Silver Electronic Auction Favored as Replacement for London Fix

Jun 05, 2014 12:34 pm ET

June 5 (Bloomberg) -- A replacement for the century-old London silver fixing benchmark that will end in August should be an electronic, auction-based process and one that’s tradeable with more direct participants, a survey showed.

The London Bullion Market Association began a consultation in May seeking views for an alternative to the fix that’s used by miners to central banks. More than 440 participants completed an LBMA survey, the industry group said in a statement today. After requesting proposals from companies seeking to become a price administrator for a new system, the LBMA will hold a seminar on June 20 for members to give feedback on proposals.

The London Silver Market Fixing Ltd. will stop running the fixing on Aug. 14, after Deutsche Bank AG’s planned exit as it scales back its commodities business would leave just two banks to conduct the price-setting ritual. ETF Securities Ltd. said today it proposed an alternative method and the London Metal Exchange has said it got requests to provide a daily rate. CME Group Inc. and Platts have also said they have talked to the LBMA about helping find a way to set prices.

“The benchmark they come up with has to be based on actual tangible transactions,” Ounesh Reebye, a vice president at Vancouver-based Silver Wheaton Corp., the largest precious- metals mine-financing company, said in a telephone interview yesterday. “As long as the new benchmark provides a level of transparency and trust, people will feel comfortable.”

Deutsche Bank, HSBC Holdings Plc and Bank of Nova Scotia conduct the silver fixing each day at noon. The German bank stopped taking part in gold fixings in May after failing to agree on a sale of its seat. It postponed its planned April 29 resignation from the silver rate to Aug. 14.

Financial Benchmarks

Regulatory focus on financial benchmarks is intensifying after rigging was uncovered in everything from interbank lending rates to currencies. Economists and academics have said fixings are susceptible to manipulation and lack sufficient regulation, while traders say the processes are efficient and crucial reference points for the market.

During the fix, the three member banks 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, before the fix is made.

The first silver fixing took place in 1897 at the office of Sharps & Wilkins, according to the silver fixing company’s website. It was also attended by Mocatta & Goldsmid, Pixley & Abell, and Samuel Montagu & Co., according to the fixing company’s website. It moved to a phone-based process in 1999.

LBMA Survey

When asked to rate the usefulness of the current silver mechanism on a scale up to 10, the LBMA survey returned an average of 7.5, according to today’s statement. Sixty-four percent said they use the fixing daily and 72 percent said the price discovery method is sufficient. Twenty-five percent said they would consider acting as a contributor, 44 percent said no and 31 percent said maybe.

ETF Securities, an exchange-traded-products provider with about $19 billion of assets, proposed using a five-minute auction process that occurs on the London Stock Exchange, Graham Tuckwell, chairman and founder of the Jersey-based company, said today. The proposal could allow the transfer of physical metal two days later, he said.

The LME, the world’s biggest metals bourse, said May 29 it had requests from industrial and financial companies, has defined a “robust” process for a daily price and is working with the LBMA in consulting with the market. The exchange will provide over-the-counter clearing for gold and silver in September, its website shows.

Gold Fix

Societe Generale SA, Bank of Nova Scotia, HSBC and Barclays Plc are the four remaining members of the London gold fix. The U.K.’s Financial Conduct Authority has been visiting member banks involved in the gold fixing this year as part of its review of gold benchmarks, a person with knowledge of the matter said in April. The regulator said May 23 it fined Barclays 26 million pounds ($44 million) because one of its traders sought to influence the price-setting process in 2012.

“The market wants a solution that will not affect business,” Silver Wheaton’s Reebye said. “If you are looking to establish a benchmark price it should be indicative of physical ask and bid rates and not prices at a point in time.”