The silver market ushered in a new era of electronic benchmarking on Friday after a regulatory drive for transparency brought the 117-year-old silver "fix" to an end.
Scrutiny of precious metals pricing from European and U.S. financial watchdogs intensified in the wake of benchmark manipulation in other financial markets, most notably the rigging of London Interbank Offered Rate (Libor).
The final conference call in the old process of fixing the benchmark silver price took place on Thursday between banker-dealers in the $3 billion-a-day London silver market.
The London silver fix started in 1897, predating the gold process by 22 years, in the offices of one trading firm and with three others participating.
At that time, the cash price of silver was 27-9/16 old pennies. On Friday, the first LBMA Silver Price was set at $19.86 per ounce.
Beginning in 1999, the process was conducted by telephone, with HSBC, Deutsche Bank and Bank of Nova Scotia-ScotiaMocatta as fixing members.
The new price mechanism, operated by the Chicago Mercantile Exchange and Thomson Reuters in association with the London Bullion Market Association (LBMA), is an electronic, auction-based and auditable process and is tradable with an increased number of direct participants.
Traders were sanguine about day one of the new price.
"Without enough participants in the old system, it seems to be the best solution available, maybe the way to go for the other precious metals as well," a European precious metals trader said.
The CME Group provides the platform and algorithm, while Thomson Reuters acts as administrator. The LBMA, which acted as a facilitator in the quest to find an alternative to the benchmark, will publish volumes and participants of each daily settlement on its website.
Volumes on the new benchmark on Friday stood at 525,000 ounces on the sell side and 325,000 ounces on the buy side.
The LBMA said three price participants had been accredited to contribute to the benchmark from Aug. 15 — HSBC Bank, Mitsui & Co. Precious Metals Inc. and The Bank of Nova Scotia.
While a number of banks, trading houses, refiners and producers have expressed interest in contributing, "the tight schedule and the time of year has imposed time constraints on some potential participants seeking internal sign-off on the necessary credit, legal, compliance and IT requirements," the LBMA said.
At its silver price webinar in July, the CME said that "for day one participation, we are looking at the LBMA market-makers with consistent and constant bilateral credit facilities."
Eleven institutions are LBMA market makers for gold and silver. Credit Suisse said on Thursday that it would be taking part in the new process, while UBS said in an email that "it is currently evaluating the feasibility of becoming an auction member in the near future."
Societe Generale, JPMorgan, Bank of America-Merrill Lynch, Deutsche Bank and Barclays declined to comment, while Goldman Sachs did not respond to a request for comment.
HOW IT WORKS
The new benchmark — used by producers, consumers and investors — is set every day at noon as an online "equilibrium auction" conducted over multiple auction rounds.
Like the old process, it starts with a price that reflects the spot market level. Then within each round of the auction, participants enter their buy and/or sell orders, which are compared at the end of each round to determine whether the market is balanced.
To be balanced, the total of buy versus sell orders entered by all market participants need to be within a certain tolerance, which is initially three lakhs, or 300,000 ounces.
If the market is not balanced, a new suggested price is automatically calculated (moved up or down on the side of the imbalance) and a new round begins at this price.
If the market is balanced, the LBMA Silver Price is determined, and market participants then execute trades based on the buy/sell orders they entered in the last round and any at-market orders entered.
The operator and administrator will have full transparency about the names during the auction process, but participants, who can change the size of their orders at any time, cannot see the names of others.
The overhaul of the silver fix process is the first in a series of revamps of all precious metals benchmarks, including the century-old gold fix and the platinum and palladium fixes, whose operators earlier this month said were looking for a new administrator.
Some of the companies that had proposed alternatives to the silver fix said they would send their tenders for the gold market, when the request for proposals process starts at the end of August.
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