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July 16, 2014 4:44 pm
The unfortunate name will disappear. So too will the private teleconference, as well as the ownership by a handful of banks that have run the London Silver Fix – the global benchmark price – since 1897. And the cloak of secrecy over the trading volumes will be lifted.
But anyone thinking there has been a complete change in the way the daily snapshot of the silver market is conducted would be mistaken. The new benchmark, to be administered jointly by Thomson Reuters and the CME Group from August 15, keeps some of the main features of the silver fixing, in particular the auction-style process used to calculate the reference price.
“This is like the move from wet-plate photography to box brownie cameras,” says Brian Lucey, professor of finance at Trinity College, Dublin, and an expert on precious metals economics. “Which is fine, because these benchmarks should be handled conservatively.”
The death of the silver fix was caused by the withdrawal of Deutsche Bank, which runs the benchmark with HSBC and Bank of Nova Scotia. A few years ago, the German bank, which also retired its seat on the gold fix, would have had little trouble finding a purchaser for both positions.
But amid the increased scrutiny of all financial benchmarks following the rigging of the Libor interest rate, precious metals fixes have lost their shine.
Competition to run the new silver benchmark was keen. The CME Group, which operates exchanges, and the information and data provider Thomson Reuters, saw off six other bids from the London Metal Exchange, Platts, Bloomberg and others. The process was overseen by the London Bullion Market Association, an industry group.
Under the London Silver Price – as the new benchmark will be known – Thomson Reuters will handle the governance and administration. It will publish the volumes of silver bars traded daily and prices that are tested – something that does not currently happen – while maintaining the anonymity of buyers and sellers.
CME Group will provide the electronic price platform and the methodology. By maintaining the auction process that is used in the current fixing – the silver price is adjusted up or down depending on supply and demand from the member banks – it will ensure that market participants can still trade at the daily benchmark price. But instead of a chairman from one of the fixing banks determining the opening silver price, and subsequent adjustments, an algorithm will now fulfil that role.
“It’s a good system, with good governance, that will be overseen by well-respected organisations,” says Jon Spall, managing director of G Cubed Metals Ltd, a precious metals consultancy, who conducted an independent review of the silver benchmark selection.
“It addresses what market participants need.”
The initial users are expected to be the 11 market-making members of the LBMA, including Credit Suisse, UBS and Goldman Sachs, which are active in the over-the-counter silver trade. A precious metals fund manager says that while the new benchmark appears robust in theory, there is a chance that some banks will initially sit on the sidelines until they are convinced it works.
“That’s the risk: you host the party but nobody comes,” he says. “If there’s not enough liquidity, it will be a disaster.”
Even so, few dispute that the new benchmark will be an improvement on the fixing. Rosa Abrantes-Metz, adjunct professor at New York University Stern School of Business, and one of the most prominent critics of the precious metals fixes, says she is “greatly satisfied” with the changes, citing the improved transparency and expanded market participation.
“What is most important is the reduction of conflict of interest between the benchmark administrators and those who trade on it,” Ms Abrantes-Metz says.
Her one concern is that the auction process is maintained, because it lasts for a short period, usually less than 15 minutes. Benchmarks discovered over a longer period of trading – an entire day, for example – or from time windows selected randomly each day, are harder to manipulate, Ms Abrantes-Metz says.
If the London Silver Price does prove popular and successful, the banks that run the fixing for gold – a much bigger market – will come under pressure to move to a similar solution. On Wednesday the London Gold Market Fixing Limited said it was introducing changes to its benchmark, but it was not clear how far this would go.
“Everybody in this process, from market participants to the LBMA to us and others, was very mindful to set a template that is applicable to other precious metals,” says Dan Rees, head of strategy for commodities at Thomson Reuters. “If we have to go through a similar process for all the other metals and come up with different mechanisms, that’s going to be problematic for all the participants and providers.”
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