CME/Thomson Reuters Chosen to Run Replacement for Silver Fix

Jul 11, 2014 11:01 am ET

(Updates with broker comment in 10th paragraph, CME trading volume in 11th, academic in 12th.)

July 11 (Bloomberg) -- CME Group Inc. and Thomson Reuters Corp. will run the replacement for the 117-year-old silver- fixing benchmark that’s ending in August, the London Bullion Market Association said.

Testing is set for early August with the new mechanism to go live on Aug. 15, the LBMA said today in an e-mailed statement. The London Metal Exchange, Autilla Ltd., Bloomberg LP, Intercontinental Exchange Inc., ETF Securities Ltd. and Platts had also proposed alternatives last month.

Mining companies to central banks use fixings to trade or value metal. The phone-based ritual for silver that takes place each day at noon will end Aug. 14 as Deutsche Bank AG’s exit from the process as it scales back its commodities business would leave just two banks to set prices. Precious metals are getting more attention from regulators after price-rigging in everything from interbank lending rates to currencies led to fines and overhauled financial benchmarks.

“With the imminent demise of the silver fix in mid-August, it was imperative that the market found a new mechanism to replace it,” said Nic Brown, head of commodities research at Natixis SA in London. “If the new silver fix is seen as a clear success, then that might encourage calls for it to be used as a blueprint for a new gold fix.”

The World Gold Council hosted a meeting on July 7 where 34 delegates including producers, refiners, central banks and exchanges discussed the gold benchmark. The industry wants an independent party to administer the rate that’s set twice a day as well as improved transparency, the council said.

Global Circulation

About $5 trillion of silver circulated globally last year, according to CPM Group, a New York-based research company. Silver prices climbed 10 percent this year to $21.466 an ounce.

Deutsche Bank said in January it would withdraw from participating in setting gold and silver benchmarks in London, a month after announcing that it would cut about 200 jobs in commodities. Germany’s biggest lender, HSBC Holdings Plc and Bank of Nova Scotia conduct the silver fixing, the first of which took place in 1897 at the office of Sharps & Wilkins with former dealers including Mocatta & Goldsmid, Pixley & Abell, and Samuel Montagu & Co.

During fixings, 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 spot price changes, before the fix is made. Participants can trade the metal and its derivatives on the over-the-counter market and exchanges during the calls.

Electronic System

An LBMA survey in May showed the market wants a new silver system to be an electronic, auction-based process with more direct participants and prices that can be used in trades. The association’s members heard firms’ proposals for an alternative at a meeting in London on June 20.

“We look forward to using the new fix when buying silver on behalf of clients,” Mark O’Byrne, a director in Dublin at brokerage GoldCore Ltd., said today by e-mail. “Having Thomson Reuters and CME as fix operators is better than a handful of banks.”

Comex, owned by CME Group, traded 14.48 million silver futures contracts and 47.29 million in gold futures last year, according to the Washington-based Futures Industry Association. CME, the world’s biggest derivatives bourse, also offers platinum and palladium contracts, according to its website.

“CME through Comex has a huge part of the financial silver market,” Brian Lucey, a finance professor at Trinity College Dublin, said by phone today. “Thomson Reuters, like Bloomberg or like other trading systems, captures the over-the-counter market very well. LME is big for industrial metals, but not precious.”

Reference Point

The LME, which said July 9 it pulled together its bid for a silver fix replacement with Autilla, said it was “disappointed” its solution wasn’t selected and was ready to expand its range of products to further service the industry. The 137-year-old exchange is the world’s biggest industrial metals marketplace.

While traders say fixings are efficient and a crucial reference point, economists and academics say the process is susceptible to manipulation and lacks sufficient regulation. The U.K.’s Financial Conduct Authority in May fined Barclays Plc after a trader sought to influence the gold fix in 2012.

While there’s “no clear evidence” of manipulation during the London gold fixing, it’s possible it occurred, David Bailey, director of financial markets infrastructure and supervision at the FCA, said at a U.K. Treasury Select Committee hearing July 2. The regulator 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.

Exited Fixing

Deutsche Bank has already exited the gold fixing, leaving Societe Generale SA, Bank of Nova Scotia, HSBC and Barclays as the four remaining members of the process which takes place twice daily and dates back to 1919.

Bloomberg LP is a provider of financial information and trading systems, and is also the parent of Bloomberg News. It competes with Thomson Reuters in selling financial, legal information and trading systems.

--With assistance from Agnieszka Troszkiewicz in London.