London Silver Fix sees revamp

CME Group and Thomson Reuters have been chosen to deliver a new silver price mechanism to replace the London Silver Fix — a system that has been in place for over a century to set the daily benchmark price for silver.

Starting in mid-August, an electronic, auction-based system devised by the two companies will do the job instead, the London Bullion Market Association (LBMA) said in a July 11 release.

CME Group will provide the price platform and methodology while Thomson Reuters will take care of administration and governance.

The LBMA made the decision based on a market consensus — it conducted surveys and numerous meetings with market participants, solution providers and regulators — with a review by independent consultants G Cubed Metals.

In a press release, the LBMA said respondents to one of its market surveys preferred the joint CME Group–Thomson Reuters proposal over the others.

The LBMA included several criteria in its request for proposals to set up and operate a more transparent system. In addition to being electronic and auction-based, the system has to be auditable, tradable and allow for more direct participants.

The joint proposal by CME Group and Thomson Reuters won out over those of several other organizations, including the London Metal Exchange and Bloomberg.

The London Silver Fix was established in 1897 and historically, has been determined by a small number of banks in an auction-like process. The banks participate in a conference call and invite clients to submit buy-and-sell orders. The price is adjusted higher or lower until it matches supply and demand.

Most recently, Deutsche Bank, HSBC and the Bank of Nova Scotia have been responsible for setting the London Silver Fix.

However, in April, Deutsche Bank announced it would be withdrawing from the group as part of a larger exit from the commodities space. The group could not find a replacement.

The revamp comes at a time when regulators are investigating whether other benchmarks — the London Gold Fix and the London Interbank Offered Rate (Libor) — have been subject to manipulation by banks.

Barclays was fined US$44 million in May by the Financial Conduct Authority after one its traders manipulated the price to its benefit at the expense of one its clients. It was also fined in the Libor-rigging scandal.

Reform is also planned for the London Gold Fix, which is currently set by Barclays, HSBC, Bank of Nova Scotia and Société Générale. The silver price benchmarking system could act as a model for that reform. The World Gold Council is heading up a review of the London Gold Fix.

It recently hosted a forum to examine reforms, which included representatives of central banks, bullion banks, refiners, exchange-traded funds, exchanges and industry bodies.

In a press release, Natalie Dempster, the World Gold Council’s managing director of central banks and public policy, said the organization was modernizing the gold benchmark. She said there was strong support for the World Gold Council’s key principles for reform.

“We believe it should be based on executed trades and a tradable price, it should have highly transparent input data, should be calculated from a deep and liquid market, and represent a physically deliverable price,” Dempster said.

London Gold Market Fixing Ltd., the company that operates the gold fix on behalf of the four banks, has just launched a formal process to find a new third-party administrator for the daily fix, who would be supported by the LBMA. An independent chairperson will also be appointed to lead the new administrator.

“It is sensible to say that based on the feedback received for the silver alternative, the reformed gold system will also be electronic, auditable and transaction-based,” an LBMA spokesman told Reuters.

The silver benchmarking system will be tested in early August before going live on Aug. 15.