Silver Fixing Company to Stop Running Century-Old Benchmark

May 14, 2014 10:23 am ET

(Updates with LBMA consultation from second paragraph.)

May 14 (Bloomberg) -- The company that runs the London silver fixing, a benchmark dating back more than a century, will stop running the process after Deutsche Bank AG said two weeks ago that it was dropping out of the price-setting ritual.

The London Silver Market Fixing Ltd. will stop administering the fixing on Aug. 14, it said today in a statement. Until then, Deutsche Bank, HSBC Holdings Plc and Bank of Nova Scotia will remain the three members of the company, which will liaise with the U.K. Financial Conduct Authority. Alternatives may be available. The London Bullion Market Association started a consultation and will work with the market, regulators and potential administrators.

Regulators have been stepping up their scrutiny of how gold and silver prices are set in the wake of the London interbank offered rate-manipulation scandal. The FCA is visiting member banks involved in the gold fixing as part of its review of gold benchmarks, a person with knowledge of the matter said last month. The watchdog hasn’t leveled any accusations that the process is being manipulated. Deutsche Bank has said it is leaving fixings as it scales back its commodities business.

“I suspect that something will be developed that will enable an auction price to be achieved during the working day, taking the place of the fix and that will enable people to derive a benchmark figure, which is what the market needs,” Ross Norman, the chief executive officer of London physical broker Sharps Pixley Ltd., said today by phone. “It’s essential for the market. It is the only objective price.”

Fixing Process

The silver fixing takes place each day at noon by phone between the three members, which declare how much metal they want to buy or sell for clients as well as their own accounts. Traders relay shifts in supply and demand to clients and take fresh orders as the price changes. The first silver fixing took place in 1897 at the office of Sharps & Wilkins. Fixings also take place for gold, platinum and palladium.

Silver for immediate delivery, which slumped 36 percent last year, rose 1.5 percent to $19.8363 an ounce in London today, according to Bloomberg generic pricing. The price was fixed at $19.87 today.

The London Silver Market Fixing “is not in a position to comment on other fixings,” it said in today’s statement. Bank of Nova Scotia, HSBC, Barclays Plc and Societe Generale SA are members of the gold fixing.

Deutsche Bank

Deutsche Bank said in January it planned to withdraw from the London gold and silver fixings as it scales back its commodities business and announced last month that it would resign from setting the gold benchmark as of yesterday after failing to agree on a sale of the seat. The bank was asked by the FCA to stay on with the silver fixing for another 90 days, according to a person familiar with the request, who asked not to be identified because the information is private.

The Frankfurt-based lender postponed its planned April 29 resignation from silver fixings to Aug. 14, it said today in a statement. Joe Konecny, a spokesman for Bank of Nova Scotia, didn’t immediately reply to a phone message left outside of Toronto business hours, or to an e-mail sent later.

“HSBC remains committed to the silver market and, if the market wishes to develop an alternative to the London silver fixing, is willing to take part in discussions with other market participants,” Jezz Farr, a spokesman for the bank, said today by phone.

Economists and academics have said the fixing processes are outdated, susceptible to manipulation and lacking in direct regulatory oversight. The gold fixing members formed a steering committee last year to review the process.

FCA Involvement

“The FCA is at the forefront of benchmark reform and will engage with the firms involved in the silver fix as appropriate, in line with our objective to protect and enhance the integrity of the U.K. financial system,” it said by e-mail.

Germany’s Bafin is looking at bench marking processes such as gold and silver price fixing at individual banks, Ben Fischer, a spokesman for the Bonn-based regulator, said in April. The Commodity Futures Trading Commission, which regulates derivatives in the U.S., also discussed reviewing how gold prices are set in private meetings in 2013, a person with knowledge of the matter said in November.

The period to Aug. 14 “will provide an opportunity for market-led adjustment with consultation between clients and market participants,” the silver fixing company said in the statement. “The London Bullion Market Association has expressed its willingness to assist with discussions among market participants with a view to exploring whether the market wishes to develop an alternative to the London Silver Fixing.”

LBMA Review

The LBMA said in November it’s reviewing its own benchmarks to see whether they conform to guidelines set by the International Organization of Securities Commissions. Those include making prices based on “observable” deals where possible. The LBMA oversees gold forward offered rates, which reflect bullion borrowing costs for different durations and are used in loan agreements.

“The LBMA has launched a consultation in order to ensure the best way forward for a London silver daily price mechanism,” Ruth Crowell, the association’s chief executive, said in an e-mailed statement today. “The LBMA will work with market participants, regulators and potential administrators to ensure the London silver market continues to serve efficiently the needs of market users around the world.”

The first silver fixing was attended by Mocatta & Goldsmid, Sharps & Wilkins, Pixley & Abell, and Samuel Montagu & Co., according to the fixing company’s website. It moved to a phone- based process in 1999.

“I do think it’s sad, but only speaking as a traditionalist,” Sharps Pixley’s Norman said. “Producers need to deal on something stronger than a flash price that’s coming up during the trading day. I shouldn’t be surprised to hear that there are several people already looking to develop alternatives.”