Attempts by traders to move benchmarks to protect digital derivatives contracts – as was seen in Barclays’ recent fine by the FCA – could be a routine occurrence, industry insiders have warned.
Last month, Barclays was fined £26m for failing to adequately manage conflicts of interest as well as systems and controls failings, after a former trader placed orders to influence the London Gold Fixing and avoid paying out on a digital exotic options contract on the price of the yellow metal.
Although the case, which also saw the trader in question fined £95,600 and banned from financial services, was seen a one-off, some industry members have warned that attempts to shift benchmarks could be a common event within the derivatives market.
One hedge fund manager active in the gold market told the Financial Times: “If I was at the FCA I would be looking at all banks trading digitals. This could be the tip of the iceberg – there’s a massive issue with exotic derivatives and barriers.”
A former precious metals manager at a big investment bank also told the newspaper that buyers and sellers of digital contracts are expected to protect their positions by attempting to move a benchmark if it was close to a barrier price.
“These are not Ma and Pa products, they are for super-professionals. There’s a fundamental belief that both parties can aggress or defend their book and I would have expected my traders to do so,” he said.
In the case of the Barclays’ fine, a customer had purchased an options contract that would pay out $3.9m if the London Gold Fixing was above $1,558.96 a troy ounce at 15:00 on 28 June 2012.
Trader Daniel Plunkett, who was a director on the bank’s precious metals desk, placed a large sell order on the gold fix to push the price below this barrier and averted the need for the contract to be paid out. The customer later complained and the FCA became involved, with Barclays paying out the $3.9m.
FCA director of enforcement and financial crime Tracey McDermott says: “We expect all firms to look hard at their reference rate and benchmark operations to ensure this type of behaviour isn’t being replicated.
”Firms should be in no doubt that the spotlight will remain on wholesale conduct and we will hold them to account if they fail to meet our standards.”