Banks routinely rigged gold fix to defend their positions, Financial Times reports

As a result, customers of Barclays and other market-making banks may be looking to see if they too have cause for complaint, according to one hedge fund manager active in the gold market.

"If I was at the Financial Conduct Authority 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."

In the City, digital options are common in the precious metals sector and, especially, in forex trading. A payout is triggered if a predetermined price -- or "barrier" -- is breached at expiry date. If it is not, the option holder gets nothing.

One former precious metals manager at a big investment bank says there has long been an understanding among market participants that sellers and buyers of digitals would try to protect their positions if the benchmark price and barrier were close together near expiry.

"These are not Ma-and-Pa products. They are for super-professionals," says the former manager. "There's a fundamental belief that both parties can aggress or defend their book, and I would have expected my traders to do so."

In the case of gold, this means trying to move the benchmark price, which is set during the twice daily auction "fixing" process run by four banks, including Barclays.

That is what the Barclays trader, Daniel Plunkett, did on June 28, 2012. Exactly a year earlier, the bank had sold an options contract to an unnamed customer stating that if after 12 months the gold price was above $1,558.96 a troy ounce, the client would receive $3.9 million.

By placing a large sell order on the fix Mr Plunkett pushed the gold price beneath the barrier, thus avoiding the payout. After the counterparty complained, the FCA became involved. Barclays paid the client the $3.9 million and was fined. Mr Plunkett was also fined -- L95,600 -- and banned from working in the City.

In its ruling, the FCA criticised Barclays for its poor controls related to the gold fix and said the bank had failed to "manage conflicts of interests between itself and its customers."

"We expect all firms to look hard at their reference rate and benchmark operations to ensure this type of behaviour isn't being replicated," said Tracey McDermott, the FCA's director of enforcement and financial crime.

The identity of the Barclays client has not been revealed. But a senior gold trader with knowledge of the transaction says it was not another investment bank or hedge fund.

"This was not professionals going head to head," he says.

Philip Klapwijk, managing director of Precious Metals Insights, a consultancy, says digital options were also sold to funds, as well as to private banks, and then repackaged for sale to wealthy individuals, typically as interest rate products. In these cases, the option seller pushing around a benchmark is "not quite cricket," Mr Klapwijk said.

The hedge fund manager who believes that the problem is more widespread agrees, and says his firm would have also complained to the FCA had it been in the same position as the Barclays customer.

"If you have Goldman Sachs on one side and JPMorgan on the other, the gloves are off. But not everybody in the market has the same level of sophistication and vindictiveness."

He adds that tighter regulation has made banks selling derivatives think more about their business models and what is fair.

The gold trader familiar with the Barclays case expresses some sympathy for Mr Plunkett, saying in the pre-financial crisis days the trader may have been censured by his bosses if he had not defended the digital option sold by the bank.

"What's changed now is the market morality," he says. "We can't simply say: It's always been done this way."