The British government has announced that various of the London price benchmarks are to get the same sort o0f regulatory treatment that Libor has recently received. On the grounds that as one or more of these benchmark prices seem to have been manipulated, as Libor was, then the same sort of protections should be offered:
Traders who manipulate key oil, gold and currency benchmarks will be handed the same huge fines or jail sentences as those who rig Libor under government proposals to tackle market abuse.
The Treasury launched a formal consultation on Thursday to extend the new legislation to cover the foreign exchange, fixed income and commodity markets. Under the proposals, the legislation would cover the London Gold Fixing and the LMBA Silver Price, which determine the price of the precious metals in the London market.
Also targeted is the ICE Brent futures contract, "which acts as the crude oil futures market's principal financial benchmark", the Treasury said.
“The integrity of the City matters to the economy of Britain. Ensuring that the key rates that underpin financial markets are robust, and that anyone who seeks to manipulate them is subject to the full force of the law is vital," said Andrea Leadsom, economic secretary to the Treasury.
This all seems fair enough. There was a time in The City when it was very much a closed club. If you acted in a manner that was regarded as being beyond the pale then you really did find your business drying up and people refusing to deal with you. It was that almost community policing that kept people on the straight and narrow. As the place has got so very much larger (and rules rather than reputation based) that's not really a tenable method of controlling bad behaviour any more. Thus we probably do need to move to a more legalistic definition of what may and may not be done.
The FT has a good list here of those different benchmarks and how they're calculated. Those are the ones that will come under this new regulation. It's worth noting that there are hundreds of other such benchmark prices around The City. Just in my own little world of non-ferrous metals there's the London Metal Exchange prices for aluminium, copper and so on. Much of the wholesale trade in those metals (up to and including the US Mint purchases of zinc blanks for the penny for example) are based off those. In smaller markets we might use the Metal Bulletin prices for tungsten or tantalum say. And those aren't anything other than just journalists phoning around and asking people in the markets what they think prices are. At least the LME prices are reflecting actual trades.
Clearly, you wouldn't want to have all of these various benchmarks coming under that new and strict legal regime.
The other thing to note is that they're not going to start defining what the benchmark itself actually is, nor who may use it nor how. They're simply making it a criminal offence to try to manipulate it. That leaves everyone with the flexibility to adapt the methods of calculations as time goes on: and also, of course, to invent new such benchmarks if people find them useful. It's one thing to have the politicians insisting upon no manipulation: it would be quite another to have them insisting upon detailed regulation of something they've very little hope of understanding.
