitions was amended to reference these new benchmarks. In December 2014, the UK announced legislation that criminalized manipulation for critical financial benchmarks, would extend to cover gold and silver. Similar criminalisation of benchmark manipulation has been implemented by the EU.
The research triggered litigation from market participants seeking redress from the financial harm suffered as a result of market abuses. The first gold case was filed in March 2014. It was followed by over 40 actions and consolidated into the “Commodity Exchange, Inc., Gold Futures and Options Trading Litigation, No. 14-M-02548 (VEC)”, which is currently before the US District Court. Silver fixing complaints started in July 2014 and were consolidated into the “London Silver Fixing, Ltd. Antitrust Litigation, No 14-MD-2573 (VEC)”. Platinum and palladium fixings complaints began in March 2015 and were consolidated into the “Platinum and palladium Antitrust Litigation, No.14-CV-9391 (GHW)”. All cases are being tried in the US District Court of the Southern District of New York, with Judge Valerie Caproni presiding over the gold and silver trials, and Judge Gregory Woods ruling over the platinum and palladiums trials. Professor Caminschi remains an expert consultant to all three trials.
Daniel L. Brockett, Quinn Emanuel, Oct 2016: “It is testament to the excellent caliber of Professor Caminschi’s work that the judge in the case recently issued an order denying the banks’ motion to dismiss and allowing the investors’ claims to proceed. In doing so, the judge cited Professor Caminschi’s work…Moreover, citing in part Professor Caminschi’s research, one of the banks has recently agreed to settle the case for a significant sum of money. These achievements demonstrate the pioneering success of Professor Caminischi’s work, which has helped us to expose potential anti-competitive behaviour in the gold markets.”
The research has been recognised through the award of the 2014 ASX Prize for “Any Silver Linings”, 27th Australasian Finance & Banking Conference and in 2017 for the Accounting & Finance Association of Australia & New Zealand AFAANZ Best PhD.
The process used to derive the benchmark price dates back to 1897 in the coffee houses of London where leading bullion brokers would meet daily to hold a private auction. The result of the auction was the “London Fix” price, which became the benchmark price for the rest of the market. Remarkably, this mechanism remained while global and derivative markets ballooned to exceed US$30 trillion of precious metals trade annually. The daily benchmark price was used to settle contracts, price trades, calculate royalties, commissions and value financial derivatives by a wide range of market participants, including governments, central banks, miners, refiners, private investors, and pension funds.
In researching the interactions between the London Fix and public precious metal markets, Professor Caminschi’s research asked four questions; are fixing benchmark prices biased?; are the fixings still relevant and do they still impact markets?; are the fixings exploitable by participants seeking trading advantages?; what impact did the transition to futures screen trading have on these markets?
Professor Caminschi conducted the analyses as part of his PhD candidature under the supervision of The University of Western Australia Professor Richard Heaney, from 2013 through to 2016. From 2016, Assistant Professor Professor Caminschi was appointed Director of the Rosemarie Nathanson Financial Markets Trading Room (operational from 2017).