Former Citigroup and UBS trader Tom Hayes was handed a 14-year sentence in a closely-watched ruling that has set the tone for future, similar trials in the coming weeks.
The ability to manipulate benchmarks have been widely publicized in a series of high level enforcement cases brought by regulators and public authorities around the world.
Libor, foreign exchange spot rates and the gold fix all made headlines for the wrong reasons, with investigations identifying false submissions by traders and brokers, collusion between individuals at submitting firms, trading solely to influence a benchmark, or requesting that prices published on a broker screen be changed without any trading actually taking place to justify the move.
But UK regulator the Financial Conduct Authority says that while some progress had been made on improving the oversight and controls around benchmarks, the application of the lessons learned had been uneven and often lacked urgency.
A big problem appears to be that despite all the scrutiny, firms interpret the definition of a benchmark too narrowly, and don’t considered the potential conflicts of interest between their businesses and benchmark activities.
Unless, it would appear, you are in the commodity markets, and specifically gold and silver.
The precious metals markets were held up almost as the poster child for how to reform benchmarks.
When the FCA issued a notice to Barclays in relation to manipulating the gold fix, it highlighted the risks posed by so-called barrier options and the lack of appropriate controls to identify, manage and monitor conflicts of interest.
The FCA argues that barrier options often give rise to conflicts of interest where traders may put their own or their firm’s interests ahead of their clients or those who act as counterparties to these options.
That’s because a barrier option only becomes valuable if the price of the underlying asset stays within or crosses a pre-determined threshold. So in relation to a benchmark, the FCA says there is a risk that traders place orders strategically to increase the likelihood of the fix occurring at a price above or below the barrier, allowing the firm to profit at the client’s expense accordingly.
Barclays was fined £26 million ($40.6 million) for gold fix misconduct, and one of its traders was fined £96,000.
But since the FCA issued its Barclays gold notice, controls and policies in relation to barrier options have been reviewed, with computerized algorithms introduced and delta limits imposed in an attempt to prevent manipulation of options by traders. A small number of firms had introduced conflicts of interest training for traders around barrier options in gold, the FCA added.
In March, the gold fix was replaced by the London Bullion Market Association gold price, moving from a conference call to a public and electronic auction.
The process to find a replacement for the silver fix was meanwhile singled out by the regulator as an example of coordination between benchmark administrators, market participants and the regulatory authorities. The silver fix was replaced by the LBMA silver price in August 2014.
From the sound of the FCA comments last week, other financial markets still have some way to go.